FidelityConnects: Inside the Canadian consumer: What earnings are telling us now

00:01.001 --> 00:06.573

<b>Subtitles are AI Generated</b>

 

00:07.607 --> 00:09.509

Hello, and welcome to Fidelity Connects.

 

00:09.509 --> 00:13.546

I'm Pamela Ritchie. Well, we've seen this week Canada's latest CPI

 

00:13.546 --> 00:17.717

print being a little bit of a balm to

 

00:17.717 --> 00:22.789

the overall story for economics. We saw inflation increasing to 2.3%.

 

00:22.789 --> 00:26.893

This is for recent months, below expectations, while grocery

 

00:26.893 --> 00:29.262

inflation showed signs of cooling.

 

00:29.262 --> 00:31.031

We're going to talk about that today.

 

00:31.031 --> 00:35.101

Even though consumers remain focused on essentials and markets are taking

 

00:35.101 --> 00:39.139

note are consumer staples becoming the market's new safe

 

00:39.139 --> 00:42.542

haven as disruption risks appear elsewhere.

 

00:42.542 --> 00:47.247

Might utilities ultimately be quietly benefiting from steady demand?

 

00:47.247 --> 00:50.817

Joining us here today for a look at the health of the consumer is equity

 

00:50.817 --> 00:53.453

research analyst Andrew Hall. Warm welcome to you, Andrew.

 

00:53.453 --> 00:54.621

How are you today?

 

00:54.621 --> 00:55.255

Very well. Great to see you, Pamela.

 

00:55.255 --> 00:58.158

Great to have you here. We'll invite everyone to send questions in for Andrew

 

00:58.158 --> 01:01.061

over the next half hour or so.

 

01:01.061 --> 01:04.330

We're going to put this to you now because it just came across the headlines,

 

01:04.330 --> 01:07.300

the IEEPA ruling from the Supreme Court in the US.

 

01:07.300 --> 01:11.471

This is essentially against the tariff policy that the Trump administration

 

01:11.471 --> 01:14.040

has put out. It affects Canada.

 

01:14.040 --> 01:17.343

I guess your initial reaction one way or the other.

 

01:17.343 --> 01:19.279

It's hard to know when this was going to break but here it is.

 

01:19.279 --> 01:19.979

It's here today.

 

01:19.979 --> 01:23.917

Exactly. I think there are a few things to unpack when we think about

 

01:23.917 --> 01:26.086

this. Number one, it's a big deal.

 

01:26.119 --> 01:30.223

The tariffs were a central plank of Trump's agenda

 

01:30.223 --> 01:34.094

since he got into office last year and the IEEPA tariffs were kind of the

 

01:34.094 --> 01:35.862

broadest implementation of that.

 

01:35.862 --> 01:39.065

Obviously, he's done it a few different ways and there are still some tariffs

 

01:39.065 --> 01:42.135

in place but it's pretty big deal.

 

01:42.135 --> 01:44.304

You're seeing a relatively market reaction so far.

 

01:44.304 --> 01:45.939

I think that reflects...

 

01:45.939 --> 01:46.306

Why is that?

 

01:46.306 --> 01:49.275

This was widely expected. If you go back to oral arguments in the Supreme Court

 

01:49.275 --> 01:52.412

late last year there was a lot of skepticism from the Justices.

 

01:52.412 --> 01:55.415

Obviously, all of the lower court rulings that brought it up to the Supreme

 

01:55.415 --> 01:59.552

Court were against the tariffs so

 

01:59.552 --> 02:02.822

I think people were just kind of waiting, when is this finally going to happen.

 

02:02.822 --> 02:05.625

We had a few false starts through the year where people were expecting it maybe

 

02:05.625 --> 02:07.827

a little bit earlier in the docket.

 

02:07.827 --> 02:11.764

I think the second component is if we knew that it was likely

 

02:11.764 --> 02:15.869

to be struck down so did Trump and his administration and they're likely

 

02:15.869 --> 02:20.173

going to try to find a way to salvage much of the agenda through other means

 

02:20.173 --> 02:24.177

of tariffs. It remains to be seen how quickly those get back in

 

02:24.177 --> 02:26.946

place, whether they'll be an air pocket. But like I said, I think they were

 

02:26.946 --> 02:30.583

ready for this and so it will be relatively quick.

 

02:30.583 --> 02:36.055

Then we'll probably have to go through another litigation process of

 

02:36.055 --> 02:42.495

are those tariffs legal. Whatever the new regime is are those legal?

 

02:42.495 --> 02:46.533

Broadly does this affect consumer staples as you look at it, this

 

02:46.533 --> 02:50.503

industry, and I'll ask more broadly Canada, a lot has

 

02:50.503 --> 02:54.574

been pushed under CUSMA to a certain extent, except for various very

 

02:54.574 --> 02:58.912

important sectors. We've been protected from some of those tariffs,

 

02:58.912 --> 03:02.582

certainly. What is sort of the net impact to Canada, would you say, of this

 

03:02.582 --> 03:04.050

ruling?

 

03:04.050 --> 03:07.620

As it relates to my companies, they were typically relatively insulated from

 

03:07.620 --> 03:10.056

the tariffs that we've seen since last year.

 

03:10.056 --> 03:14.394

The retailers', grocery, they buy products and they sell them in Canada

 

03:14.394 --> 03:16.863

so they're not doing a whole lot cross-border.

 

03:16.863 --> 03:20.099

They were importing products under the reciprocal tariffs but Canada pulled

 

03:20.099 --> 03:24.204

them off last year on food items so there was a relatively

 

03:24.204 --> 03:27.273

small share of their products that were kind of tariff-impacted.

 

03:27.273 --> 03:30.043

That's already kind of gone through the system.

 

03:30.043 --> 03:32.445

It's more of a relative change.

 

03:32.445 --> 03:36.449

I do think there is an element of this is one fewer arrow in

 

03:36.449 --> 03:41.854

Trump's quiver for the upcoming CUSMA or USMCA negotiations.

 

03:41.854 --> 03:45.592

Maybe it gives him a little bit less leverage to make changes to things like

 

03:45.592 --> 03:49.162

supply management in dairy that he's been really focused on or other

 

03:49.162 --> 03:53.433

industries. Of course, as we know, Trump's unpredictable and he

 

03:53.433 --> 03:57.937

tries to get what he wants through means regardless of how much

 

03:57.937 --> 04:01.774

precedent there is for that so it would be, I think, a mistake to get too

 

04:01.774 --> 04:04.344

complacent but this is a benefit.

 

04:04.344 --> 04:08.815

Ultimately, and as you say, to the sectors that you're looking at

 

04:08.815 --> 04:12.819

it's not a meaningful story for the way you're looking and analyzing your

 

04:12.819 --> 04:13.353

companies.

 

04:13.353 --> 04:15.054

Exactly.

 

04:15.054 --> 04:19.092

Let's go into how your companies, and any company, really,

 

04:19.092 --> 04:22.662

that has been a place to hide out while there's been some market action.

 

04:22.662 --> 04:26.633

We've seen a lot of button pressing and sort of running for

 

04:26.633 --> 04:31.237

the hills for basically hard assets or staples.

 

04:31.237 --> 04:36.509

How, again, some of that market action, this is the AI disruptive waves

 

04:36.509 --> 04:39.946

that are going through the markets right now, how have staples sort of

 

04:39.946 --> 04:41.881

benefited ultimately?

 

04:41.881 --> 04:45.051

I think it's a pretty unique time in the market for a couple of reasons.

 

04:45.051 --> 04:49.222

Number one, while we've seen a ton of volatility the actual indices

 

04:49.222 --> 04:50.923

have been pretty stable.

 

04:50.923 --> 04:54.927

TSX, S&P are close to or at all-time highs despite

 

04:54.927 --> 04:57.530

a ton of carnage in certain areas of the market.

 

04:57.530 --> 04:58.531

And intraday.

 

04:58.531 --> 05:02.735

And intraday, and a lot of volatility on the high end and the low end going

 

05:02.735 --> 05:06.739

down. I think what's really happened here is

 

05:06.739 --> 05:09.575

this is a unique risk.

 

05:09.575 --> 05:13.713

Typically we think about staples and utilities as when economic risk is high

 

05:13.713 --> 05:18.284

people want to buy them because the certainty on their earnings is high and

 

05:18.284 --> 05:20.853

the certainty in earnings elsewhere in more cyclical parts of the economy is

 

05:20.853 --> 05:22.955

low. But we're not necessarily seeing that.

 

05:22.955 --> 05:26.893

We're seeing energy work, a more cyclical sector, alongside consumer staples

 

05:26.893 --> 05:31.431

and utilities which have all essentially been working for the last three weeks

 

05:31.431 --> 05:35.501

because, as you say, it's the unique risk that's going on which is that a

 

05:35.501 --> 05:39.772

lot of the technology companies in the market or maybe consulting services,

 

05:39.772 --> 05:43.676

anything kind of white collar, people are concerned about how transformative AI

 

05:43.676 --> 05:47.647

can be to them. The reality is in twelve months you're

 

05:47.647 --> 05:51.417

going to see very little impact, I think, on the majority of companies in the

 

05:51.417 --> 05:52.752

next twelve months from their growth rates.

 

05:52.752 --> 05:56.456

But because these companies started with such high valuations people aren't

 

05:56.456 --> 05:58.458

worried about the next six or 12 months.

 

05:58.458 --> 06:02.462

They're worried about, I was paying for cash flow 10, 20 years

 

06:02.462 --> 06:06.532

out on this trajectory of growth and what's going to change there.

 

06:06.532 --> 06:10.503

Inherently, there's less of a floor to the stocks than there

 

06:10.503 --> 06:14.140

would have been, say, low valuation starting sectors because people were

 

06:14.140 --> 06:17.744

looking out for growth previously.

 

06:17.744 --> 06:21.214

If you want stability in your portfolio and you're looking for that, of course,

 

06:21.214 --> 06:24.150

staples and utilities have been a place to hide because the risk of AI

 

06:24.150 --> 06:27.120

disruption in places like that, it's much lower.

 

06:27.120 --> 06:31.224

On the staple side, grocery, your shopping list, you've got to eat your

 

06:31.224 --> 06:36.329

food. Maybe it can change how the grocers approach promotions

 

06:36.329 --> 06:40.433

or how, you know, we talk about agentic commerce, there are things

 

06:40.433 --> 06:44.470

on the margin but fundamentally you're still going to buy food

 

06:44.470 --> 06:47.573

from your retailer so it's not likely to be high disruption.

 

06:47.573 --> 06:52.178

On the utility side, of course, AI superpower-intensive.

 

06:52.178 --> 06:56.282

We all see that. These data centres require enormous amounts of

 

06:56.282 --> 07:00.520

power. In Alberta, for example, the requests into the grid for

 

07:00.520 --> 07:04.323

data centre connections are in excess of the entire size of the grid today.

 

07:04.323 --> 07:08.294

So just the demand story regardless if anyone short term, long term, is looking

 

07:08.294 --> 07:10.596

for somewhere to hide, that is just a long term demand.

 

07:10.596 --> 07:15.935

A good problem to have, basically. That's

 

07:15.935 --> 07:20.006

really interesting. On the staple side of things

 

07:20.006 --> 07:23.109

has something been brought forward on the evaluation side of things because

 

07:23.109 --> 07:26.779

people have dumped themselves into these stocks, essentially?

 

07:26.779 --> 07:29.782

Is there anything to be aware of on the valuation side of things, short term,

 

07:29.782 --> 07:33.719

long term? Is it a long term transition, I guess, to some of those

 

07:33.719 --> 07:35.455

more defensive names?

 

07:35.455 --> 07:39.125

I think for sure these names have seen their valuations increase over the last

 

07:39.125 --> 07:43.629

two or three weeks but what we tend to do is try to look at the

 

07:43.629 --> 07:47.333

historical precedents and see where are we sitting relative to them and then in

 

07:47.333 --> 07:50.903

our fundamental forecast have our earnings estimates kind of change.

 

07:50.903 --> 07:54.874

I think on the former point, valuations have come up relative to the market but

 

07:54.874 --> 07:57.743

valuations across the market are still relatively healthy.

 

07:57.743 --> 08:01.781

On a relative basis, if you compare it to Liberation Day last year

 

08:01.781 --> 08:05.418

when there was a lot of economic fear, or the Silicon Valley banking crisis

 

08:05.418 --> 08:09.622

going back to 2023, or the economic concerns

 

08:09.622 --> 08:13.559

around rates rising in 2022, we're below all of those levels in terms

 

08:13.559 --> 08:15.862

of kind of relative valuation indicators.

 

08:15.862 --> 08:19.899

It does give us a sense for we're not at a scary point

 

08:19.899 --> 08:23.903

where it's probably all priced in but it remains to be seen exactly

 

08:23.903 --> 08:25.771

how the pace of AI adoption will go through.

 

08:25.771 --> 08:29.408

No one has a crystal ball on exactly how that's going to play out.

 

08:29.408 --> 08:33.246

Is a piece of the relative stability that you're talking about compared to some

 

08:33.246 --> 08:37.250

of those others, does it have to do with a ballast from the economy?

 

08:37.250 --> 08:41.420

We've gotten some data out over the last several days on the inflation front,

 

08:41.420 --> 08:46.726

on sort of overall growth front, things look

 

08:46.726 --> 08:50.396

okay. There's the discussion that we've skipped the recession and there's a bit

 

08:50.396 --> 08:52.698

of a footing on the economics.

 

08:52.698 --> 08:56.536

That doesn't mean there isn't a K-shaped economy, it appears there is, does

 

08:56.536 --> 08:59.972

that account a little bit for an underpinning?

 

08:59.972 --> 09:04.176

I think that's a good point. Coming into the year there was a lot of enthusiasm

 

09:04.176 --> 09:08.180

around the growth outlook is getting better for Canada and for the US, stimulus

 

09:08.180 --> 09:12.084

in the US, Canada, we've got these kind of major projects and after years of

 

09:12.084 --> 09:16.088

sort of anemic growth, pressured by the change in rates, rates have

 

09:16.088 --> 09:17.924

come down.

 

09:17.924 --> 09:20.760

That's typically not the best setup for kind of more defensive companies.

 

09:20.760 --> 09:22.828

You want to be in other areas of the market.

 

09:22.828 --> 09:24.730

But as we've seen this is a unique type of disruption.

 

09:24.730 --> 09:28.434

Like I said, it's not about a recession coming down the pipe for the next 12

 

09:28.434 --> 09:32.538

months that might disrupt earnings or fundamentals, it's about the

 

09:32.538 --> 09:35.408

long term potential structural change.

 

09:35.408 --> 09:39.612

The challenge is, of course, up front it's hard to know

 

09:39.612 --> 09:42.214

... certainly there's going to be areas of the market that were hit very hard

 

09:42.214 --> 09:45.284

that are going to ultimately not be impacted nearly as negatively, or going to

 

09:45.284 --> 09:49.221

be winners. There's going to be other areas of market that were hit harder.

 

09:49.221 --> 09:53.125

I think unlike a recession it's harder to necessarily have short term

 

09:53.125 --> 09:57.797

indicators that can disprove this sort of long term structural argument

 

09:57.797 --> 10:01.133

versus sort of saying, okay, well, employment data is getting better or rates

 

10:01.133 --> 10:05.304

have come down. Tou do have a bit of a difference in the narrative between the

 

10:05.304 --> 10:08.574

economic underlying story which is, I think, a story of kind of muddling

 

10:08.574 --> 10:13.646

through. It's not gangbusters but we think we've skipped the recession.

 

10:13.646 --> 10:17.984

It's about the long term uncertainty on some of these high valuation companies

 

10:17.984 --> 10:22.588

that are drawing questions and putting that more into the staples.

 

10:22.588 --> 10:25.691

Within the staples, let's go into the grocers for a second here just because

 

10:25.691 --> 10:30.196

it's often what we all do every day.

 

10:30.196 --> 10:32.498

Food prices are high, this has not changed.

 

10:32.498 --> 10:36.836

The inflation that was brought in basically during the pandemic has not

 

10:36.836 --> 10:39.138

really come off in a way that people feel it.

 

10:39.138 --> 10:41.574

There's still complaints and frustrations and so on.

 

10:41.574 --> 10:43.676

What do you do with that within the staple story?

 

10:43.676 --> 10:45.511

It's just going to stay there until we earn more?

 

10:45.511 --> 10:47.446

Will prices come down?

 

10:47.446 --> 10:51.684

Tell us a little bit about what grocers, food retailers are

 

10:51.684 --> 10:54.920

navigating through on that front.

 

10:54.920 --> 10:59.058

What I would say is first off food inflation in Canada today looks really

 

10:59.058 --> 11:03.029

high, it's close to 5%. There's a bit of an artifact from, if you recall last

 

11:03.029 --> 11:07.133

year the GST, HST sort of rebate piece

 

11:07.133 --> 11:08.834

and that's artificially elevating that.

 

11:08.834 --> 11:12.571

We think on an underlying basis it'd be more than a point below sort of those

 

11:12.571 --> 11:16.375

headline figures but that's still relatively high versus the overall CPI number

 

11:16.375 --> 11:21.013

or historical food inflation which kind of tends to run in the mid-2s.

 

11:21.013 --> 11:25.017

What you're seeing there is it's concentrated in a lot of protein and

 

11:25.017 --> 11:27.319

produce categories which tend to be more volatile.

 

11:27.319 --> 11:31.323

It's harder to say it's here to stay with us but there are some structural

 

11:31.323 --> 11:35.661

things, beef, in particular, has been a huge driver of inflation,

 

11:35.661 --> 11:39.799

coffee, those are sort of a bit more structural in terms of sort of the

 

11:39.799 --> 11:43.803

agricultural dynamics of the countries that produce a lot of that, what they've

 

11:43.803 --> 11:43.903

been challenged.

 

11:43.903 --> 11:45.805

Because no one's going to give up coffee. I mean, you might think about giving

 

11:45.805 --> 11:47.606

up beef but coffee's a staple.

 

11:47.606 --> 11:49.508

It's true that beef, I think, is more substitutable.

 

11:49.508 --> 11:52.244

You've seen that benefit to other types of protein.

 

11:52.244 --> 11:55.614

Maybe people buy more chicken, they buy more pork, which have also seen

 

11:55.614 --> 11:57.917

inflation just not to the same magnitude.

 

11:57.917 --> 12:00.853

That's why I think when you speak to the grocers they're generally saying that

 

12:00.853 --> 12:04.690

their basket inflation, the way they calculate it, is lower than the CPI you

 

12:04.690 --> 12:08.394

see from Stats Canada. That's because Stats Canada is a fixed basket so it

 

12:08.394 --> 12:11.063

doesn't account for the fact that you're buying pork instead of beef, whereas

 

12:11.063 --> 12:14.300

the grocers would say that's a protein occasion and you've made a different

 

12:14.300 --> 12:16.669

decision and so the net inflation.

 

12:16.669 --> 12:20.573

In terms of your question around do we see deflation anywhere and is that a

 

12:20.573 --> 12:22.441

likely reality? I don't think so.

 

12:22.441 --> 12:24.744

I think it's very unlikely.

 

12:24.744 --> 12:28.914

There's very little precedent over 50 plus years of data in Canada for

 

12:28.914 --> 12:33.085

food deflation. Typically, it's around kind of competitive entrance,

 

12:33.085 --> 12:35.688

trying to make a name for themselves maybe when...

 

12:35.688 --> 12:37.590

Or a recession.

 

12:37.590 --> 12:42.228

Even in recessions, in 2009 food inflation actually was still positive.

 

12:42.228 --> 12:44.797

It's really more so about competitive intensity.

 

12:44.797 --> 12:47.233

I think most of the competitors are already here and they're already doing what

 

12:47.233 --> 12:50.903

they're doing so it's unlikely you're going to see sort of any kind of

 

12:50.903 --> 12:52.438

sustained negative inflation.

 

12:52.438 --> 12:55.174

Tell us a little bit about that. There have been players that moved into

 

12:55.174 --> 12:59.245

groceries. This is X years ago when home delivery came

 

12:59.245 --> 13:01.380

onto it. Some players were better at that.

 

13:01.380 --> 13:04.984

There was an expansion. Pretty stable competitive ...

 

13:04.984 --> 13:08.354

we talk a lot about moats in this area but there's nothing there sort of on the

 

13:08.354 --> 13:11.390

horizon where you see that shifting different players and so on.

 

13:11.390 --> 13:14.059

I think that's a great point in terms of when we're thinking about the AI

 

13:14.059 --> 13:16.295

disruption risk and how to size it for grocery.

 

13:16.295 --> 13:20.299

E-commerce, 10 years ago, I think, when

 

13:20.299 --> 13:24.470

Whole Foods was bought by Amazon 10 plus years ago, or close to 10 years ago,

 

13:24.470 --> 13:28.607

I think it was in 2017, it was,

 

13:28.607 --> 13:30.843

oh my gosh moment for a lot of the retailers.

 

13:30.843 --> 13:34.446

Here's a big behemoth that's made a lot of inroads in a lot of places, what are

 

13:34.446 --> 13:35.514

they going to do to the category?

 

13:35.514 --> 13:36.649

And knows how to deliver.

 

13:36.649 --> 13:40.452

Exactly. What we've seen in Canada is penetration rates for grocery delivery

 

13:40.452 --> 13:44.557

almost 10 years later, it's running in the mid-single

 

13:44.557 --> 13:47.693

digit, low single digit across the country.

 

13:47.693 --> 13:47.827

Why is that?

 

13:47.827 --> 13:51.864

I think it's hard to replicate the shopping experience

 

13:51.864 --> 13:56.936

in store in terms of maximizing your promos, seeing what's on special, picking

 

13:56.936 --> 14:00.539

the right produce. I think that the e-commerce solutions have gotten better but

 

14:00.539 --> 14:02.241

people still like to just go to their grocery store.

 

14:02.241 --> 14:06.312

For most people it is relatively convenient to get there.

 

14:06.312 --> 14:10.749

The relative advantage of going to your weekly grocery

 

14:10.749 --> 14:13.986

shop versus getting it delivered to you is smaller than it might be for other

 

14:13.986 --> 14:14.620

industries.

 

14:14.620 --> 14:17.823

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

 

14:17.823 --> 14:21.160

I wanted to share that here at Fidelity, we value your opinion.

 

14:21.160 --> 14:24.196

Please take a few minutes to help us shape the future of Fidelity Connects

 

14:24.196 --> 14:28.667

podcasts. Complete our listener survey by visiting fidelity.ca/survey,

 

14:28.667 --> 14:31.036

and you could win one of our branded tumblers.

 

14:31.036 --> 14:34.340

Periodic draws ending by March 30th, 2026.

 

14:34.340 --> 14:37.943

And don't forget to listen to Fidelity Connects, the Upside, and French

 

14:37.943 --> 14:41.981

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

 

14:41.981 --> 14:45.184

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

 

14:45.184 --> 14:46.919

So then layer on top ...

 

14:46.919 --> 14:49.922

this is part of the reason why it's an interesting place to hide from the AI

 

14:49.922 --> 14:53.325

disruption, it sounds like ... so layer on the AI destruction.

 

14:53.325 --> 14:56.195

How disruptable is that?

 

14:56.195 --> 14:59.331

I mean, because you're going to things like logistics, the services side of

 

14:59.331 --> 15:03.302

things. It sounds like we already did that with basically the internet boom,

 

15:03.302 --> 15:04.336

is that fair?

 

15:04.336 --> 15:08.440

I think that what people are mostly focused on from an AI standpoint today is

 

15:08.440 --> 15:12.645

this notion of agentic commerce, which is really AI shopping

 

15:12.645 --> 15:15.581

on your behalf, making more of the decisions in order to free up some of your

 

15:15.581 --> 15:17.516

own time.

 

15:17.516 --> 15:22.821

We saw the biggest grocer in the US make a partnership with OpenAI late

 

15:22.821 --> 15:26.926

last year. We saw a partnership with the largest grocer in Canada this

 

15:26.926 --> 15:31.130

year with OpenAI and Google over the recent months.

 

15:31.130 --> 15:34.099

What the biggest grocery in the US has said right now is that we're talking a

 

15:34.099 --> 15:38.203

tiny fraction of an infinitesimal part of their

 

15:38.203 --> 15:42.341

sales today are related to agentic commerce

 

15:42.341 --> 15:44.843

so it's more of a question of how big.

 

15:44.843 --> 15:49.014

I do think that the e-commerce and the delivery story is a good benchmark

 

15:49.014 --> 15:53.419

for saying having an AI agent pick

 

15:53.419 --> 15:57.556

my grocery list, my grocery list is 80% the same every week anyways so

 

15:57.556 --> 16:01.493

it's less beneficial that an AI agent is kind of

 

16:01.493 --> 16:04.296

relieving that from you versus, let's say, planning a two-week trip across

 

16:04.296 --> 16:07.099

multiple countries, trying to organize itineraries, pick the best tours.

 

16:07.099 --> 16:11.103

That could actually be hours of work that maybe they can at

 

16:11.103 --> 16:14.740

least point you in the right direction on a lot of things so it's likely to be

 

16:14.740 --> 16:18.877

a more disruptive element for something like that.

 

16:18.877 --> 16:23.716

Just as an example, not calling that one as the number one use case.

 

16:23.716 --> 16:28.220

I think in grocery, other than maybe, hey, I want to try this new recipe and

 

16:28.220 --> 16:31.390

then you ask the AI for a recipe and it gives it to you and then it says just

 

16:31.390 --> 16:35.327

buy me those ingredients. There are occasions where it could be beneficial but

 

16:35.327 --> 16:36.295

it's probably on the margin.

 

16:36.295 --> 16:39.598

But New York Times Cooking does that for you already. You could just go into

 

16:39.598 --> 16:43.369

the app for your restaurant and say print me a list, it does that, or send it

 

16:43.369 --> 16:47.439

somewhere. Let's go into the utility story.

 

16:47.439 --> 16:51.643

This is so fascinating of whether certain utilities and how

 

16:51.643 --> 16:55.714

they're going to be disruptive and how the grid that they are providing

 

16:55.714 --> 16:59.785

and overseeing and regulating and making sure it happens is going to

 

16:59.785 --> 17:02.154

change because of data centres, basically.

 

17:02.154 --> 17:04.056

It can change in a few different ways.

 

17:04.056 --> 17:08.560

This is an area of stability,

 

17:08.560 --> 17:12.564

it's a defensive play, but it's also kind of a growth play as well.

 

17:12.564 --> 17:15.934

How do you see the shifts in that industry?

 

17:15.934 --> 17:18.904

It's a really interesting kind of intersection of that sort of old economy

 

17:18.904 --> 17:23.008

notion versus new economy. The mantra of Silicon Valley is move

 

17:23.008 --> 17:27.112

fast and break things. The mantra of utilities is be reliable and

 

17:27.146 --> 17:31.316

definitely don't break things. Trying to marry the

 

17:31.316 --> 17:35.554

unique capital intensity of the AI boom with these data centres with

 

17:35.554 --> 17:39.858

grid realities around we were planning for kind of zero demand growth

 

17:39.858 --> 17:44.129

and most of the investment was around kind of storm resiliency

 

17:44.129 --> 17:48.133

related to climate change or maybe transition to lower the

 

17:48.133 --> 17:52.604

carbon intensity of generation and then kind of truing up

 

17:52.604 --> 17:55.074

ageing infrastructure on the transmission side.

 

17:55.074 --> 17:59.044

Now all of that has this data centre piece which is substantial

 

17:59.044 --> 18:01.013

to demand.

 

18:01.013 --> 18:04.049

On one hand it's for sure a positive because it's accelerating the growth

 

18:04.049 --> 18:07.286

potential but it is also inviting a lot of political scrutiny.

 

18:07.286 --> 18:11.957

We're seeing that with the Trump administration

 

18:11.957 --> 18:14.993

talking about a special auction in PJM, one of the largest grid operators in

 

18:14.993 --> 18:19.631

the US. The governor of Pennsylvania, which is part of PJM, also

 

18:19.631 --> 18:23.035

putting caps on rates.

 

18:23.035 --> 18:26.505

Typically, political uncertainty is bad for utilities because you buy them for

 

18:26.505 --> 18:30.442

certainty so there's this sort of trade-off of we want to capture this

 

18:30.442 --> 18:34.746

potential growth avenue but do it in a very measured way

 

18:34.746 --> 18:38.684

to not draw the ire of the regulator or the politicians.

 

18:38.684 --> 18:41.820

Affordability, as we know, is the number one political issue right now and

 

18:41.820 --> 18:45.557

peoples' power bills going up is top of mind for them, just like it is in

 

18:45.557 --> 18:47.926

grocery, so it's a compromise.

 

18:47.926 --> 18:52.231

One of the questions is can it be ring-fenced?

 

18:52.231 --> 18:54.399

Can the grid be shared in that sense?

 

18:54.399 --> 18:58.337

Can it be a ring-fenced to protect the rate payers who need

 

18:58.337 --> 19:01.340

to turn their lights on at home and do their dishwasher and all that kind of

 

19:01.340 --> 19:04.743

stuff and have the portion that needs to go to everything from resource

 

19:04.743 --> 19:07.079

development to building the actual data centres themselves.

 

19:07.079 --> 19:11.216

How can it be shared physically, or will it

 

19:11.216 --> 19:13.218

be at some point? Is this the goal?

 

19:13.218 --> 19:17.055

I think that's the idealized version which is these tech companies are huge,

 

19:17.055 --> 19:20.526

they have a lot of cash and so they'll pay through the nose to get it done and

 

19:20.526 --> 19:23.195

then we'll be able to figure it out. But there are physical constraints on

 

19:23.195 --> 19:26.965

infrastructure and the pace and how many skilled people are available.

 

19:26.965 --> 19:31.136

It is not easy work to build the transmission line for potentially

 

19:31.136 --> 19:35.274

hundreds of kilometres or tens of kilometres long, as we

 

19:35.274 --> 19:38.043

saw with the Ontario line or the Eglinton line.

 

19:38.043 --> 19:42.047

Big infrastructure projects, even if you have a big blank cheque,

 

19:42.047 --> 19:46.185

take time. I think there are those physical constraints that are slowing the

 

19:46.185 --> 19:48.787

pace and that's why you've seen the tech companies try to go into whatever

 

19:48.787 --> 19:52.424

market they see there's a little bit of excess today that they can then kind of

 

19:52.424 --> 19:54.826

latch onto for speed reasons.

 

19:54.826 --> 19:58.897

I think as we kind of move 18 to 24 months ahead, a lot

 

19:58.897 --> 20:01.767

of those areas are going to be tapped out and then it's how fast can we

 

20:01.767 --> 20:06.305

actually build the new stuff, and that is still a challenge.

 

20:06.305 --> 20:09.708

What sort of power is going to be going into the grids over the course of the

 

20:09.708 --> 20:13.345

next 10 years?  Where's it going to come from?

 

20:13.345 --> 20:17.349

I think nuclear has done a 180, from

 

20:17.349 --> 20:21.153

no new nuclear, we're going to retire it, whether that's Japan, Germany, France

 

20:21.153 --> 20:25.357

was talking about it, to nuclear is the biggest piece.

 

20:25.357 --> 20:28.694

We want it to be a really long term piece because it's stable, it's reliable,

 

20:28.694 --> 20:30.696

and it's clean.

 

20:30.696 --> 20:38.103

The challenge for nuclear is it costs a lot of money and it takes forever.

 

20:38.103 --> 20:40.906

So you just build little ones. Just build the little ones and then they're

faster.

 

20:40.906 --> 20:43.709

That is a possibility, it's still a science project.

 

20:43.709 --> 20:46.211

It's a possibility but it's still a science product.

 

20:46.211 --> 20:50.315

I think we're talking about early 2030s

 

20:50.315 --> 20:54.519

by the earliest for the SMRs to really be commercially available

 

20:54.519 --> 20:56.788

and will remain to be seen how well they perform.

 

20:56.788 --> 21:01.426

You're even seeing some of the SMRS, the small modular reactors,

 

21:01.426 --> 21:05.063

getting kind of upsized because they're realizing that it doesn't make sense to

 

21:05.063 --> 21:09.034

do 100 megawatts or 300 megawatts, just doesn't change the

 

21:09.034 --> 21:13.171

game as much as a traditional nuclear facility that would be probably

 

21:13.171 --> 21:18.644

three one-gigawatt reactors, so three gigawatts of power in totality.

 

21:18.644 --> 21:20.712

That's still probably more of a mid-2030s story.

 

21:20.712 --> 21:24.683

I think gas is clearly a bigger part of the story,

 

21:24.683 --> 21:28.720

natural gas. We've gone from are we ever going to build new gas turbines again

 

21:28.720 --> 21:32.991

to certain companies are basically sold out for three to five years

 

21:32.991 --> 21:37.129

on the turbine side. Renewables are still there as the

 

21:37.129 --> 21:40.232

cheapest, fastest way to get power but not reliable power.

 

21:40.232 --> 21:43.335

It's intermittent, whether the sun's shining or the wind's blowing.

 

21:43.335 --> 21:46.605

I think it is an all of the above solution.

 

21:46.605 --> 21:49.408

Renewables are going to have a place in that growth, gas is going to have a

 

21:49.408 --> 21:53.612

place and nuclear is, hopefully, going to take us home further out.

 

21:53.612 --> 21:57.749

For today, to change the facts on the ground today, it's mostly renewables and

 

21:57.749 --> 21:59.451

a bit of gas.

 

21:59.451 --> 22:03.555

Really, really interesting. What do you want investors to know probably about

 

22:03.555 --> 22:06.024

the utility space going forward?

 

22:06.024 --> 22:08.860

There's a story today. There's the piece of the running for the hills going

 

22:08.860 --> 22:12.764

into something that's kind of low vol, essentially, and then there's the other

 

22:12.764 --> 22:16.101

story. There's a great question coming in on the consumer side so we'll go back

 

22:16.101 --> 22:17.936

to staples in a second.

 

22:17.936 --> 22:21.206

What do you think you'd like to leave investors with to think about for

 

22:21.206 --> 22:24.943

utilities because there's real change happening there.

 

22:24.943 --> 22:28.413

There's real change but I think you should always think of utilities as

 

22:28.413 --> 22:32.417

incremental. Because of the regulated nature, because

 

22:32.417 --> 22:37.055

of way the organizations are set up you can't go from 6% growth to 15%

 

22:37.055 --> 22:41.660

growth. What we are talking about is an acceleration of that growth

 

22:41.660 --> 22:44.796

from kind of that mid-single digit to maybe creeping into the high single

 

22:44.796 --> 22:47.199

digit, depending on the utility.

 

22:47.199 --> 22:51.403

That's meaningful on a base of 5 or 6% going to 8% but

 

22:51.403 --> 22:54.272

it's not going to break out ...

 

22:54.272 --> 22:58.143

even if the rate of investment grows out into the double digits for very

 

22:58.143 --> 23:01.780

specific utilities they're going to need to fund that with equity because these

 

23:01.780 --> 23:05.984

are 9% type ROE businesses so as a result your kind of ability

 

23:05.984 --> 23:10.088

to grow your EPS is still going to be constrained by sort of that

 

23:10.088 --> 23:13.859

financing structure and the regulated returns that the governments have these

 

23:13.859 --> 23:17.829

constructs. It's helpful but I think it's not

 

23:17.829 --> 23:20.065

going to become like a leading growth sector in general.

 

23:20.065 --> 23:24.035

The utilities that exist today, the companies, the ones that are private

 

23:24.035 --> 23:28.173

and public, is it likely that

 

23:28.173 --> 23:32.377

if you put the ability of management

 

23:32.377 --> 23:38.049

to execute aside just for a second, they are all sure things?

 

23:38.049 --> 23:42.387

I would say no specifically because

 

23:42.387 --> 23:45.524

we go back to the affordability question. The political scrutiny is always

 

23:45.524 --> 23:48.860

there and that's one of the number one things that I do when I'm stock picking

 

23:48.860 --> 23:52.631

within the group is where do I see political risk as higher or lower?

 

23:52.631 --> 23:56.568

Like you say, people typically buy utilities for certainty and safety and if

 

23:56.568 --> 24:00.372

there's an elevated risk of, when I say political risk what does that mean, it

 

24:00.372 --> 24:03.608

means they could go to the regulator and give you a really bad outcome so your

 

24:03.608 --> 24:05.343

9% ROE becomes ...

 

24:05.343 --> 24:09.181

sure, it's still 9% allowed but your ability to actually earn that return is

 

24:09.181 --> 24:13.819

severely constrained so you're earning 7% which is pretty meaningful change.

 

24:13.819 --> 24:17.489

I think there's always going to be that sort of undercurrent.

 

24:17.489 --> 24:21.493

This, to your point about execution, increases the stress on

 

24:21.493 --> 24:24.396

management teams to be able to manage all these stakeholders.

 

24:24.396 --> 24:26.965

We want to grow faster, we want to support the data centres, we want to support

 

24:26.965 --> 24:30.936

AI but we want to do it in a way that doesn't undercut our consumers, people

 

24:30.936 --> 24:34.940

who vote, and draw the ire of politicians and kill all the growth

 

24:34.940 --> 24:38.143

because then you'd see a moratorium on data centres or something like that.

 

24:38.143 --> 24:41.346

So interesting. The regional story of how that will be managed, ultimately,

 

24:41.346 --> 24:44.216

across the country. Back to the consumer.

 

24:44.216 --> 24:48.553

Are higher consumers making up for potential spending curtailment

 

24:48.553 --> 24:50.222

at the lower end?

 

24:50.222 --> 24:53.492

Really interesting in the K-shaped economy, just the health overall, what do

 

24:53.492 --> 24:54.292

you see there?

 

24:54.292 --> 24:58.530

That's for sure been the case. We've seen the lower income consumer, they

 

24:58.530 --> 25:02.634

spend more of their paycheque so they are less resilient

 

25:02.634 --> 25:07.405

when there's changes to inflation or changes on sentiment.

 

25:07.405 --> 25:10.876

We've also had a rising stock market, higher income people participate in that,

 

25:10.876 --> 25:14.312

lower income people don't participate nearly to the same degree.

 

25:14.312 --> 25:17.349

That's, no doubt, the story. I would say that there are some green shoots on

 

25:17.349 --> 25:21.353

the lower income side that we haven't seen in the last sort of 12 to 18 months

 

25:21.353 --> 25:22.454

that we're starting to see.

 

25:22.454 --> 25:24.456

Are they all fiscally related?

 

25:24.456 --> 25:27.225

I think that you're seeing some of it ...

 

25:27.225 --> 25:31.229

inflation is coming down, wages are catching up on the low end and then

 

25:31.229 --> 25:34.299

you do have this, the hope, I think, we are already seeing some of that in kind

 

25:34.299 --> 25:38.470

of Q4 into Q1 on things like restaurants which skew lower

 

25:38.470 --> 25:43.041

income or convenience stores or dollar stores in the US late last year.

 

25:43.041 --> 25:44.910

There's some signs of improvement.

 

25:44.910 --> 25:49.214

The hope is that's going to be carried forward by sort of higher tax refunds,

 

25:49.214 --> 25:53.385

no tax on tips, no tax on overtime for certain

 

25:53.385 --> 25:57.622

types of workers, as an additional stimulus to the lower income consumer.

 

25:57.622 --> 26:01.326

I think that piece of it is still kind of the hope remains to be seen.

 

26:01.326 --> 26:04.796

Even ex that think things have gotten a little bit better, albeit from a low

 

26:04.796 --> 26:06.464

base.

 

26:06.464 --> 26:09.234

Really interesting. Final thoughts just on those two sectors.

 

26:09.234 --> 26:12.771

You also take a look at telecom which we'll go into another time.

 

26:12.771 --> 26:17.475

Tell us a little bit about what you want to leave with investors

 

26:17.475 --> 26:20.178

sort of this moment, literally, of people running through the hills and looking

 

26:20.178 --> 26:25.183

at these two particular sectors that you follow on a more incremental basis.

 

26:25.183 --> 26:29.454

I think that, like I said at the outset, these are relatively

 

26:29.454 --> 26:33.391

insulated sectors so the disruption risk from AI is

 

26:33.391 --> 26:37.395

pretty low. What's unique about this disruption risk relative to economy

 

26:37.395 --> 26:41.499

or recession risk is that it impacts things that are traditionally recession

 

26:41.499 --> 26:45.503

resistant as well. That's narrowed the list of companies that

 

26:45.503 --> 26:48.707

might be of interest. In one sense, like in terms of quality companies, but it

 

26:48.707 --> 26:52.677

also has widened it in terms of why are sort of resource companies

 

26:52.677 --> 26:56.915

doing well in a time where people are selling off

 

26:56.915 --> 26:59.884

sort of other things. I think that's because people generally feel like the

 

26:59.884 --> 27:03.955

economy is okay. It's not an economic risk issue, it is a disruption

 

27:03.955 --> 27:08.293

risk issue. Where are we in valuation?

 

27:08.293 --> 27:11.396

Again, we're not at the levels, despite the moves we've seen in the last couple

 

27:11.396 --> 27:15.400

weeks, that we've seen in previous kind of times of stress so it's not

 

27:15.400 --> 27:20.405

necessarily all priced in but remains to be seen exactly how the

 

27:20.405 --> 27:22.774

disruption risk will come. What's the pace of AI adoption?

 

27:22.774 --> 27:26.978

That's still a big question. Nobody truly knows the answer to that.

 

27:26.978 --> 27:30.248

I think, as we said on utilities, these are incremental stories.

 

27:30.248 --> 27:33.652

From an earnings standpoint, I think you're going to see relatively consistent

 

27:33.652 --> 27:37.422

earnings growth with history, probably a bit of an acceleration on the utility

 

27:37.422 --> 27:39.724

side and more similar for the staples.

 

27:39.724 --> 27:42.794

Really, really interesting, of course, both at the heart of sort of the hard

 

27:42.794 --> 27:43.561

asset story right now.

 

27:43.561 --> 27:45.630

Exactly.

 

27:45.630 --> 27:49.067

Andrew, thank you very much for joining us. Have a great weekend and we'll see

 

27:49.067 --> 27:49.668

you next time.

 

27:49.668 --> 27:50.435

Thank you very much.

 

27:50.435 --> 27:53.071

Thanks for watching or listening to the Fidelity Connects

 

27:53.071 --> 27:57.375

podcast. Now if you haven't done so already, please subscribe to Fidelity

 

27:57.375 --> 28:00.745

Connects on your podcast platform of choice.

 

28:00.745 --> 28:03.581

And if you like what you're hearing, please leave a review or a five-star

 

28:03.581 --> 28:07.552

rating. Fidelity Mutual Funds and ETFs are available by working with

 

28:07.552 --> 28:10.922

a financial advisor or through an online brokerage account.

 

28:10.922 --> 28:14.626

Visit fidelity.ca/howtobuy for more information.

 

28:14.626 --> 28:18.463

While on Fidelity.ca, you can also find more information on future live

 

28:18.463 --> 28:22.600

webcasts. And don't forget to follow Fidelity Canada on YouTube, LinkedIn,

 

28:22.600 --> 28:23.902

and Instagram.

 

28:23.902 --> 28:26.771

We'll end today's show with a short disclaimer.

 

28:26.771 --> 28:30.608

The views and opinions expressed on this podcast are those of the participants,

 

28:30.608 --> 28:34.546

and do not necessarily reflect those of Fidelity Investments Canada ULC or

 

28:34.546 --> 28:38.550

its affiliates. This podcast is for informational purposes only, and should not

 

28:38.550 --> 28:41.086

be construed as investment, tax, or legal advice.

 

28:41.086 --> 28:43.388

It is not an offer to sell or buy.

 

28:43.388 --> 28:47.726

Or an endorsement, recommendation, or sponsorship of any entity or securities

 

28:47.726 --> 28:52.530

cited. Read a fund's prospectus before investing, funds are not guaranteed.

 

28:52.530 --> 28:56.101

Their values change frequently, and past performance may not be repeated.

 

28:56.101 --> 28:58.436

Fees, expenses, and commissions are all associated

 

28:58.436 --> 29:00.238

with fund investments.

 

29:00.238 --> 29:02.841

Thanks again. We'll see you next time.