[00:02:53] Rebecca Hotsko: Is Latin America also part of your investment strategy?

[00:02:57] Ian Bezek: Yeah, I mean the largest portion of my assets are in in the United States, but then Latin America’s my next largest holding as a region outside of the United States. I think there’s a lot of opportunities here, and people haven’t really talked much about Latin America for the last 10 years.

[00:03:10] Ian Bezek: Kind of everything’s been down in the dumps here, and so a lot of investors have left. A lot of money has moved out, but I think that’s created an opportunity for people that are rediscovering the region now. As we talked about the returns of really starting to pick up here over the last year, and so I think there’s interesting opportunities.

[00:03:26] Rebecca Hotsko: I’m really curious to learn more about those opportunities that you see investing in this space. Because I was looking at Fize, which is something that I just like to use to look at a worldview of different returns in markets and sectors and it, it’s really interesting how Latin Amer a lot of countries in Latin America have been the only ones that have performed really good over the past.

[00:03:50] Rebecca Hotsko: Can you just talk a little bit about kind of the opportunities that you see investing in this space and what’s been driving those really good returns over the past year?

[00:03:58] Ian Bezek: Most of the Latin American countries, I’d say are driven by commodities tend to be export countries that are still developing, that haven’t reached the same level of wealth you’d see in Europe or Japan or the US.

[00:04:09] Ian Bezek: That creates an opportunity in a year like this year where you have a lot of inflation, you have a lot of shortages. Obviously the invasion of Ukraine has taken a lot of grain and a lot of energy supplies out of the. And so people are looking for alternative sources of those goods. Obviously you think about a country like Brazil or Argentina, they’re known for growing tons of soybeans and wheat and cattle and if you need energy, you’ve got a lot of oil producers down here.

[00:04:33] Ian Bezek: You’ve got some of the oil that are just copper mines, which are vital for the green energy transition. There’s a lot of raw materials here and now that the prices for commodities have gone up and everyone’s worried about inflation, south America’s looking like a much more hospitable place to get resources from than.

[00:04:49] Rebecca Hotsko: Yeah, that’s really interesting. Argentina is one in particular that has done exceptionally well over the past year, and even more so in the past three months, along with now Mexico, Peru, Cayman Islands in Brazil are also doing really well. So is it all that commodity story then for all of those ?

[00:05:09] Ian Bezek: Largely the one exception would be two exceptions. Caveman Islands is kind of holding companies because it’s kind of a banking paradise. So I’m not sure which companies those would be in particular. But the big exception would be Mexico, because that’s more of a manufacturing play. The, you have a ton of integration with the US I believe, what, 30 years ago now you, you had nafta, the North American Free Trade Agreement, which opens the Mexican market to Canada and the US.

[00:05:35] Ian Bezek: Any company can locate in Mexico and produce, sell to the US or Canada without any tariffs or taxes. And so over the past 30 years, we’ve seen a ton of automakers, aircraft health medical equipment, all that sort of stuff, set up shop along the Mexican border. And that had been growing naturally. But now with all the problems we’ve had with China and shipping over the past year or two, that people couldn’t get goods from China, and a lot of companies are reconsidering how much exposure they want to China, it’s looking a lot safer to manufacture in Tijuana instead of in Shanghai.

[00:06:06] Ian Bezek: It’s just been off the charts activity in Mexico this year. I believe exports are up 50% versus last year. That’s just been a tremendous tailwind for Mexico, but that’s largely just Mexico. If you look at South America, you don’t have the same links. You don’t have highways or railroads that go the us.

[00:06:22] Ian Bezek: It’s a lot more complicated to manufacture in Brazil, say, than in Mexico.

[00:06:27] Rebecca Hotsko: So I am wondering what is kind of your, so these countries have done so well over the past year, but what’s kind of your outlook going forward? I read the most recent I M F World Economic Forecast, which predicts that Latin America’s rebound.

[00:06:43] Rebecca Hotsko: Is expected to kind of slow going forward, and they expected their growth to be 2.5% in 2022 and 2023. So that’s considerably slower than I think it was 6.8%. That was 2021. And so I guess I’m just wondering what you think will happen maybe to the markets going forward if economic growth is kind of expected to slow down a.

[00:07:07] Ian Bezek: I think it’s going to be a challenge for the region, particularly the higher interest rates that we’ve seen in the us That’s a global phenomenon. All of the countries down here having to erase their interest rates as well for the same factors. And uh, that’s creating the same pressures on housing and construction and not.

[00:07:23] Ian Bezek: Definitely there will be a slowdown, but we’re slowing down from some pretty incredible numbers. I believe the last GDP print for here in Columbia where I live was plus 13% year over year growth. Wasn’t going to keep happening at that rate regardless, but I think there’s definitely enough going on that we can avoid recession here.

[00:07:39] Ian Bezek: Fingers crossed, as long as like the rest of the world doesn’t totally crash. I think Latin America will be advantaged because energy, food, kind of the stuff that we produce the most of is really in short supply right now. Yeah. I think we face the same, same risks as other people, but we’re better suited to, to handle the current set of risks we have than, than a lot of the rest of the world.

[00:07:59] Rebecca Hotsko: What’s the inflation picture like? There are so about North America and other developing economies, so is it just as bad there?

[00:08:07] Ian Bezek: I think Mexico, Columbia, Peru, Chile are all around seven to 10% now. Pretty similar to what you’d see in the US or, yeah, Brazil’s a little bit higher, and then Argentina is kind of its own story there.

[00:08:19] Ian Bezek: Inflation I think, is closer to 70%, just totally out of control. But there, the government has decided it’s a good idea to print money and pay a lot of the government’s bills, like they pay people’s salaries and pensions directly from, from printed money is a big part of the reason why Argentina has hyperinflation.

[00:08:35] Ian Bezek: The rest of Latin America. It’s not been that bad at least so far.

[00:08:39] Rebecca Hotsko: Wow. Yeah. So that seems like that could be a big risk to the markets going forward. But then on the other hand, inflation is largely driven by commodity prices too. So that maybe benefits the companies there because they’re exporters and producers of much of that.

[00:08:55] Ian Bezek: Yeah, exactly. I’m sure we’ll get into this more, but I’d say probably the biggest problem in Latin America is the structural distribution of income. So much income goes to the, the top of society. There’s not very good systems in place that so that money gets from like a state owned oil company, like Petrobras in Brazil or.

[00:09:13] Ian Bezek: Eco patrol in Columbia, they’re making more money than ever, but it’s a question, how will those funds be distributed? How will will people get better healthcare and better education? They lower crime as a result of this money? Or is it just going to, to take advantage to help the top 10% of society? I think that’s what you’ve seen with these elections recent, like Brazil, Columbia, out of these countries have elected more socialist leaders because people are saying that the money just never gets to.

[00:09:38] Ian Bezek: There’s more, more dollars coming in thanks to the higher commodity prices. But it’s a challenge to see whether that will benefit the average person in these countries.

[00:09:48] Rebecca Hotsko: Yeah. So how do you think about the risks investing in these emerging markets? They typically have greater additional risks for a US investor because of political uncertainties and a lot of those things that you just mentioned.

[00:10:02] Rebecca Hotsko: How do you think about that, factoring that into your analysis and your allocation at capital?

[00:10:09] Ian Bezek: I think the biggest thing I would tell people is just to, that there’s a wider range of outcomes that you can ha, like volatility is going to be higher, both to the upside and the downside. If normally you would take, say, a 10% position in something, maybe make it a 5% position because you know, like if your thesis is right, you’re still going to make a lot of money with a 5% position, and if you’re wrong, won’t be as hard to recover.

[00:10:31] Ian Bezek: 2003 to 2008 when we had kind of the China Supercycle and all the commodity countries did very well. Like most of the US listed Latin American stocks went up, threefold, fivefold. The largest bank here in Columbia went up 30 x. It was available for $2 in 2003, and it ended at $60 in 2010. So just, you don’t need a huge position in that sort of stack.

[00:10:54] Ian Bezek: Just doning a little bit and holding tight through the volatility has done very well for people.

[00:11:01] Rebecca Hotsko: Do you think of these investments as long-term? because typically on this show we like to talk about buy and hold strategies, or are you trading these more tactical?

[00:11:11] Ian Bezek: Yeah, I think of it through a cycle. Once, like these countries tend to go in and out of favor.

[00:11:16] Ian Bezek: Like 2000, the 1990s were good for Latin America. 1999 to 2001, everything crash. Several of our largest countries went bankrupt to 2003 to 2008 was just golden age, like the best you could imagine. And then since 2011, everything’s gone way down. So you have kind of this 10 year cycle where things go up and down.

[00:11:36] Ian Bezek: And so I would say I’ll be looking to sell my Latin American investments at the top of the next cycle, but realistically, that might not be until 2030. Still pretty long too. I wouldn’t view it as something just to put in a safe deposit box and pass on to your grandkids. I think you. Should monitor Latin American investments, but you don’t need to be trading in and out every quarter.

[00:11:56] Ian Bezek: Definitely not.

[00:11:58] Rebecca Hotsko: Okay. So that’s interesting. How do you think about assessing when it’s at the top of the cycle? Is it linked to the commodity cycle

[00:12:04] Ian Bezek: then? Yeah, there’s a commodity cycle, but I’d say more general, you can just look at sentiment. How much are people talking about Latin America? How well if the currency’s done, you had tremendous amounts of money flowing into Latin America through up to 2011.

[00:12:19] Ian Bezek: You had Colombians and Brazilians and all buying tons of luxury properties in Miami and there were . There was just so much money coming outta South America. If you were looking around at all, it’s clear that they weren’t doing very well. And now no one is talking about these regions. A bunch of the ETFs the, one of the Argentina ETFs and one of the Columbia ETFs just shut down the summer, which is usually what you see near the bottom when there’s no more investor demand.

[00:12:46] Ian Bezek: I think when you see the opposite of that, when you see people going on CNBC and saying, this is the Mexican stock you need to buy, this is why Brazil’s going higher, and they’re already up a bunch, that’s when you start saying, no, I need to be more cautious.

[00:12:57] Rebecca Hotsko: What drove that ETF shutting down?

[00:13:00] Ian Bezek: Just, I think that they were very small.

[00:13:01] Ian Bezek: Like there used to be two Colombian ETFs. There was vank, and I forget who was the sponsor of the other one. Both of them had like under a hundred million of assets under management. And so I think the sponsors just decided there’s only room for one ETF for this country because there’s so little demand.

[00:13:17] Ian Bezek: And same for Argentina. And I would note they shut the ETF the second one down in June. And then since June Aine stocks played 50%. It’s quite, quite ironic.

[00:13:28] Rebecca Hotsko: I think typically we think of ETFs as the safer vehicles, obviously, because they’re more diversified. What happens to an investor’s funds when it shuts down?

[00:13:40] Ian Bezek: So they sell off all the underlying stocks or bonds or whatever assets are in the ETF. And then they will redeem it. They finish their accounting. It’s usually like a one or two week delay while they do all the back office stuff. And then they’ll send everyone a cash dividend equal to the last called the net asset value nav reported of the ETF.

[00:14:00] Ian Bezek: Investors don’t lose anything. If ETF shuts down, it’s just a inconvenience because you have to reinvest the money and it might cause tax consequences or.

[00:14:09] Rebecca Hotsko: So I was looking at some of the largest ETFs in Latin America, and there’s one in Brazil, ticker E w Z, Mexico, E w W Chile, e c h, Peru, E P U, and Columbia, G X G.

[00:14:26] Rebecca Hotsko: I’m just wondering how should investors think about analyzing these ETFs? Do you have any thoughts on what do you think is the best way they can get exposure to certain economies?

[00:14:38] Ian Bezek: I own a small bit of the Chilean ETF, which was ech. Other than that, I mostly own individual countries stocks within the individual countries.

[00:14:48] Ian Bezek: I only picked the Chilean ETF because they have so few companies that are quoted in New York that it was, it was hard to get exposure to the country without buying the ETF. Say in general, looking at the ETFs, just take a look at their holdings, see if the sectors make sense. In some countries you’ll find that they’re quite diversified, like the Mexico ETF is pretty good.

[00:15:08] Ian Bezek: It has consumer staples as transportation, as telecom. There’s a variety of things, but then you look at other countries in the ETF will be like 40% banks, and so maybe that’s not such a, unless you really like. I would steer away. Like I would tell people to be careful with the Columbian ETF, for example, because I haven’t looked recently, but at one point the top two holdings were 40% of the fund.

[00:15:30] Ian Bezek: And so it’s like, do you really want to pay a, a management fee and you could just buy those two stocks and get almost half the ETF for yourself? Look how liquid are they? Like, is, is there a reasonable amount of assets and trading spread and are they giving you a good diversity of stocks or just kind of buying a couple of names?

[00:15:46] Ian Bezek: I think like the Argentina ETF as. At one point it was like 25% Mercado Libre stock. So if you just want to own the, the e-commerce, they’re just buy Mercado Libre outright by far. Then we’re just holding a dtf anyway.

[00:15:59] Rebecca Hotsko: I find it’s so hard to get emerging markets exposure because you could go very broad with something like I E M G or V W O, but right now they’re, well, they’ve always been super heavy China, and right now China’s doing awful, but then Latin America only makes up like less than 10% of that ETF.

[00:16:17] Rebecca Hotsko: So if you want to hone in on certain countries, then there are more risks with buying one of those. And so that’s good that you mentioned all of those things that we can look for. I found it super interesting though. I was looking at the Brazil ETF and the dividend yield is so high. It’s 12.32%, so I was just wondering if you could talk a little bit about that, why it’s so high, and why that’s a bit deceiving.

[00:16:43] Rebecca Hotsko: Because I think some people could look at that at face value and think that’s incredible, but maybe you shed some light on why that’s not the case.

[00:16:51] Ian Bezek: Sure. Yes. Brazil is a very commodity heavy country in particular in what’s in their ETF. I believe three or four of the top holdings are related to oil and gas mining, or heavy industry.

[00:17:04] Ian Bezek: They’re like Petrobas, which is the state run oil company, is the largest holding in Vale, which is iron ore. Kind of these things are all making windfall profits right now because they’ve kind of directly replaced production from Russia with production from. Like Petrobas, for example, pays out the majority of its income as dividends every year.

[00:17:22] Ian Bezek: And so in a down year, like when oil was $30 a barrel or whatever it was, a few years ago, Petrobas was paying no dividend at all because it wasn’t making a profit. But now it’s making a ridiculous profit. And so I believe Petrobas has a 35% dividend at the moment because they just pay all their profits out to shareholders.

[00:17:39] Ian Bezek: And so if your ETF is 10% in Petro Rast and Petrova is paying a 35% dividend, that gives shareholders the, the appearance of a huge yield. But the problem is you, if you’re just speculating on what the oil price will be next year, maybe oil will be up again and Petro Vasst will pay you another huge dividend.

[00:17:56] Ian Bezek: Next year, maybe oil will go down and they will cut their dividend dramatically. There’s just no guarantee that these dividends are oil and gas and iron and steel and all will last. But there’s certainly people that have held Brazil for many years are now being richly rewarded for with dividends, for having faith during the lean years.

[00:18:15] Ian Bezek: But I couldn’t forecast where dividends will be for Brazil in two or three years. So I bet on where commodity crisis will be.

[00:18:22] Rebecca Hotsko: I dug a little bit deeper into that E T F just to see the historical dividend yield and just two years prior it was below 2% and then it all of a sudden spiked to 9% in 2021.

[00:18:35] Rebecca Hotsko: Now it’s over 12, so it’s clearly extremely volatile. It’s not to suggest that would persist. Do they have to give any type of forward guidance though? How does that.

[00:18:47] Ian Bezek: I would’ve to look at the ETF specifically. Some ETFs pay quarterly dividends and some pay kind of an annual or semi-annual, so it would depend on their payment schedule.

[00:18:56] Ian Bezek: But usually the ETF will collect all the dividends it receives from companies over a given period of time, say six months, and then it will pay those all out at a lump sum. If you were tracking the amount of underlying dividends that each company the index had paid, you could forecast what the yields would be.

[00:19:12] Ian Bezek: But aside from that, I mean the ETF itself won’t give you guidance. They just say after the fact, here’s how much dividends we received over X period of time, and so here’s your payment. One other thing I’d note on Brazil specifically, since we’re talking about it, they’re one of the few countries that charges no dividend tax to foreigners.

[00:19:28] Ian Bezek: Most countries will charge you if you’re not a resident of their country, but that makes Brazil’s dividends more attractive compared to most of Europe charges. I believe 20% on Americans, for example, I don’t know the tax treaties with Canada or Australia or other countries, but like as an American citizen, you pay a tax down almost any country except Brazil is one of the few that’s tax.

[00:19:48] Rebecca Hotsko: Yeah, I think that’s something that can be overlooked by investors, the amount that foreign dividends are taxed because we don’t directly see it, so I’m glad you pointed that out. I think that’s something we need to keep in mind if we’re investing in a foreign stock, especially for their attractive

[00:20:03] Ian Bezek: dividend.

[00:20:04] Ian Bezek: Yeah. Yeah, it’s definitely when you are thinking about how to, how you want to allocate money to emerging markets or really anywhere outside of your home country more generally, definitely consider the, the tax consequences. because I think that’s something a lot of people don’t really look at until after they’ve gotten their bill and then be like, oh, I wish I’d known that sooner.

[00:20:22] Ian Bezek: Better to to take the into account in advance. And this is a good time to do tax planning now because presumably most people won’t have too much from the way of capital gains this year. So this is a good time to optimize portfolios going forward and hopefully vary more, more profits in 2023 than this year.

[00:20:37] Rebecca Hotsko: Exactly, and I think the last thing I just want to wrap up on investing in emerging markets in Latin America is it has been attractive over the past year, but that doesn’t necessarily mean it’s right for everyone. I just kind of wanted to cover it with you because it has been so interesting why it’s been doing so well.

[00:20:56] Rebecca Hotsko: But I think it’s also important to highlight just, yeah, what are the risks of investing in this space that our listeners should be aware of, and how they can kind of think this through if they should add it to their portfolio.

[00:21:08] Ian Bezek: Yeah, I think political risk is certainly the one that gets the most headlines.

[00:21:12] Ian Bezek: Probably every year or two, some new leftist or socialist will get elected in at least one American country, and you’ll see people just knee jerk sell off their exposure to that country. Usually that’s been a mistake just over the past three years. Peru, truly Mexico. Now Columbia and Brazil have all elected leftists, and of those like only Columbia has meaningfully deteriorated from an investment standpoint.

[00:21:35] Ian Bezek: Like Peru. Stock market dropped 20% on their election last year, and now it recovered all those losses and it’s got under new highs. Same with Chile, like the foreign media was saying it was going to turn into a communist country and now their president has become a centrist. People tend to overreact. But I think investors who come into it being aware that these countries have large structural problems in terms of governance, obviously people talk about corruption, but I would say from living here, the, the bigger issue is just the schools and healthcare is not a very high quality, or at least not for the lower class.

[00:22:05] Ian Bezek: And as long as that’s the case, People feel that the capitalist society isn’t working for them. And so you’re going to consistently see populist movements against that. I think investors need to be aware of that and capitalist, they support free markets and business, but the system is not working for everyone here.

[00:22:21] Ian Bezek: And so people should keep expecting to see more like the election of Lua and Brazil. That’s totally understandable why people would do that, given their circumstances. Other risks. Yeah, inflation’s a big problem. I think you saw like the Arab Spring 10 years ago where people were protesting over food prices.

[00:22:39] Ian Bezek: We may see something similar. So far there haven’t been huge protests in Latin America in particular, but I can tell you the price of groceries where I live is up 20 or 30%, and I think the government increased wages for its state employees, like 8%, and so do the math. That doesn’t really work if this keeps up.

[00:22:53] Ian Bezek: So that will create more insecurity. Certainly it’ll hit sales for more discretionary things, like it’ll be a headwind for traveler tourism, restaurants, kind of the stuff that people spend with their, their leftover money. Let’s see. Any other risks? Yeah, just some of the academies aren’t that diversified, so if commodities keep going well, things will be good, but if commodities drop, a lot of countries will have problems.

[00:23:15] Ian Bezek: Mexico is kind of the one that’s the most stable because it’s tied to the us, but aside from that, there’s a lot of commodity.

[00:23:22] Rebecca Hotsko: Yeah, that’s a very good point. That’s kind of the same issue I actually have in Canada too. It’s stock market is mostly banks and energy, and so I have to look to the world to get more diversification for my portfolio.

[00:23:35] Rebecca Hotsko: But I want to talk to you about investing in infrastructure. Now, you write about this, you mentioned that you like investing in this space. Can you kind of talk about why and the opportunities that you see in

infrastructure?

[00:23:50] Ian Bezek: Yeah, I think it’s a great asset class because you get these very long-term cash flows, very long-term dividends generally from things that you can own.

[00:24:00] Ian Bezek: Either you own outright or you have leases that last 30, 40, 50 years. And just provide steady cash flow in a zero interest rate world. I don’t think people cared as much about these sorts of assets. People are focused more on things that would grow quickly, but now that interest rates have gone up and people need to consider how much profit and how much dividend is being generated today, these kind of toll roads kind of assets are much more attractive.

[00:24:21] Ian Bezek: And there are literal toll roads. I believe you’re, what is it? The 4 0 5, what is in Toronto? One of the highway areas publicly. Here in Latin America, the airports, a lot of the airports are publicly available. Overseas. You can invest in seaports. Yeah. There’s a lot of different assets, particularly in a emerging market where you still have a sharply rising population and more consumer spending, just people want to travel more.

[00:24:44] Ian Bezek: So naturally your, your revenues for owning a toll road or airport or whatever are going to go up pretty conservative. Like one of the infrastructure investments I own, which is a Mexican airport. Their primary asset is the airport in Guadalajara, which is the country’s second largest city. A decade ago, I believe it had 5 million passengers per year.

[00:25:03] Ian Bezek: I don’t remember our, and by believe it was 5 million. Now it’s up to 16 million despite the pandemic, and they’re expanding it with their own money now with the government’s money. So they serve 40 million people over the next 20 years, and so there will be an eightfold growth in traffic while they’ve.

[00:25:18] Ian Bezek: And then they pay a hundred percent of their free cash flow out to shareholders as dividends. And so assuming flat profit margins, the dividend will go up eightfold as well. And so people might look at it and say, oh, the starting dividends only 4%. But you look at the future, it’s like this thing’s going to be much larger because you’ve got an airport for a city of like 7 million people that 20 years ago hardly any Mexicans flew.

[00:25:39] Ian Bezek: And going forward, presumably Mexicans will fly nearly as much as, as Americans do. And so it. A tremendous opportunity to own the equivalent of the Chicago or Vancouver airport in terms of like the same size city for the US or Canada. And to, to own that asset in Mexico is, I think, very interesting benefits from demographics.

[00:25:57] Rebecca Hotsko: Wow. So what was the ticker for that one again?

[00:26:01] Ian Bezek: It’s called Pacifico Airports. It’s traded on the New York Stock exchanges.

[00:26:05] Rebecca Hotsko: How can investors think about assessing that acro pictures of investing in infrastructure? What would they be looking for? Its population trends, or what’s the driving factors behind how well that does?

[00:26:18] Ian Bezek: Population in general. And then what local industries, kind of what’s powering the local economy. I was talking to the CFO F of Pacifico and just asking kind of what’s, cause I’d seen traffic had gone up dramatically and I was asking what’s going on? And he said it’s all the logistics because people couldn’t ship anything out of China for the last two years.

[00:26:36] Ian Bezek: And so they were looking for any other alternative and so they started flying stuff in like DHL and FedEx directly to the airport and then sending it into the US and into Canada from railroad, because the airport’s directly tied to the railroad. So it’s like there, the logistics industry is booing there and then that creates all sorts of new jobs.

[00:26:54] Ian Bezek: People move to be near the airport so they can, can operate the warehouses and all, like Amazon’s building a big facility there. And so you get kind of these network effects. This people need to create new supply chains that don’t involve China. So I’d just be looking to see what’s going on, what can, what can drive new traffic.

[00:27:11] Ian Bezek: This reassuring trend with people wanting to build closer to end consumers in the US and Canada is going to be a tremendous boom for Mexico and for North American. Logistics will do very well as well, like your railroads in Canada and the us. Probably strong assets as well.

[00:27:27] Rebecca Hotsko: Yeah, that’s true. That’s kind of what I want to talk to you about.

[00:27:29] Rebecca Hotsko: Those boring assets that really no one likes to talk about or, or own. You mentioned that you’re kind of a fan of investing in those less glamorous industries, food, beverage, banks, typically defensive or consumer staples sectors, I guess. So can you talk to us a little bit about that? Any opportunities or investments that you see as particularly interesting right now and in kind of that long-term hold perspective?

[00:27:58] Ian Bezek: Yeah, I think it goes very well with what you were saying earlier, things that you want to buy and not have to worry about, just buy it. Know that you’ll get steadily increasing earnings and dividends and, and share price over the. I think the consumer staples, that’s food, beverage cleaning products, that sort of stuff has proven to be very resilient.

[00:28:16] Ian Bezek: Just people trust brands. I understand sometimes nowadays people might trade down to save money, particularly with inflation, but still in general, people generally want to buy something they know and trust. Something like Coca-Cola, there’s other sodas, but there’s only one that tastes like that. As sales tend to be very, I think the place where people get into trouble with staples, kinda defensive companies is just make sure the brands are strong.

[00:28:40] Ian Bezek: You don’t want to own something that looks like the cheapest one. If the brand isn’t strong, like it needs to be something that really connects with consumers. I think the growth opportunities, particularly in things where you’ve got either a growing category, like I’d point out spices and hot sauces is the fastest growing food trend that’s been going at 7% a year for the past decade.

[00:28:59] Ian Bezek: So a company like McCorick, who’s virtually Monopoly and those sales in the. That company has done very well. I believe it’s tripled earnings over the past decade, so people might think of that as a, a boring company. It just sells black pepper or whatever. But it’s actually a very good business. Companies that take advantage of demographics are one of my holdings.

[00:29:16] Ian Bezek: Hormel Foods take H R L. It is the largest kind of importer of Mexican products to distribute in the, in the us. So guacamole, hot sauces, variety of things. That’s done very well because they partnered with a Mexican company and so they sell all these brands that Mexican Americans grew up with or that their grandma always served.

[00:29:34] Ian Bezek: So there’s what, 50 million Spanish speakers in the US now. And so a company that has taken a lead in distributing those sorts of products, doing very. And I like the Staples companies in emerging markets. I think that’s a good place to be because we’ve got very quickly growing populations that have more spending power.

[00:29:49] Ian Bezek: So something like Ambe which was the division of Budd Heiser, Anheiser Busch, excuse me, for South America kind of the Brazilian beer monopoly. I think your sales are going to go up a lot there. Kind of Latin America’s been very slow to reopen from Covid, but hoping the World Cup get some stuff going on that.

[00:30:04] Ian Bezek: Yeah, that’d be, that’d be kind of my overview for Staples. Just look for things where strong brands and where there’s something that catalysts that can drive growth that other people might not be seeing.

[00:30:13] Rebecca Hotsko: So are you mostly getting exposure to these companies then by picking certain companies? Or do you hold any ETFs or anything as well?

[00:30:24] Ian Bezek: Yeah, in this space I just own individual companies. I think the ETFs are probably fine. I just, I have expertise in this area and I feel I can pick the individual companies out pretty well. And I think the main Staples ETF is like 15% Proctor and Gamble, and another 15% Costco. The West Track, once again, it’s very top heavy.

[00:30:43] Ian Bezek: And a couple of companies that, they’re fine. I think they’re good companies, but maybe they’re, if you want to be more tactical, maybe there’s other options.

[00:30:50] Rebecca Hotsko: And then on dividend investing. So you’re also a fan of that. Is it mostly through kind of the staples and the emerging markets that we already talked about?

[00:30:59] Rebecca Hotsko: Or are these other companies that you kind of want to share?

[00:31:03] Ian Bezek: The majority of dividends come from those defensive companies that can consistently increase their earnings and dividends every year. I like looking through the dividend aristocrats, which are those of the companies that have increased their dividends for at least 25 years in a row.

[00:31:16] Ian Bezek: So that means we got through the nine 11 attacks, the 2008 financial crisis, COVID and I get through all that, and we’re able to pay a rising dividend every year. That means the company is generally strong enough to make it through a garden variety Recess. A lot of the companies that I would own for other reasons, like because they’re a strong defensive company whatnot, also happen to be RISAs.

[00:31:36] Ian Bezek: I like looking through the, particularly like looking through the 52 week lows there to see kind of what are these very successful companies that are currently going through a hard time? Because that might be a bargain opportunity. And for ETFs of the dividend companies, I believe what, like the utilities have sold off a lot.

[00:31:51] Ian Bezek: Interesting. So that might be interesting to some people. Yeah. And one other thing I’d point out, one thing I like about these defensive companies and kind of the companies that have allowed dividend track record is if they’re get into trouble or they underperform, they tend to not fade away overnight.

[00:32:05] Ian Bezek: I’d point out for my own, my own personal. My dad was an employee for IBM for virtually all of his professional life, and so the, my parents bought a bunch of IBM stock when he got hired there in 19 84, 19 85, I believe. And obviously like if you’ve looked at IBM over the last 10 years, like it’s a dog, like it’s, the company’s just outdated.

[00:32:24] Ian Bezek: It miss the cloud evolution. Like people love to make fun of this company. Yeah, I, my parents bought it for like $15 a share and now it’s paying $7 a share of annual dividends. So it’s like they’re getting back almost half their initial investment every year just from the dividend. So it’s. Say what?

[00:32:40] Ian Bezek: Say what you will like. Say, oh, IBM’s old-fashioned, or whatever. But some of these companies continue to produce tremendous amounts of cash flow even after people write them off. It’s tempting to look at like you’re in videos and AMDs and whatever, and so you need to own the latest technology companies and certainly there’s great trades and great opportunities there, but don’t cut out some of these older companies that are very strong profits, even if they’re not the newest kid on.

[00:33:02] Rebecca Hotsko: Yeah, so dividend strategies can be quite attractive in this environment. If investors kind of are wanting more positions and things that offer those maybe stable cash flows, what kind of due diligence for dividend companies, what do they have to look for to make sure that dividend is actually sustainable over time?

[00:33:21] Ian Bezek: I think probably the biggest area where people get into trouble with dividend investing is trying to buy something with a very high yield today and not asking enough questions about where that yield comes from. Like you were saying, like how is this Brazilian ETF yielding 12%? It’s probably not sustainable when you look at it closer.

[00:33:37] Ian Bezek: So I look at a company’s earnings track record is ultimately earnings are what drives how much dividends a company can pay, and particularly look how they did during crises. So go back and look. How did this company do in 2008? How badly was it impacted during the 2020 covid decline? I look at the company’s debt, like if the company has no debt or very little debt, it will have more resilience regardless of what its operations do.

[00:34:00] Ian Bezek: Whereas as a bunch of debt, then there’s very little margin for. You either want very stable company or a company with very little debt, or ideally both would be what I would say. Yeah.

[00:34:11] Rebecca Hotsko: And then are you looking for a certain metric of cash flow to debt or just it’s relative to kind of the industry and company?

[00:34:19] Ian Bezek: I don’t have any hard and fast rules, but that’s probably because I’ve been investing for 14 years now. But yeah, for certainly if I were starting out, I would use metrics like a payout ratio, which is just your dividend compared to your earnings. Avoid companies well as certain credit rating or set some parameters.

[00:34:36] Ian Bezek: So then over time it’s kind of, you have a few years of experience and you’ve seen worked, and where you made mistakes, then you can refine those parameters. But I would definitely start out with a checklist. Otherwise, you’re going to end up owning some, some dodgy stuff. Pay a 10% yield today and then pay a much smaller yield tomorrow.

[00:34:51] Rebecca Hotsko: The last topic I want to talk with you today is currency risk. Kind of what this means and how it impacts companies profits. The US dollar has risen sharply this year compared to many other countries. I kind of just wanted to dive deeper into how currencies impact corporate earnings since the dollar has heard a lot of US companies earnings and led many to cut their guidance this year.

[00:35:18] Rebecca Hotsko: Can you talk a little bit about this and how it impacts corporate earnings?

[00:35:23] Ian Bezek: Yeah, yeah, for sure. It’s, it’s the US multinationals in particular are facing a big obstacle going forward because they will sell a product generally for X number of dollars, and then they expect to get that amount for when they translate it back from local currency.

[00:35:38] Ian Bezek: Like to use an example, apple traditionally would sell iPhones and Max and whatever. Europe for significantly lower prices than their local currency there because the Euro and the pound were with a lot more than the dollar. And so like if a iPhone cost a thousand dollars in the US, it would cost like 800 euros.

[00:35:54] Ian Bezek: But now that the Euro and the dollar are worth the same, Apple’s only getting back $800 when they saw that iPhone. So that’s a what, 25, 20% hit to their top line. And so either they have to raise prices dramatically in those other countries, which might be hard because they’re already experiencing economic troubles as it is, or they have to accept a much lower profit merchant.

[00:36:14] Ian Bezek: So these, yeah, particularly the technology companies like Microsoft that sells us windows on every corner of the planet or Google, where they’re getting money off every search worldwide, they’re seeing a big hit to their, their ad dollars. On the flip side, it’s an advantage for foreign companies because they have cheaper costs of production because their local costs have gone done a lot.

[00:36:33] Ian Bezek: And so country like Japan, I think is advantage. Advantage. I think you’ll see their manufacturing pick up a lot. They have very high skilled labor, they’re very advanced technology. And now that Theen is dropped, I believe 30% this year, that gives them a tremendous event. I give you a Toyota Honda.

[00:36:49] Ian Bezek: It’s only one of those guys you should have a very advantageous position competing against American firms going forward.

[00:36:56] Rebecca Hotsko: I read an article that said big tech companies generate almost 60% of their sales outside of the us. So like you mentioned, that seemed like a major headwind. Then just given the economic backdrop where it doesn’t seem like there’s a lot of extra disposable income to go around where they can just up their prices, I’m wondering what are your thoughts on Big tech?

[00:37:18] Rebecca Hotsko: Do you see this as big risk to their valuation?

[00:37:22] Ian Bezek: Yeah, I think it’s a big uncertainty for them. There’s kind of multiple factors that play there because the big tech stocks and in my view, got over overvalued last year because people were kind of extrapolating all of the spending we were doing in 2021 to buy computers, to study at home, and upgrading all of our technology and all that.

[00:37:40] Ian Bezek: People are kind of extrapolating a straight line that earnings were just going to keep growing and growing and growing and then kind of this series like, oh no, actually everything reopened and now we don’t need another computer and we don’t need another phone and whatever. I think you’re naturalizing earnings just re declined to a more normal level for big tech.

[00:37:55] Ian Bezek: But then you’re throwing this additional headwind that, oh, now when I saw an iPhone overseas, it’s worth 10, 15% less than it was last year. Yeah, I think it’s a c. The nasdaq, the US technology index went up every single year between 2009 and 2021, which is quite unprecedented. And people just kinda had this idea that these stocks were safe from any downturn, like regardless of what happened.

[00:38:17] Ian Bezek: And so I think they were too popular with folks and now it’ll take a couple of years to kind of reboot and reset expectations there. But it’s creating opportunities like energy, the and tremendous industrials have done well. The banks have done pretty well. People are kind of rediscovering some of the other parts of the stock market that have been out of favor the last couple of years.

[00:38:34] Ian Bezek: One other report I’d make on currency before we move on. I personally am building a house here in Columbia. That’s why I’m kind of recording out of a storage room at the moment, so apologies for that. But since I started building, like since I bought the lot, like six months ago, the currency here is devalued by 25%.

[00:38:50] Ian Bezek: And so it’s just, it creates a great deal of uncertainty. I have no idea what the end budget for my property is going to be because every week the currency’s moving five. So a lot of people just stopped, like the construction activity when I was starting, it was hard to find people to work on the site and like, it was like weeks to find a plumber or whatever.

[00:39:06] Ian Bezek: And now there’s no problem finding labor because people just stopped building there. We don’t know where, where the exchange rate’s going to be. We don’t know where inflation is. And so it just paralyzes the economy here because people rely on, on savings and dollars and yet they’re spending in pesos to do anything.

[00:39:19] Ian Bezek: And it’s, it’s a major. There’ll be a major drag on a lot of economies just because people are kind of deer in the headlights right now. Just we don’t know what anything costs. We don’t know what our incomes will be next. It’s, it’s a mess.

[00:39:31] Rebecca Hotsko: Wow. Yeah. It has so many real life implications beyond investing.

[00:39:36] Rebecca Hotsko: And then you kind of see how that relates back to company decisions and why things are going to be at such as standstill because companies can’t make decisions when there’s so many unknown factors. I am wondering on banks as well, we didn’t touch on that yet. And banks can typically do well in rising interest rate environments because they can increase their net interest that they receive.

[00:39:59] Rebecca Hotsko: But then also what is kind of the limit where that works against them And where do you kind of see banks going in this rising interest rate environment?

[00:40:09] Ian Bezek: I can speak more to the US banks since that’s what I’m familiar with. In Latin American banks. I don’t really know as much about the Canadian banks, so your House of America is something that’s beyond my pay.

[00:40:18] Ian Bezek: But for the US banks, they were very risky prior to 2008 because there were very few limits on the sorts of loans they could make. You had undocumented Guatemala migrants getting $700,000 loans, which was obviously going to lead to. Not to pick on Guatemala migrants, but that just spoke to the, to the level of loan due diligence that was occurring in the US in 2007.

[00:40:38] Ian Bezek: So you had a major bus there, but I think a lot of investors are fighting the last war in terms of their, it’s like, oh, banks go down whenever the economy goes down. Being short, we’re all going to make money betting against banks. But the regulations are changed dramatically in the us. They’re holding three times as much capital as they were in 2000.

[00:40:54] Ian Bezek: There’s very few loans above 80% of the value of a property now, so the house has to drop 20% in value in the US before banks start facing any exposure to losses. Yeah, so I think there’s a lot more room for, like, the economy can roll over quite a bit before the banks start taking losses. And meanwhile, the interest rates are just phenomenal.

[00:41:12] Ian Bezek: Like banks are making real money enough for blending. You look at the results for JP Morgan Goldman, a lot of these big banks, they’re up like 75, a hundred basis points of net interest margin over the last year, which is the biggest move we’ve seen in 20 years for the sector in terms of improved profitability.

[00:41:26] Ian Bezek: So I think people are overplaying the risk and under not realizing the level of reword on.

[00:41:33] Rebecca Hotsko: Are there a couple banks that you think could be more resilient than others? If we get into a recession next year and things get worse, because that’s the big question right now, are things going to get worse? What banks in your mind would be resilient if that happened?

[00:41:51] Ian Bezek: This is one where I would be more comfortable. I’d be very comfortable using an ETF here. I think an ETF of the large US banks would be fun. And I particularly like the regional banks. Unlike Canada, the US banking system is not very consolidated. We still have several thousand banks in operation and I believe 500 or so that are quoted on our stock markets.

[00:42:11] Ian Bezek: The regional banks have more exposure to rising interest rates because they tend to just be banks that make mortgages. They don’t really do any of the exotic derivatives, mbo, whatever, the black box stuff. So they’re a very good way to get exposure to the American economy, which I think is the best of a, of a bad bunch right now.

[00:42:26] Ian Bezek: Like all the problems we’re seeing in China and all is, is generally been good for the. I like the regional banks in particular, but there’s no need to pick individual stocks so you can just buy the ETF. I think it’s fine. Strong dividend, not much in the way of credit quality concerns and a ton of juice for higher interest rates.

[00:42:44] Rebecca Hotsko: One thing I was talking about with a previous guest is that the quantitative tightening will actually make banks risk profiles look worse. That is something maybe to consider with the banks that their balance sheets are just going to get riskier as quantitative tightening is happening. But I guess, is there anything else that you think investors should know about in this sector?

[00:43:09] Ian Bezek: Yeah, specifically for year banks, I think it’s interesting, like TD has the large US business, which would probably be advantageous. I’m more bullish on the US than Canada in the short term now. So as kosher bank has its huge footprint here in South America. So I think that’s kind of a, a backdoor way if you want some exposure to the Latin American Renaissance that I think is happening now.

[00:43:29] Ian Bezek: But you don’t want to put actual capital into an individual South American. Scotia gets you a, a large footprint here, and the, the returns on equity that they earn on their, their Latin American division is much higher than the Canadian side. If you see some economic growth here, I think that could be, could help Scotia stand out over the its peers in Canada.

[00:43:47] Rebecca Hotsko: Well, that is all I have for today. Thank you so much, Ian, for joining me. Before we wrap it up, can you let the audience know where they can connect with you and learn more about your.

[00:44:00] Ian Bezek: Sure is I’m most active on Twitter. Can join me there, almost 9,000 followers. @irbezek And then I’m on Seeking Alpha. I’ve written more than a thousand articles there and I have a premium newsletter if either on Seeking Alpha, on ck it’s the same newsletter, but if you prefer seeking Alpha, it’s hosted on both called the Insider Corner, so weekly, 10 15 page newsletter.

[00:44:24] Ian Bezek: All my new ideas and I’ll answer your comments, questions, concerns. Or just Twitter? I’m on. I’m on Twitter all the time. Thank you so much, Ian. Yeah, thanks for having me on. It’s great discussion.

[00:44:37] Rebecca Hotsko: All right. I hope you enjoy today’s episode. Make sure to subscribe to the show on your favorite podcast app so that you never miss a new episode.

[00:44:46] Rebecca Hotsko: And if you’ve been enjoying the podcast, I’d really appreciate it if you left us a rating or review. This really helps support us and is the best way to help new people discover the show. And if you haven’t already, be sure to check out our website, the investors podcast.com. There’s a ton of useful educational resources on there, as well as our T I P Finance tool, which is a great tool to help you manage your own stock portfolio.

[00:45:11] Rebecca Hotsko: And with that, I will see you again next time.

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