The Attractions of Telecom Infrastructure Investment

Stock Market Outlook

In the first week of October, we published our Quarterly Market Outlook. Other than some uncertainty generated recently over the future of NAFTA and the encouraging fact that the ECRI Weekly Leading Indicators have reversed to the upside over the last two weeks, not much has changed in terms of our short term market outlook. Thus, we would just repeat what we concluded in our October 1 Strategy Note: “In sum, it appears that North American and global growth will remain stable in the second half of 2017 before a pick-up in US economic growth around the turn of the year and that the risk of a U.S. or global recession and a bear market in the latter part of this year and the first half of next year currently appears to be low.

In essence, in normal times, we take a historical multiple range for the appropriate investment criterion (EPS, CFPS and Book Value) and apply it to consensus forecasts for those three metrics for the TSX and to EPS alone for the S&P 500. However, assuming no large increase in risk aversion among investors, we think it fair to use the average for these metrics for the last five years. Applying these to Bloomberg consensus forecasts provides a target for the TSX of 15,990 which makes for a high single-digit positive total return from current levels (higher if the 2017 year end oil price moves back to the $60 plus area a barrel, which we think is quite possible by year-end/next spring).

In the case of the S&P 500, if we use a similar projected P/E of 16 times (the TSX’s last 5-year average) on blended forward 12-month EPS, we get a target of 2,274 for a capital loss of 10% from current levels and a negative high-single digit total return (roughly 8%), which is certainly significantly inferior to what would be the case for Canada’s index using the same methodology. In addition, we believe it is likely that the Canadian dollar will increase modestly from here (if oil prices firm further) and will add to the potential projected underperformance of the S&P 500 relative to the TSX over the next 12 months. Note that although the S&P 500 has materially outperformed the TSX year-to-date, the strength of the Canadian dollar this year has offset all but 3% of the underperformance by the TSX versus the S&P 500 in Canadian dollars.”

We returned at the end of September from our fall trip to Toronto, Montreal and New York visiting the senior management of companies in our universe located there. In New York, we interviewed Thomson Reuters and also attended the Brookfield Investor Day presentation in Lower Manhattan. The Brookfield meetings allowed us to get together informally with several of the executives of the companies and we were particularly struck by the emphasis from Brookfield Infrastructure’s top management on the various infrastructure opportunities they see over the next five to ten years. Of the four main opportunity sets they saw, a key one was Data Infrastructure. This area would create the need for significant investment in the telecom sector. We also interviewed the CFO of BCE in Montreal and prior to our trip the CFO of Telus in Vancouver. This Note will highlight the message from those interviews as well as what it means for the companies involved on a longer term basis.

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