Isabela
Imagine booking a flight to Tulum and accidentally investing in a fighter jet. Wild. But welcome to the economy. Travel content all over your feed. Global defense budgets, breaking records and ETFs. The cheat code to invest without pretending. You read The Economist. We're breaking down what's really moving the market. No fluff, no finance bro jargon. Let's get into it.
Oh, and Jose is in the building. Welcome to the podcast Jose.
Jose
Thank you. Isabella. I love the way you said Jose is in the building. Like the world is supposed to recognize this person like “Bono”. But I think people might be confused as one Joe... multiple Joe’s, because I don't think they know if it's fairly right. but thanks for the intro. Pretty cool.
Isabela
Welcome. Maybe you could tell us a little bit about what are your travel plans this summer?
Jose
I'm very fortunate where I get to travel a lot of Canada for, work. I get to meet clients. and so usually during the summer, I actually really love, traveling within the country. And, this year, I'm actually going to Kananaskis in a month. so, I'm actually pretty excited. I've seen some photos that, it makes no sense how beautiful it is.
And I actually didn't even know Kananaskis existed as a place until earlier this year. So, excited for that, actually.
Isabela
Watch out for the bears out there.
Jose
People telling me that I am, in awe of bears and I really respect Mother Nature, so I don't want to be, like, too close, but just close enough fear. What about you? What's your plan?
Isabela
I recently went to Calgary, so also staying domestic and it was great. It's beautiful out there.
Jose
I know, I know the mountains. Something about it. Yeah.
Isabela
Okay, so let's jump into it. Jose tells me a bit... Since we're on the travel topic, how exactly are millennials traveling and what are the trends that we're seeing?
Jose
Very relevant. as I would consider myself somewhere in that generation, I think there has been an evolution as, as life goes on. Right. Like people change and the big, let's say, shift of the current generation versus the previous generation, I would say is, they value experiences more and they tend to value that, especially in their 20s and 30s.
Jose
So, they're making big life decisions later in life. I think we can all relate to that to some degree. so, my parents' generation, my mom, for example, or my dad, there were really into goods like washing machines, refrigerators. They, they, they were excited about buying stuff versus I think about me, my friends and our generation as a whole.
We actually want that crazy experience. Oh, you did this thing in Tulum or, you know, you went to this unspoken place that no one's gone to before, you know? So, that said, we still want to build families homes, XYZ. We're just not doing in our 20s. We're probably doing it in the 30s. So slight shift, but huge implications.
Isabela
Absolutely. So 20s are more about the experiences that travel and then 30s where we're going to buy a house and settle down.
Jose
Increasingly later and later.
Isabela
Yeah, that's kind of the trend we're seeing. Okay. You know what else I read actually, was that domestic travel bookings surged by 40% for the summer. which is crazy. I mean, makes sense. A lot of people are staying more in Canada, so how do you actually invest in this trend?
Jose
so it's fascinating that, you know, some politics had to happen for Canadians to look inward, but it's fantastic. It's actually longer term. There's a lot to see. But for an industry to really grow, the demand has to also drive it. Right. So you can see more people going, Banff, Calgary, all of these places. Just imagine if there was more amenities, more hotels, more ability to see all of that nature.
That'd be fantastic. So if that leads to the development of the tourist industry in Canada and a bit more aggressive fashion, I think we all get to see the country and to invest... well, travel as a whole is a very fascinating theme. And if you ask me, it is probably the oldest theme in human history because, you know, if we go back far enough, we all started somewhere in, the savannas of Africa.
Jose
Right? And then humans, we one by one, we wanted to always explore. So, we've loved this theme as a whole, and there are myriad ways to think about it. So you can invest in hotels, airlines, aircraft makers. You can invest in the parts suppliers that supply parts to these aircraft cruise lines. So there's tons of ways to play the themes.
Jose
You just need to know, which is the best way ultimately. Right, to, to generate performance.
Isabela
And is the best way. Does it depend on the individual investor?
Jose
yes, to some degree, but also the industries matter, right. Some industries generate more profitable, are more profitable than the others. Like, Warren Buffett famously said, like, airlines just are difficult to operate, if you think about it. Why? Like, you know, they don't control price, right? If one company's reducing tickets, the other companies are reducing tickets. They don't control cost because they don't have no control of the fuel price.
So effectively they don't control profits versus some other industries. Really good suppliers, fantastic online travel agencies. Great. Like a hotel, like a Hilton. Fantastic. Like you see Hilton's all over the world, or any of those brands all over the world. They actually don't necessarily own the hotel that's owned by somebody else who's invested in it. You're buying into the brand.
So these are great business models. So there's ways to think about it. you just need to understand the business.
Isabela
Gotcha. And so you talked about like the different industries as well. And I know last week we had a conversation about how the aerospace industry and defense are categorized as one. Can you expand a bit more on that?
Jose
That's a great question. When you think about travel, and holidays, you never think of aerospace and defense, right. But aerospace and defense is, very linked, to travel in some sense where, I said something about parts suppliers and aircraft makers in that sense. Right. And part suppliers and, aircraft makers are engine makers.
What parts go into commercial travel, which is your Boeing's that you and I fly on a daily basis. And a lot of the parts are going into the defense industry are really the same if you think about it. Right. Both sides need jet engines, high performing engines. Both sides need, avionics, all of the electronics and the wiring and the technology that goes into planes.
Right. I think there's a stat like a Boeing 777 or something has over 100 miles of electrical wiring in the plane. Yes. So, so, so there's a lot of systems, the radars, the security systems, the communication systems that apply on this side, that also apply on and on the side. So, it's a very fascinating but understated way of gaining exposure to travel as a team.
Isabela
So, the two industry industries are kind of like sisters or cousins.
Jose
Cousins, brothers, depending on your relationship with your sisters, cousins or whatever you want to call it, you can classify it, but they're effective. Oh, I would say they're like conjoined twins, you know, let's get more creative. Yeah. They're they're tied at the hip. They they make the same technologies. Like if you think about an aircraft fuselage and the composites that go into it, which is all these, custom alloys, effectively to make the, the flight lighter and more efficient in the air.
That same technology applies to fighter jets. Yeah. So, they're very much hand in hand. They go hand in hand. Yeah.
Isabela
Okay. So, on the topic of this, because this is also a trend with Canada announcing that they're spending like over 9 billion on their defense budget for 2025 and 2026. It's another huge trend. can this be leveraged by investing within these industries then? Right now.
Jose
A lot of these, aerospace industry, aerospace and defense stocks have been doing really well for quite some time. and yes, yes, indeed, this trend can be leveraged. Right. Because this is now like a global theme. What is happening in Canada is happening kind of worldwide. And the way to think about defense is just like you have your home, you probably have ring, or some sort of camera system that is tracking your, your home.
Jose
You have ADT or some sort of home security system in there. similarly for countries, they need to invest in that infrastructure, to, to maintain security and to be aware of your country and its borders and, along those lines. So, a lot of nations, had not necessarily invested in that muscle for some time. So, think about, you know, I've been out of shape before.
And then at some point I look at the mirror and I'm like; I actually need to invest a little bit in some physical activity. And then I go on that, activity trend for a while till I get back, you know, kind of in shape, reasonably. And it's the same concept here, too, like, defense as a theme.
was not as invested as, let's say, some other parts of the economy in, in, in many countries. And now there's a bit of a spotlight on that, because you do need that muscle. And so that's really happening. And investing in industrials like like something like a defense technology or, or even like ordering a commercial airline. Right. Let's say you and I, we start an airline, we'll call it Fun Air and Fun Air.
Tomorrow, we want airlines. I cannot just go to Boeing and tell them, like, hey, I need to buy a, ten, ten aircraft or Airbus ten aircraft off the shelf. If I put in an order now, chances are I'm not getting it like I'm earlier than 5 or 7. Ten years, maybe.
Isabela
Yeah. Versus, like, if I need an iPhone, I can just go to the Apple Store and get it today.
Jose
Exactly. So, so investing in defense, if you start on that trend, it's it's something that can stay for some time. It's not a very immediate thing because, hey, you want to build all those factories, you want to build all those machineries, you want to then create the product that cannot be done overnight. You know, that's like a, a little bit of so this you can think of it as long term fitness planning for for the industry.
So, it's not one of those fads where after New Year, everybody is like, I need to hit the gym. And then two weeks later it's over. This is something more sustainable than that long term.
Isabela
Sounds great. Obviously, it's what we're some people that what might fit within their portfolio. But then what could be some risks that come along with this?
Jose
Well, there is with every investment. That's the key question. You have to know, the risks as well, because the key aspect is risk reward framework. Right. What is what is the reward you kind of see. But also, we should be conscious what could happen. Right. So, if you think about, travel, a very simple risk, right.
If you're thinking about travel stocks, is we just came through that as five years back when the pandemic happened and the world shut down. Right. Something that stops travel is obviously some sort of risk. We talked about defense budgets, but budgets are going up now. But it's very possible a couple of years later, a countries priorities change.
you know, at the end of the day, we're democracies and we have priorities as citizens, right? So, if our priorities change and depending on that, our capital allocation, how we allocate a budget dollars change, that could be something. then of course, with every company you invest in there is the execution risk, right. you can have a great plan, you can have a great product, but if you don't price it well or you're unprofitable or your operations are not good, then the investment that you invested in, even if the team is doing well, might not do as well.
So, there's a few of these risks, that you should always consider with, every sort of investment. And I know I saw a movie a long time back, and I remember this line. It's the juice with the squeeze. And and and that applies just as a logic, to, to stocks or to any sort of investments.
And that is also a personal thing because everyone's ability to take risk is different. Everyone's. So, willingness to take risk is different. So, you need to make that risk reward framework based on your own kind of, knowing yourself as an investor, for sure.
Isabela
And it's important to also diversify in that case as well and not put all your eggs in one basket.
Jose
So that's the thing, right? That's really where the magic is when it comes to portfolio management, because risk is very easy and tempting for us to get excited in the team. Right. You have stick take travel, for example award of 90 I get so excited. Okay. Travel is a thing and 90% of my portfolio is now travel.
And then Covid happens. Let's say this is March of 2020. Covid happens. Next thing you know, my portfolio is the opposite of amazing is probably give me a heart attack, you know? So, you need to know not to. But as you said, very well, all your eggs in one basket because that diversification, when, you know, at a portfolio level, what are all the themes that are driving my basket of stocks?
think of an ETF when they're diversified. That means there's always offsets. You know, when one is zigging the other can be zagging. They're all one like fall together at the same time. And that gives you a much smoother client experience and and an investing experience as a whole.
Isabela
Yeah, you mentioned ETFs. So, TD actually has an ETF called the Global Enhanced Dividend ETF.
Jose
Yes indeed.
Isabela
And I'm going to put you on the spot here Jos. What percentage of that ETF is invested in the aerospace and defense sector.
Jose
we would say directly in Berkeley to the theme where give or take 10%. and I should know because I cover that fund and my, my fields are listed here.
Isabela
And so, it's 10% considered a lot, a little.
Jose
So, the thing with the, investing and portfolio manager when it comes to diversification is, 10% is reasonably okay. It's it's all relative. You have to think right. Let's say let's say you're talking about technology. You know, technology easily 30% in the S&P 500. And then you have 10% in technology. That means on a relative basis you're not doing that.
Jose
If anything, you're actually soft on technology, right. If you have a portfolio that is. So, you have to think of that risk concept or what that number is on a relative basis on a relative basis. The S&P 500 when it comes to aerospace and industrials is maybe 2%. So, we're actually 4 to 5 x give or take. What the actual broad market is into this team.
So that does is a reflection of our conviction. But we're also not to that degree where all of the portfolio is that because we have 90% of the portfolio plus offset in other parts or other thematic, aspects of the economy that are all offsetting and kind of diversifying each other to give you, smooth plane experience. So, yes, if you like a theme, we definitely, if you like a theme, a stock, we want conviction in it, you know, we want to be.
So how do you outperform? How do you create portfolios that outperform? by being different. So, you have to be different. But you should also manage your risk at the same time. And that's the art and science that comes with portfolio management. That's what makes it makes our makes our industry, or at least what I do so fascinating and exciting.
Isabela
Absolutely. So, it's a matter of also diversifying within, but being sure of what you're investing and understanding, like the trends, taking advantage of those, yes, but not forgetting what else is going on in the markets as well.
Jose
Yes.
Isabela
Okay, perfect. So next time you're booking a flight or scrolling through your Instagram Reels or dreaming of your next getaway, just remember your investment portfolio might already be on the move. Happy travels this summer and remember, stay curious, stay informed, and stay invested.
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