FidelityConnects: Consumer trends: Travel & leisure insights

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Hello, and welcome to Fidelity Connects.

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I'm Pamela Ritchie. The U.S.

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consumer is sending pretty mixed signals, high earners

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thriving while lower income households certainly

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feeling the squeeze.

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From restaurants to travel the divide is showing up

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in some surprising ways.

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What is driving this pressure on the lower income consumer

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at this moment and could some of these challenges actually

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create opportunity for investors?

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Joining us here today to explore what's behind some

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of the consumer shifts and where opportunity for

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you may lie is equity research analyst, David Cochrane.

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Warm welcome to you, David. Good to see you again.

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Good to see you. Thank you so much for having me.

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Delighted to have you here.

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We spoke with you in this forum, I felt like it

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was days after the April 2nd announcements, is that about

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right? It's like maybe in May.

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Yeah, we spoke in the spring right after that was announced.

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We're back today with another interesting time in

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consumer land.

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These are moments that kind of create opportunity but we'll

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get into what's going on in consumer.

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Dispel this or flush it out for us, whatever, the K-shaped

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economy is what we hear, K-shaped consumer is

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what we hear.

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Is this correct and do you want to just fill us in a bit on

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exactly what that means.

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Sure, sure, happy to.

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To set the stage, consumer discretionary, it's

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a sector with high intrasector dispersion.

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What that means is there's always winners and there's

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always losers in the sector.

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We've been fortunate to have a good

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year at Fidelity in the sector but it's been a really

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challenging place to invest this year.

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Market's up double digits, consumer discretionary's

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flat year-to-date, and you've had a lot of

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smaller pockets where there's been a lot of pain within the

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sector.

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As you mentioned, it's really been a tale of two consumers.

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The higher income consumer,

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they're hanging it, they're still spending, they're doing

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just fine.

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They're earning so they're spending.

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They're earning so they're spending and the lower income

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consumer, that's where you're seeing some signs of weakness.

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At one point there was sort of

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a reopening narrative not so long ago  where,

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boy, did we need workers back in every regard.

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It was actually hard to get people back to the office, back

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to their jobs and so wages,

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in fact, increased to get people back to work.

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There was a period of time where a lower income worker

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within the economy was really enticed to come back to work.

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The wages were going up. Is that still the case?

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What you've seen more recently with respect to wages is

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the lowest ... so if you go back a couple years ago the

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lowest quartile of wage earners were experiencing

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the fastest wage growth.

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Today that quartile is experiencing the slowest wage

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growth and the gap has actually widened in recent

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months. That's one of the headwinds facing the lower income

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consumer. You're also seeing, I mean,

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you have rates continuing to put pressure on that consumer.

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Unemployment rates overall are fine but

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you've seen unemployment rates tick up about 4%

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for younger workers

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who tend to be lower income.

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You've had things like the government shutdown

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which, of course, it interrupts federal paycheques,

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right? But perhaps the bigger impact of that

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has been ... you have 40 million Americans on

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SNAP benefits, which are also known as food stamps, and

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those experienced interruptions during the government

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shutdown. Of course, if you don't have money from the

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government to spend on groceries you're gonna...

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All of a sudden.

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All of a sudden you're gonna spend the money that you

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do have on groceries and that leaves very little for

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anything else.

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Plus you've got consumer sentiment issues so...

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Take us through, for instance, also within this is,

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well, interest rates are falling.

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Directionally, they're going sort of in the right direction

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for our consumer, for someone who owns a small business, for

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instance is employing other people.

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This is good.

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Of course, a rate cut doesn't sort of manifest itself in the

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economy like that. That's it.

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It takes time for rates to flow through.

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Look, I'd love to set the stage of where we're at today and

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then we can talk about kind of how we're addressing it

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as Fidelity, and then we could talk about, hey,

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maybe things like rate cuts that could help into next year.

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Where we are today, you're seeing some

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of those pressures that we talked about.

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Plus, you have consumer sentiment amongst Democrats at

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all-time lows.

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You have Hispanic consumers pulling back, perhaps because

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of ICE. You're seeing it in all types of different areas.

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The first area you're seeing it, you're seeing it in

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restaurants. People are just going to restaurants less

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and you are seeing evidence of people trading down from more

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expensive restaurants to cheaper restaurants.

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McDonald's, they recently reported, they're seeing nearly

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double digit declines in visits from lower

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income consumers but it's offset by the middle income

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trading down. Then you have places like Chipotle, they

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reported their traffic's also down and they're

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calling out that low and middle income consumer.

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That's an example of the weakness at the lower end.

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Another great example is hotels.

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You've seen revenue per available room night is the

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statistic, or the metric, and

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that's basically how much it costs to stay at a hotel.

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That has continued to fall through the year in the U.S.,

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the growth of that, but it's such a

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... if you look at the high end, the high-end luxury chains,

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they continue to charge more.

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They're doing just fine. People are showing up.

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In the economy low end hotels

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rates are down mid to high single digits because people just

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aren't coming at that lower end.

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To clarify, this is the U.S., you cover the U.S.

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You're taking a look at sort of travel, leisure, consumer

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within the U.S.

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numbers. We'll talk about Canada later but I'm really

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interested about why

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this ... because it sort of also seems a little bit like the

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direction of the stock market, some people would argue.

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There's a lot of pieces that seem to fit together for

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this K-shape discussion and you're filling in the pieces

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for sort of the bottom level.

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Those that are still spending,

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what types of things are they still spending on?

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Do we go into apparel from here?

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Where is this spending?

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Hotels is one, obviously, and restaurants

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that are high end are publicly traded so we don't know.

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Again, so I mean, it's a divide.

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What you've seen is some companies that aren't as exposed to

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the low income consumer, they're doing fine.

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But stocks of companies that do have some exposure,

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they've been doing poorly.

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What you find in environments like this is

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when you get some macro weakness

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the fundamentals are poor for these companies and every

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company tells you, hey, it's because of the macro.

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Right?

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Your job...

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To come back to the prior point of consumer always having

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winners and losers it's our job to go through and

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separate, okay, is this company really just

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impacted by macro or is there something else structurally

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going wrong?

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That's really where we roll up our sleeves and the magic of

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Fidelity comes in. We have a deep research team.

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We have phenomenal management access, we're spending time

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with all the management teams, understanding what they're

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seeing. We have access to industry experts,

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we have unique data sets, we're building our models, doing

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our analyses, and just trying to separate, basically,

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we are trying to answer three questions.

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One, is this just bad because of the macro or

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is something else happening?

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Two, are there company-specific drivers

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that can drive the fundamentals in a way that is

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underappreciated?

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Three, ultimately what do earnings look like on

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the other side and what does that mean for the risk-reward

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and how do they compare to consensus. That's the work we're

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doing here at Fidelity.

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What if it is just macro? Is it just macro?

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Tell us about that.

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Sentiment, completion expectations, what about the

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macro?

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I think you are seeing a divide.

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I'll give you the example, an area — I want to be careful

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from a compliance perspective — but an area where we're

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doing a lot of work is restaurants.

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What we've seen is a broad traffic slowdown

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but there are some restaurants where, yes, the macro isn't

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helping them but they also have a competition issue.

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They have an issue with their value proposition, their cost

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structure. Yes, the stock's down but estimates are

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still too high and the stock is down but still expensive.

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On the flip side, there are some restaurants that have seen

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a slowdown and it does seem to be mostly macro

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and they've got some interesting company-specific drivers

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which can help them accelerate growth next year even if

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the macro is kind of more just stable.

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That's an area where we're doing a lot of work right now.

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It's very interesting because you'll hear a lot about

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groceries, you'll hear about prices, how is that

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filtering through?

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The tariff story sort of fits nicely into almost everything

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that you cover but you could go into the restaurant, the

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food, the side of imports, essentially,

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and the tariffs that are being applied.

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Is this an area, are tariffs fitting into

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your macro story right now? I mean, they must.

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Tariffs, the way I'll talk about tariffs,

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they're kind of an interesting example of how

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environments like this create opportunity.

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I was on the show in the spring, as you mentioned, shortly

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after the Liberation Day tariffs

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and if you'll recall,

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that type of environment creates a

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great opportunity for us to do the work and say, okay,

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which of these companies will be able to mitigate

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these tariffs through supply chain initiatives,

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through pricing and protect their margins and

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ultimately thrive versus which companies are gonna be

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very impacted directly in a way that's gonna hurt them

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and hurt the stock.

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A great example of that, I can talk about this because

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it's been a top contributor, or it's been

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a top position of the funds and a great contributor this

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year so it's all disclosed, is Aritzia.

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Aritzia, they're a women's apparel retailer

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specializing in everyday luxury.

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It's a Canadian company but they have a large U.S.

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operation and that's really where they're growing so they're

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directly in the eye of the storm of the tariffs.

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When the

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tariffs were announced in April the stock was immediately

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hit.

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It got thrown out with everything else.

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Exactly. So what do we do here at Fidelity?

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Well, good thing is we already had a great understanding of

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the company. We'd spent a lot of time with management.

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We'd analyze the impacts of tariffs even before

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Liberation Day.

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We had a good idea of the earnings power of the business.

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What's happened?

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One, company has done a phenomenal job mitigating tariffs.

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They've been able to shift their supply chain and improve

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initial markups to protect their margins.

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Because they do produce things in countries

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around the world that were slammed by tariffs.

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Exactly.

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So how did they shift that, or what's an example of how they

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shifted that?

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You can shift out of higher tariff geographies

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to lower tariff geographies.

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Net-net you're still impacted by tariffs but you're able to

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partially mitigate them that way.

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They did some of that. They improved their initial markups

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and then have done a great job mitigating tariffs.

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Also, the company has just done a phenomenal job executing

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in general.

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They've continued to grow in the U.S.

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U.S. growth comes with higher margins.

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They've continued to grow online.

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All this allows you to leverage your fixed cost structure

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and grow margin, expand margins.

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More recently, they launched an app, which you may have

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seen, which went to number one in the U.S.

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and the Canadian app stores.

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All of this has driven earnings

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growth in excess of what consensus

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expectations were.

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We love to say at Fidelity stocks follow earnings, right?

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It's been a phenomenal contributor to the funds, up 90%

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since before tariffs were announced and 160%

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off the bottom.

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This is a great example of where environments like this,

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like tariff announcements, like low income consumer

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weakness, can create opportunity for those that are able

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to do the deep work and understand, okay,

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which companies are going to do well on the other side

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versus which aren't.

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How have they kept pricing up?

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Again, out of the pandemic, again, this

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is years ago but these things go in cycles.

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There was a period where lots of companies that had pricing

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power used it and then you sort of thought, well, that's

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kind of it. I mean, they've raised and that's great that

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they can do that but they're kind of up at the high levels.

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How did Aritzia manoeuvre that?

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The team has done a phenomenal job curating

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great apparel.

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They price very reasonably versus competitors

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and they have a tremendous amount of heat around the

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brand and that gives them licence to

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improve their, what they call initial markups and

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protect the margin.

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They've done a great job and that's part of it.

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That's amazing.

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What about with tariffs in other parts?

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Is that sort of, because at the moment it appears that

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tariffs are becoming less onerous.

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I mean, there's headline news about what the Trump

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administration is planning to do in peeling them back.

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There's also court cases going on.

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They're lower than they were when we spoke last, that is for

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sure. Do you have some confidence that it

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continues to go in that direction and works well for

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companies like Aritzia but others.

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What we're trying to do, a level set and

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then we can talk about it into next year including tariffs,

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what we are trying to is separate

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stocks that are impacted today by this low income consumer

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weakness and say, hey, if the macro

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environment is more stable what do earnings

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look like and are there great opportunities that have come

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about because of this macro weakness.

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We're not necessarily trying to say a bunch

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of things are going to get better into next year but there's

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an interesting argument for why they should.

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What

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that does is provide a layer of upside optionality

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to some of these consumer investment ideas.

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Why might things get better into next year?

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As you mentioned, you're seeing some signs

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at the margin of tariff relief, certainly since the peak

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but you saw agriculture of tariff announcements last week.

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You've had SNAP benefits come back online.

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Next year you should have larger tax refunds because of

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some retroactive tax credits, plus there's some new

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tax breaks in '26.

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Then you've got Trump talking about, on the other side of

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tariffs, he's talking about $2,000 stimulus cheques

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called tariff relief cheques.

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Not popular with everyone but could go very well for your

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sector.

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I mean, hey, you want to keep people happy ahead

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of the mid-term elections, right, so if you send out

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cheques, I mean, you put all this together, maybe you get

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rate cuts, maybe you get...

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Or maybe you sort of feel the rate cuts.

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Yeah, maybe you feel the rate cuts, maybe get rates coming

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down, tariffs coming down.

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Again, we're not trying to ...

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I'm not a macro guy, I am not looking into next year and

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making a big macro bet ...

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we're looking at stocks that can work really well even in a

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more stable macro environment.

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As you mentioned, there's kind of some of these interesting

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upside levers into next year that adds maybe a

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layer of optionality on the upside.

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Hello, investors. We'll be back to the show in just a moment.

[00:16:06.760]

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DialoguesFidelity podcasts available on Apple, Spotify, YouTube, or wherever

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else you get your podcasts. Now back to today's show.

[00:16:36.960]

Take us through some of the other areas of the consumer that

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you follow, that there are stocks within that you take a

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look at. Travel is one, travel and leisure.

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Restaurants, I guess, fits into sort of the leisure side of

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things. What about travel? I mean, we've heard everything

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from people aren't travelling as much, it's actually totally

[00:16:53.200]

full planes, nobody can get airplanes built fast enough

[00:16:56.520]

so there's a supply issue.

[00:16:58.360]

Take us through sort of the travel psyche and how it's

[00:17:01.520]

impacting your view on the whole industry.

[00:17:06.120]

I think the big theme in travel, specifically

[00:17:09.680]

hotels, is that the big

[00:17:12.680]

continue to get bigger. The

[00:17:15.960]

large companies continue to win.

[00:17:18.720]

In the U.S.

[00:17:20.640]

you have the two largest players, Marriott and

[00:17:23.760]

Hilton. Their brands make up about a third of the market.

[00:17:27.240]

It's lower internationally.

[00:17:29.920]

They grow at, call it 2 to 4X the

[00:17:33.000]

rate of the market in terms of rooms.

[00:17:35.840]

Why is that? I mean, why are these...

[00:17:37.520]

In terms of building new rooms or...

[00:17:39.920]

In terms of the number of rooms under their banners.

[00:17:43.480]

That's a big theme in hotels, why are these big

[00:17:46.480]

companies continuing to win?

[00:17:48.000]

There's a couple reasons.

[00:17:50.560]

One, if you have Hilton on

[00:17:53.760]

your hotel versus you have Dave's

[00:17:56.840]

Hotel you can charge more for the Hilton, right?

[00:17:59.480]

No one wants to stay at Dave's Hotel.

[00:18:01.040]

They have loyalty program, they can drive traffic

[00:18:04.280]

there, brand recognition so you can

[00:18:07.480]

charge a premium if you're a Hilton or Marriott.

[00:18:11.000]

Secondly, these companies are able to spend

[00:18:14.200]

marketing dollars much more effectively than

[00:18:17.800]

I could if I was just running my own hotel on my own.

[00:18:21.200]

What's that mean?

[00:18:22.680]

They have advantages in terms of better deals with the

[00:18:25.720]

online travel agencies.

[00:18:27.480]

They have brand recognition, they have scale and technology.

[00:18:31.400]

If I'm out there trying to spend my little marketing budget

[00:18:34.080]

I'm probably gonna be worse at it than if I give it to

[00:18:36.480]

Hilton to spend on my behalf.

[00:18:39.120]

Third, the bank would rather lend to me

[00:18:42.440]

to build a Hilton than they

[00:18:45.480]

would a Dave's Hotel because they think people are gonna

[00:18:48.200]

show up to a Hilton and I'll be fine and they can

[00:18:51.240]

lend me the money, versus they don't know if anyone's gonna

[00:18:53.400]

show up to my hotel.

[00:18:56.240]

What you're seeing is the large hotel companies continue to

[00:18:59.280]

take market share. Now, this isn't necessarily an

[00:19:02.480]

underappreciated dynamic, and that's where the deep work

[00:19:04.840]

comes in, of royalty rates and fees and margins

[00:19:08.520]

and expectations and valuation and all the stuff that we

[00:19:11.520]

focus on as analysts, but they're great

[00:19:14.600]

stocks to keep an eye on as they're kind of long term share

[00:19:17.600]

takers in their industry, so ones to watch,

[00:19:20.640]

I would say.

[00:19:21.800]

Long term share takers, for instance, sort of

[00:19:24.880]

the moat story there but how is the

[00:19:27.920]

industry itself?

[00:19:31.160]

Going back to earlier--

[00:19:31.600]

Maybe it doesn't matter.

[00:19:33.280]

--going back to earlier comments of the industry,

[00:19:37.120]

the revenue per available roommate, that's been slowing

[00:19:40.120]

and it's now running negative in the U.S.

[00:19:42.560]

but with that dichotomy of the high

[00:19:45.880]

end luxury consumer doing fine and those

[00:19:49.200]

rates continuing to go up versus the low end really

[00:19:52.160]

struggling, what's important is

[00:19:55.440]

over time typically you

[00:19:58.680]

charge more for hotels than you did last year, around

[00:20:01.800]

80% of the time, and these companies

[00:20:05.240]

have franchise business models.

[00:20:07.240]

At all levels of...

[00:20:08.920]

Yeah, so that grows over time.

[00:20:10.720]

They're franchise business models so they don't actually own

[00:20:13.720]

the hotels, they just charge a royalty fee which is very

[00:20:16.600]

high margin and capital

[00:20:19.720]

light.

[00:20:21.720]

Despite kind of this weakness in

[00:20:26.320]

the revenue per available room night the larger

[00:20:29.560]

end hotels have ...

[00:20:31.520]

the stocks have hung in okay because they continue

[00:20:34.520]

to grow units and people can look to the other side and

[00:20:37.320]

there's not that much operating leverage in the businesses

[00:20:39.680]

because of the royalty business model.

[00:20:41.600]

With the franchise side of things they get Dave to build the

[00:20:44.440]

hotel. They don't have to get involved in it and then they

[00:20:46.480]

put their label on it and there you go.

[00:20:48.360]

It's a great business.

[00:20:49.240]

It's a great business.

[00:20:49.840]

It's a great business.

[00:20:51.160]

It's an area where the big getting bigger, it sounds like,

[00:20:54.240]

from that perspective.

[00:20:54.760]

Yeah, certainly advantages to being [crosstalk].

[00:20:56.400]

So layer on top AI and

[00:20:59.640]

it's immediate effect.

[00:21:02.520]

This is a question for everyone. Is it accretive in the next

[00:21:05.840]

six months or a year?

[00:21:07.400]

Is that useful? Okay, we get the agenting side

[00:21:10.880]

of things, everyone can book their travel faster.

[00:21:14.240]

How does it work ultimately, for instance, the hotels within

[00:21:17.080]

this? Anything there yet?

[00:21:20.560]

What I'll say about AI, the bigger debate around

[00:21:23.720]

it in travel relates to the online travel

[00:21:26.720]

agencies.

[00:21:28.440]

So booking.com, Airbnb, Expedia.

[00:21:32.240]

Can it blow those out of the water?

[00:21:33.720]

That's sort of the competitive story.

[00:21:34.480]

It's kind of similar ...

[00:21:36.040]

there used to be this debate that would wax and wane about

[00:21:39.280]

Google search adding more and more features

[00:21:42.880]

that relate to booking hotels directly

[00:21:46.400]

into Google search. The fear was always, hey,

[00:21:49.720]

Google search will circumvent the OTAs, you won't book

[00:21:52.760]

your hotel on booking.com.

[00:21:53.840]

The OTAs are the online travel agencies.

[00:21:57.120]

Thank you.

[00:21:59.800]

That was always the fear.

[00:22:01.480]

The debate today is similar but it's about AI.

[00:22:04.160]

We're using ChatGPT

[00:22:07.960]

to plan our trips.

[00:22:09.280]

Google recently announced some new features in their AI mode

[00:22:12.560]

related to travel planning.

[00:22:15.280]

The concern, the bear view, I'll take you through the

[00:22:17.880]

bull/bear for the OTAs, but basically the bear view

[00:22:21.160]

is that you'll book directly

[00:22:24.280]

through an AI agent instead of going

[00:22:27.800]

to booking.com. The bull view is

[00:22:30.880]

a little more nuanced, which is the

[00:22:34.240]

OTAs have historically been some of the

[00:22:37.320]

largest advertisers on Google.

[00:22:38.800]

Part of the reason for this

[00:22:42.160]

is the OTAs can generally pay more for

[00:22:45.240]

an advertisement than an individual hotel.

[00:22:48.080]

Because if I pay for a Google ad and you click on

[00:22:51.120]

Dave's Hotel and you go, Dave's hotel looks trash,

[00:22:54.600]

I don't wanna go there, that's it.

[00:22:57.680]

I've lost the sale. But if you click on Dave's Hotel in

[00:23:00.440]

booking.com and you don't want to go there you probably

[00:23:03.520]

scroll down, pick another hotel and booking makes a

[00:23:06.560]

sale. That's one piece of it and maybe

[00:23:09.720]

that dynamic persists with AI agents,

[00:23:12.800]

where they're able to pay more for an ad.

[00:23:16.120]

It sounds like Google is the key here.

[00:23:18.240]

Yeah, I mean, certainly it's good to be Google.

[00:23:23.520]

That's one piece of it.

[00:23:25.440]

Another piece of it is these

[00:23:28.600]

OTAs, they're more than necessarily just booking

[00:23:31.640]

tools. They're networks and they offer other services.

[00:23:35.480]

If I was renting a room in my house

[00:23:38.480]

and I'm renting it through Airbnb do

[00:23:41.520]

I want to integrate directly with ChatGPT

[00:23:44.880]

and have millions of rooms integrate directly

[00:23:47.960]

with them, or do I just wanna have Airbnb do that

[00:23:50.640]

integration on my behalf?

[00:23:52.560]

Well, I don't know, how is that looking?

[00:23:55.040]

Because it sounds like the perfect job for agenting.

[00:23:59.120]

I think generally it's easier if Airbnb

[00:24:02.400]

... the bull argument would be it's easy if Airbnb

[00:24:05.240]

integrates on your behalf. Then

[00:24:08.400]

they also offer services around payments

[00:24:11.600]

of being the merchant of record, et cetera.

[00:24:14.320]

Are there deals between, for instance, ChatGPT, or any of

[00:24:17.240]

them, really, with a lot of these OTAs?

[00:24:19.960]

Is that actively happening?

[00:24:22.040]

Is there some circular finance going on here?

[00:24:24.040]

What's happening there?

[00:24:25.560]

Certainly not circular finance going on but what you're

[00:24:28.640]

seeing is, I guess a good

[00:24:31.760]

example would more be in hotels and this is the bear

[00:24:34.800]

case, which is a real bear case.

[00:24:37.360]

You've seen Wyndham, they recently announced

[00:24:40.960]

working on a project to make it easier for them to integrate

[00:24:44.040]

with ChatGPT and other AI

[00:24:47.040]

agents. That's an example of a hotel going direct

[00:24:50.800]

into the AI agents.

[00:24:53.720]

So there's...

[00:24:53.920]

And ultimately we don't need a website, we'll just let those

[00:24:56.360]

take over to an extent.

[00:24:57.480]

Yeah, or we don't need to pay booking.com.

[00:25:02.080]

That's kind of the bull/bear debate.

[00:25:04.800]

So far for the online travel agencies

[00:25:07.920]

you've seen continued room night growth and that's

[00:25:11.080]

gonna be the key to keep an eye on that as more and more

[00:25:14.200]

of these features get introduced, just seeing, hey,

[00:25:17.280]

are they starting to impact the room night growth.

[00:25:19.400]

It's really interesting though because sometimes the

[00:25:21.040]

conversation sort of gets away from everyone and in terms of

[00:25:24.240]

investment you might think that those OTAs kind of get

[00:25:27.520]

thrown out with the bathwater to an extent.

[00:25:29.680]

I think what you're saying, or it's interesting, that people

[00:25:32.360]

may not change that quickly.

[00:25:34.680]

I think it will take time.

[00:25:36.080]

That's part of the challenge with some of these AI debates,

[00:25:39.040]

you're almost fighting a ghost

[00:25:42.040]

in the near term--

[00:25:42.720]

A little bit, yeah.

[00:25:43.880]

--because you can't prove or disprove it and you

[00:25:47.000]

can argue both sides very reasonably.

[00:25:50.040]

Sometimes that creates opportunities, sometimes it creates

[00:25:52.960]

risk and, really, at Fidelity we're diving into

[00:25:56.120]

both sides of the argument, keeping an open mind as

[00:25:59.200]

we do our research to ultimately try and come to the best

[00:26:02.080]

conclusions we can for what it means for the stocks

[00:26:05.080]

over the medium and longer term.

[00:26:06.400]

It's fascinating to know what it means for, as you say, sort

[00:26:09.040]

of the medium term even though the conversation right now is

[00:26:11.680]

so heavily there.

[00:26:13.720]

Every single person is going that route.

[00:26:17.000]

Tell us a bit more, maybe this is hotels, maybe this is

[00:26:19.280]

everything, the discussion of housing, mortgages,

[00:26:22.640]

we go back to sort of a macro story but in

[00:26:25.680]

Canada how is the consumer?

[00:26:27.640]

Because that does tend to get tied to a mortgage

[00:26:30.760]

story in a lot of cases, or a housing story, an

[00:26:33.000]

affordability story, certainly.

[00:26:34.440]

Are we in the

[00:26:37.640]

exactly comparable K-shaped economy that the U.S.

[00:26:40.520]

is in? What are the nuances if there are differences?

[00:26:44.000]

The Canadian consumer, from my perspective, is not

[00:26:47.120]

in great shape.

[00:26:48.840]

Unemployment's around 7 so it's higher than in the U.S.

[00:26:52.480]

Rates have been coming down, mortgage rates have been coming

[00:26:55.360]

down but home prices are still coming down as

[00:26:58.800]

more and more of those COVID era mortgages come up for

[00:27:02.040]

renewal.

[00:27:03.040]

We were right in the storm that we had expected

[00:27:06.560]

but it doesn't need to be as stormy as we thought.

[00:27:08.320]

What do you think?

[00:27:10.040]

I think what's important and what we're focused on is rate

[00:27:12.920]

of change. The Canadian consumer is not in great shape

[00:27:16.240]

but they weren't in great shape last year, versus the

[00:27:19.520]

U.S., maybe you're seeing more of a dramatic rate of change

[00:27:22.640]

and a rate of change with things like low income consumer

[00:27:26.000]

falling off or the tariffs announcements.

[00:27:28.880]

These are the types of things that create the opportunities

[00:27:31.800]

to go dive in and say, okay, which of these

[00:27:34.880]

stocks have sold off too much and

[00:27:37.880]

where is their value on the other side.

[00:27:39.560]

We're really focused on the rate

[00:27:42.680]

of change and maybe you're not seeing anything as dramatic

[00:27:45.840]

in Canada as what you're seeing in the U.S.

[00:27:47.480]

right now.

[00:27:47.880]

Would you go so far as to call it a trough here

[00:27:51.040]

and therefore the other side is looking

[00:27:54.080]

closer than perhaps in the U.S.?

[00:27:56.320]

I would say, look, again,

[00:27:59.400]

I'm not a necessarily macro investor.

[00:28:02.800]

What we look to is understanding being macro

[00:28:05.880]

aware what's happening and then it creates a

[00:28:09.000]

chance for you to do work on some of the impacted companies

[00:28:12.360]

and say, hey, if macro is just normal

[00:28:15.560]

what does the risk-reward look like, what do earnings look

[00:28:17.720]

like, what are the companies doing to drive earnings

[00:28:20.160]

independent of the macro, and then you can

[00:28:23.760]

kind of say, well, if macro is better or worse what does

[00:28:26.200]

that mean, versus make a macro prediction on

[00:28:29.200]

what's gonna happen and bet on that necessarily.

[00:28:32.040]

You mentioned this kind of at the top, just the

[00:28:35.120]

differences and where there's winners and losers.

[00:28:38.120]

Across the U.S. is it divided into states, do

[00:28:41.360]

you see that in separate regions of the U.S.?

[00:28:44.360]

Is there something, again, nuanced there about the consumer?

[00:28:47.920]

What you've seen ... a couple companies have called out

[00:28:51.080]

weakness in Democratic areas.

[00:28:53.040]

There's a survey of Democratic

[00:28:56.120]

versus Republican consumer sentiment.

[00:28:59.560]

Interestingly, Democratic consumer sentiment is

[00:29:03.080]

at basically all-time

[00:29:06.320]

lows below COVID, below the GFC, which is

[00:29:09.400]

quite remarkable.

[00:29:11.080]

If your sentiment is poor maybe you're less willing to

[00:29:14.160]

open your wallet, right, so you're seeing some impacts

[00:29:17.480]

there. You've also seen, related to the government shutdowns

[00:29:20.680]

most likely, companies that have exposure to the

[00:29:23.680]

D.C. area see some weakness because if your paycheque's

[00:29:26.840]

being interrupted maybe you are not going out for lunch.

[00:29:29.680]

There's nuances there.

[00:29:33.640]

You take all of this information to help you make decisions

[00:29:36.840]

for portfolio managers, to help them make decisions.

[00:29:41.160]

It sounds like there's a lot of nuanced not awesome

[00:29:44.200]

stuff there. Does that mean it could actually be an

[00:29:46.640]

interesting time for you to enter and go shopping for

[00:29:49.160]

shopping stocks?

[00:29:50.120]

Certainly, certainly.

[00:29:52.080]

These moments, while they feel

[00:29:55.080]

challenging during it, just like when tariffs were first

[00:29:58.400]

announced and all the stocks sold off, it's often an

[00:30:01.920]

amazing time to hunt for new ideas because

[00:30:05.320]

all the stocks sound bad and they all sell off together.

[00:30:07.840]

Here at Fidelity we're doing the work, we are talking to the

[00:30:10.560]

teams, we are building our models, we're going through the

[00:30:12.920]

data, talking to experts.

[00:30:15.480]

We're trying to separate those winners and losers and take

[00:30:18.280]

advantage of moments like this.

[00:30:19.960]

That's really what it's all about.

[00:30:21.240]

That's amazing. We're so glad you have eyes on that for

[00:30:23.680]

everyone else joining you here today. David Cochrane, thank

[00:30:25.600]

you for being here.

[00:30:26.040]

Thanks so much for having me.

[00:30:27.480]

Hopefully helpful. I had a lot of fun.

[00:30:28.760]

Have a great weekend.

[00:30:30.640]

Thanks for listening to the

[00:30:33.920]

FidelityConnects podcast.

[00:30:35.480]

If you haven't done so already, please subscribe

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We'll end today's podcast with

[00:31:11.480]

a short disclaimer.

[00:31:14.040]

The views and opinions expressed on this podcast are

[00:31:16.840]

those of the participants, and do not

[00:31:19.960]

necessarily reflect the views of Fidelity Investments

[00:31:22.480]

Canada ULC, or

[00:31:25.360]

any affiliated companies.

[00:31:27.600]

This podcast is for

[00:31:30.480]

informational purposes only and should

[00:31:33.400]

not be construed as investment,

[00:31:36.280]

legal, or tax advice.

[00:31:39.120]

It is not an offer to

[00:31:42.000]

buy or sell or an

[00:31:44.920]

endorsement, recommendation, or sponsorship of any

[00:31:47.800]

securities or entities cited.

[00:31:50.040]

Read a fund's prospectus before

[00:31:53.240]

investing. Funds are not guaranteed.

[00:31:56.760]

Their values change frequently,

[00:31:59.640]

and past performance may or may not

[00:32:02.520]

be repeated.

[00:32:03.920]

Fees,

[00:32:06.920]

expenses, and commissions are all associated with fund

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[00:32:09.520]

Thanks for watching and see you next time!