Martin Pelletier: Canada is going all in on real estate speculation instead of getting in on this digital transformation
Author of the article:
Martin Pelletier
More than 10 per cent of Canada’s GDP is now derived from residential real estate activity. Photo by Carlos Osorio/Reuters One of the more interesting developments in the midst of this COVID-19 world is the accelerating digitization of the global economy, where size is everything when it comes to being able to compete, scale up and steal market share.
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This shift is so big that it is helping reshape the entire economy. In particular, we’ve seen a huge move towards the formation of technological oligopolies dominating their respective industries and decimating those who have yet to develop strong digital platforms. As a result, many companies are struggling to navigate ongoing restrictions including lockdowns while trying to compete with industry titans.
Even those regions such as China that are deploying new technology on a grand scale are having a difficult time competing against the behemoths from the United States. Not a single Chinese company was able to crack the top 10 global company list in 2021.
That said, there seems to be little interest in pushing forward antitrust legislation and breaking up this stranglehold. We can’t blame the United States government given how this sector is allowing it to remain a global economic powerhouse.
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Meanwhile, U.S. technology stocks and especially the FAANGs (Meta Platforms Inc. (a.k.a. Facebook), Apple Inc., Amazon.com Inc., Netflix Inc. and Google LLC’s parent Alphabet Inc.), are no doubt taking names and kicking butt, gaining more market share and rapidly growing sales as consumers continue to shift their spending habits online.
Alphabet’s third-quarter revenue grew by more than 40 per cent from the previous year, while revenue at Meta, Apple, Amazon and Netflix expanded by 35, 29, 15 and 16 per cent, respectively, over the same period.
Their market shares also rose, and so have their valuations. For example, Apple became the first company to break the US$3-trillion valuation barrier, making it worth more than the entire Canadian stock market and over two times this country’s gross domestic product.
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Then you have Tesla Inc., which gained more than US$140 billion in market capitalization after reporting market-beating production and delivery numbers during its fourth quarter. That one-day gain is worth more than the entire market cap of Volkswagen AG, according to financial reporter Holger Zschaepitz, and values each Tesla car being delivered at over one million dollars.
One has to wonder what kind of domestic and global impact this technological shift will have, and more so, where we go from here should this be a permanent step change? Keep in mind, one out of every 153 American workers is already an Amazon employee, according to Scott Galloway, an author and business professor.
BlackBerry phones photographed in 2011. Photo by Damien Meyer/AFP via Getty Images Canada, though, has decided to take an entirely different approach: going all in on real estate speculation instead of getting in on this digital transformation. Perhaps this has been reinforced by past spectacular failures such as Nortel Networks Corp. and BlackBerry Ltd.
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More than 10 per cent of Canada’s GDP is now derived from residential real estate activity, which is higher than any other member of the Organisation for Economic Co-operation and Development, with the exception of New Zealand.
But real estate is a non-producing asset and sucks capital out of the economy that could be used to fund and create more growth companies such as Shopify Inc., or even transform our still-dominant traditional energy, banking and telecommunications sectors.
Tech companies and real estate have something in common though: they’re both essentially long duration assets and, therefore, susceptible to changes in monetary policy.
Any material change in interest rates or quantitative easing could send both sectors into correction mode, so perhaps there will be a second chance for Canada to get it right and realize the long-term economic benefits of having a highly adaptable and technologically driven economy, instead of one driven by one-time transactions such as real estate speculation.
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More On This Topic How to prepare your portfolio for what could be a very volatile year Looking for opportunities amidst the Omicron noise and policy-makers’ nosiness Investors should take advantage of the freedom they have to go where they want Martin Pelletier: Inflation volatility, central bank policy error are the two biggest risks facing markets — so buckle up This would also help deal with our inflation problem, because it could reduce the pace of housing price increases while decreasing the cost of goods being sold and, concurrently, allow us to finally expand and compete internationally.
From an investment standpoint, why are there no incentives from our federal government to invoke such a grassroots change? Mandating American-made electric vehicles at Canadian car dealerships simply isn’t going to cut it. We need to think bigger.
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Article content We need to recognize we have a problem, which is a difficult thing to do when leveraged real estate keeps going to the moon and BlackBerry shuts down its cellular service.
Financial Post
Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc, operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning.
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