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>>[music] >>Hello I'm Greg Bonnell and welcome to MoneyTalk Live, brought to you by TD Direct Investing.
every day I'll be joined by guests from across TD, many of whom you will only see here. We we'll take you through it's moving the markets and answer your questions about investing.
Coming up and today show: will have a look at popular new option strategy that could be bringing more risks to the market with TD Asset Management Jimmy Xu. And in today's WebBroker education segment, Nugwa Haruna will show us how you can find different types of exchange traded funds using the platform.
Here's how you can get in touch with us: email MoneyTalkLive@td.com or Philip that of your response box under the video player on WebBroker. Before we get to our guest today, let's get you an update on the markets. The TSX up about 23 points and we saw but affirming a bit in the price of crude, hanging in positive territory just a little north of 72 bucks a barrel.
Thinking in some of the big energy names, thinking of Suncor this hour, sliding from its highs of the day up about three quarters of a percent. Some of the mining names, quantum up 3 1/3%.
South of the border, let's check on that broader really the American market, the S&P 500, of course all the talk of the year has been the Fed, interest rates and impressive rate hikes and what that means for a possible recession. In recent days, we've been worried about the R word. Today we have some modest green on the screen, almost 30 points.
Let's check in on the NASDAQ right now and see what's happening in that space, the tech heavy indices up more than a full percent to a bit of money moving back, perhaps cautiously into the market.
Chevron, an energy names south of the border, 173 bucks and change, probably almost hundred $74 a share. Still in positive territory but a little less than one percent and answer are connected. If you've been a bit confused by the price movements in the stock you hold, it may be because of the new option strategy. A short dated options have become an increasing part of trading volumes in our featured guest today says it can also mean more vulnerability in the markets. Joining us now for more on this is Jimmy Xu, Portfolio Manager at TD Asset Management. Welcome.
>> Thanks for having me here.
It's been a really interesting year considering what's happened on interest rates. It seems like investors are still very happy to trade and that's the theme that has come across and continue to carry through since the pandemic.
>> And using this kind of options strategy, I want to explain to the audience because I had a few gifts mentioned to me on the side after shows that it's pretty interesting and we needed to find someone to talk about it and Jimmy is the one. How do they work?
>> Historically, if you go back prior to the financial crisis, these strategies have been implanted by institution investors. But the same type of strategies are now being seen and invested by everyone. These is zero, in hopes when the options expire, they can capture that premiumfrom what they've sold.
It's interesting because since April and May of this year, the US option exchange has put out daily options with daily expiry's so investors can do this every day, day in and day out.
What they are trying to capture on is the decay of the options.
They sell the option in the morning and they hope by the end of the day becomes worthless and they buy it back at a lower price.
What's interesting about the strategies and why they are so popular is because they are very capital efficient. It only requires margin in the account liquid which makes the popular and second, they are popular because they don't have to take overnight risks. They can sleep at night knowing they have closed by the end of the day.
>> We should make sure that this is something that is happening in the markets and recommendations about how you should structure your trades… Let's talk about some of the risks though that can be associated.
An option that expires in one day… What's the risk?
>> There is a lot of risk involved. Anytime you are short selling options.
The strategies have, for lack of a better word, blown up historically prior to the great financial crisis.
So it's interesting that we are seeing a resurgence of this.
It appeared that conditions are tightening in volatility is rising.
So investors aren't implementing the strategies, they are usually selling options because they are short maturity by definition.
They only collect a small amount of premium.
However, if the market moves the wrong way or moves too much or more than what they expected, losses could be four, five, six even 10 times the amount of premiums that people had varied so there's a lot of risk involved. Here's a good thing: when we look at some statistics the talk about these trading strategies, it seems like the hit rates are positive. Sometimes one in to 50%. I think there's a psychological aspect of this right? You do this day in and day out and in terms of a small profit every day, you get really confident in this strategy.
Maybe you start to increase your size. You start selling options when it's not really attractive.
That can get you into a lot of trouble. I think Nicolas… Wrote a book and had a great example with a turkey farm.
Every day his turkeys were getting fat, it's a great life.
Then when Thanksgiving rolls around, the markets move more than what you expected, lights out.
>> Some caution right there. You don't want to be the turkey on Thanksgiving.
So that's the strategy and those of the wrists around strategy.
How popular is this strategy?
> I think what surprises the most is the popularity of the strategies.
Since these weekly options were listed earlier this year. So, just look at market stats over the last month, almost 40% of all traded options are these zero day maturity or expired options. That's quite remarkable.
Just put that in context, it's $2.
4 trillion.
Granted not all these volumes are related to these trades.
If people still use the same day maturity options for other activities, but it still a large chunk of the market. I think if popular because now, trading is getting easier and easier. We tell investors rather retail investors can trade on their mobile apps, take seconds to do it on the phone and in the US, commissions are free for trading options so when there is no explicit transaction cost, it makes the strategies a lot more attractive to the average investor.
When you look at the trading volumes, these traders typically 5 to 10 contracts which is, for the most part, too small for institutional investors so our theory is that these strategies are dominated by retail investors. And I think that is a trend that we are seeing post pandemic where retail volumes are becoming a greater portion of the overall market activities and we are seeing it in the space as well.
I would never assume to fully understand as well why a market is moving in either direction.
Even after the years of enjoying this.
There've been times where I wonder why it's doing what it is doing.
I don't know. It's just doing it. This is having an impact on some of the wild moves you've seen this year?
>> It's possible but it's hard to tell what is causing the wild moves. We know based on trading activities with these investors, they are selling options in the morning and are seeing it pick up in the morning and most of the fun comes at the end of the day where investors are trying to close off especially things are starting to move in an average direction. What that could cause is more volatility at the end of the day where investors are trying to close these positions, just giving you an example, if you are short of an option, the market goes against you, to close that option position, you have to sell more stock which puts more downward pressure and that can cause wild swings in the market when you hit pockets of liquidity.
Especially a year like this.
>> That can cause perhaps an explanation, we talked with the risk for an individual investor. We are not recommending the strategy.
We are trying to unravel it because it is playing a role in the market. As we talk about the risk of this training against individual investors, what about longer-term or overall vulnerabilities for the market.
There is some activity there in the trade.
>> I think we need to separate the difference between the short-term activities which is what the strategy is in sort of longer-term.
Let's call it normal activities.
>> Longer-term? About two days?
haha> For most investors in the office space, they typically buy and sell options that are one month or longer maturity. So, if you look at what's happening in the… Index, the S&P 500 this year, it's actually pretty muted despite the volatility.
They actually don't show up for the vix index.
… Actually quite limited but on the short end, I think what's interesting is given all of this open interest, all of this volume being up sorted by absorbed by the market easily, marketmakers are really happy to take that flow even though there is no Commission. We know that bit offers are wider so having that to a volume, selling in the morning, buying in the afternoon, is really profitable for the marketmakers. So these flows, despite the fact that they are 40% or more of the market, they have have been absorbed by the marketmakers actually quite easily. So if you're not watching, you might just miss out on the trading that's happening.
>> Fascinating stuff and a great start to the program.
We will get your questions with asset allocation with Jimmy Xu and just moments time, a reminder you get in touch was any time by emailing moneytalklive@td.com or if you what that fewer response box here in WebBroker.
Now let's get you updated on the top stories.
Exxon Mobil is expanding its share buyback program to $50 billion through 2024. The energy giant says the program will include $15 billion in share repurchases for this year.
The announcement came as Exxon laid out a five-year corporate plan that includes annual capital investments of up to $25 billion. An oil leak into Nebraska Creek has forced the shutdown of TC energy's Keystone pipeline. The company says it detected a pressure drop last night and is working to contain the spill. The Keystone pipeline runs more than 4300 km from Canada to the US and can ship more than 600,000 barrels of crude a day.
Ottawa is proposing tougher oversight of foreign takeovers, pointing to national security concerns. The Trudeau government's says the changes to the investment Canada ACT! are necessary to address challenges that could threaten Canada's economic and national security.
Part of the proposed changes focus on the transfer of intellectual property. And here's of the main benchmark index in Canada is trading: the S&P 500, now up about three quarters of a percent.
We are back now with Jimmy Xu taking your questions about asset allocation.
Will 2023 have the same sort of volatility the 2022 did?
>> As we close this year out, it's been quite a remarkable year.
think about what happened during the pandemic.
This year, equities are down. Let's call it low 10% – but volatility this year, equities has actually been quite muted.
So vix only spike about 40, a handful of times this year. Very short-lived. From a volatility perspective, yes volatility in equity was higher but a significantly lower was what we would expect to see in moments of crisis. That tells us where the investors mindset are at. But were we saw volatility this year is interest rates.
So long term interest rates in the US, from a volatility perspective is now high equity volatility.
You think about investors. When we tell investors?
Fixed income has lower volatility, lower risk investors should be buying more fixed income products but this year, the complete opposite. Fixed income volatility has been a source of pain for all investors especially considering… I think looking at next year, we don't think the volatility is going to go away.
There is still a significant amount of uncertainty on the path of central-bank rate hikes across the globe.
There is significant uncertainty about growth. What earnings might look like.
So I think from an investor's perspective, even though this year has been, we have seen volatility this year, we should continue for them to expect that to continue next year.
There will be pockets of opportunity to take advantage of it.
>> We saw interest-rate vulnerability. I can imagine if I was having this discussion a year ago.
About "by 2022, what will that look like?" If someone said they think central banks will raise rates probably 75 basis points, I would've laughed that person out of the studio. Thanks for your time, thanks for joining us and we will have the back anytime soon.
People try to wrap your head around what could be next.
>> We think back of conversations the end of 2020, 2021, what were people talking about?
We were worried about if we were going to get returns.
Equity validations were near the highs at the end of 2022.
People were worried about equity returns. Fixed income yields at that time were 1/2%. So, for a balance for investor by the end of last year, we were all worried about how we would make money.
But the reset industry interest-rate this year, the reset in equity volatility actually creates a more optimistic view into 2023.
There is obviously still a lot of downside risks. A lot of uncertainty. But returns of fixed income just from a yield perspective are looking a lot more attractive today than they were in the past.
So fixed income is like looking a lot more attractive and there is still some vulnerabilities in the equities market from the earnings perspective, probably TD Asset Management model is showing we are probably going to enter a newer recession next year.
So with those two things together, I think fixed income sets vary on time has become a lot more interesting to look at verses previous years.
> Interesting stuff indeed.
Let's get to another question now. Once we get to the next bull market, what types of sectors will lead?
>> That's a fantastic question.
I think at this point of the cycle, having not entered into a recession yet, it's a little premature to call sectors.
I think we have some theories of what could happen. For one, if interest rates could decline from this point forward, especially in the 10 year and the third year, technology stocks, growth stocks could benefit. These stocks have been re-rated because as interest rates got higher, their valuations of fallen but once that reverses, I'm assuming earnings can hold, they could lead. But there's another thought that over the last decade or so, we've been under invested in commodities space.
There hasn't been a lot of reinvestment in that space.
We have seen a lot of talk about commodity shortages, energy shortages area so for the next decade, but the next, I think a decade is a long to call but next couple of years, energy could be another place, commodities could be another place where investors need to look at the next leaders in the next cycle.
> Commodities, people ask questions about the future of electric vehicles. Not only that, the electrification of everything. That's pretty intensive. The same argument again.
Okay, if we need this much copper, this much this this much that at the top the investments in the mines actually produce in the future?
>> I think this is where the opportunities are for these commodity producers. Obviously, commodity producers are quite cyclical. So we do enter into a slowdown going into next year, there will be some headwinds but will we look projecting forward, I think the world is going to be in a stage where there will be a shortage of things that we need to produce.
>> Okay. Another question now hear about the big overriding theme of the year.
Borrowing costs. How close are we to peak rates?
>> That the $2 million question. Bank of Canada yesterday hiked another 50 basis points which is maybe a bit higher than people would've expected.
But it seems like we are nearing peak interest rate.
Going forward, it's not so much how fast they're going to hike that matters it's going to be when they stop and for how long they stop. I think all of that is going to involve around with the inflation outlook looks like.
Inflation remains stubbornly high like we saw this year. We think that rates will stay high and might stay high for a while.
But inflation can slow down.
And combined with the fact that growth slowdowns, interest rates may be in the process of topping.
> Process of topping to try to tame inflation.
A lot of people think if there is a recession they will start cutting right?
This is sort of the playbook.
Has that playbook been altered considering what we've been through the past three years?
>> I think of you is a lot more nuanced than it was in the past. Traditionally you are right. When you enter into a growth slowdown we loose monetary policy, cut interest rates and may do things like quantitative easing.
But this time around, things might be different and that really depends on inflation. We have an environment where inflation slows.
When growth slows down significantly but inflation stay stubbornly high because of supply chain issues,, when that happens, we are not confident that the playbook from the bank will be exactly the same. It will be hard to see, given the communications that they have been providing to cut rates when inflation is above target.
I think that is counterintuitive to what they have communicated this year.
>> Very interesting stuff as always. At home, make sure you do your own research before making any investment decisions.
We will get back to your questions with Jimmy Xu in just moments time.
Email us anytime with your questions of MoneyTalk Live ATD.com and now for education segment.
If you're looking to do research on different types of exchange traded funds, WebBroker has tools that can help.
Nugwa Haruna commerce Senior Client Education Instructor has more on this report.
>> : Various derivatives and the idea behind these ETF's us to track a decline or downward value in an underlying benchmark or an index.
Investors who utilize inverse ETF's, they do this because they're looking to make a profit during the market decline or they may seek to use this to protect her hedge their portfolio during a period of market decline. Now, for this reason, it inverse ETF's can also be known as bear ETF's are short ETF's. Investors are able to find these… Once in WebBroker, an investor would click on research, and under tools you would go to "readers". This tool lets investors filter through different investments for information important to them. So in this case, were going to go ETF's or exchange traded funds.
Once here, were going to go to create a custom screen.
Under our categories section, were going to choose "inverse".
Click to add criteria.
Scrolling down, we are going to select "Canada" and we are going to select "show only inverse funds". We will review these matches by clicking on here.
They are looking to track a decline in a specific underlying benchmark.
In this case, on the development example. For instance, this specific index, inverse ETF is looking to track a decline in the TSX 60.
Some notable that up on a chart.
Now, once here, I'm also going to pull up and ETF that seeks to track the performance of the TSX 60.
And once I do this, an investor is then able to see just how well an inverse ETF actually mirrors in the opposite direction the performance of a specific index.
Now, a word of caution that I will mention for investors, because inverse ETF's utilize derivatives, which tend to be traded more on a short-term basis, investors want to be aware that inverse ETF's tend to be reset on a daily basis. So for investors looking for a more longer-term investment, they may want to consider other kinds of investments as opposed to using an inverse ETF. Because of the daily nature of trades by the inverse ETF, it may actually have more of a traded expense fee and so investors want to be aware of these additional costs as well.
Look for investors looking to taking manage of market declines or are looking to protect a portfolio during a market decline, they may then consider using inverse ETF's.
>> Our thanks to Nugwa Haruna, Senior Client Education Instructor at TD Direct Investing. Make sure to check WebBroker for upcoming webinars and master classes.
And a reminder of how you can get in touch with us before we get back to our questions with Jimmy Xu.
Do you have a question about investing, or what is driving the markets? Our guests are eager to answer your questions so send them to us here at MoneyTalk Live. You can send your questions two ways: you can send us an email any time at moneytalklive@td.com or you can use the question box at the bottom screen right here on WebBroker just type your question and hit "send". We will see if one of our guests can get you the answer right here at MoneyTalk Live.
We are back now with Jimmy Xu taking your questions about asset allocations. Let's get back to them. A lot coming in the past couple of minutes. Are there options trading driving as part of the discussion are they driving markets higher or lower?
>> When we think about options, there are probably two times more demand for put options and call options.
That makes sense because people typically use options to protect and the downside.
Trying to use it as insurance to protect the portfolios. But with these zero expiring options, the volumes between our very balanced. So investors creating equal numbers of calls an equal number of puts. On the surface, that doesn't put any pressure in the direction of the equities whether the price is higher or lower. Because call and put volumes are balanced. But what does happen is near the end of the day, when invest investors a try to cover these positions, the market becomes rather it behaves a lot better with more momentum. The higher prices tent to be even higher prices and lower prices conspire to follow lower prices. So it exaggerates the moves of the direction of the market. That's onlydoes that when we look on the long term it doesn't drive the direction of equities. It's the fundamentals that really matters.
>> Fascinating stuff. Another question off the platform: why do large volumes of shares trade late in the day?
>> The typical trading volume of any stock or options is there's a lot of volume. It is U-shaped. There's a lot of volume during the start of the day. Also a lot of volume at the end of the day.
I think this year, there might, we might be seeing more volume at the end of the date due to a couple of things.
One is the strategy I talked about because investors typically try to close the book at the end of the day which means that hedging activities… Creating extra volume, second, there is also structure reasons. like ETF's. Rebalancing.
Considering the growth in ETF's, I would say the last few years, attempts to create more volume at the end of the day and also as a potential to amplify volatility over the last 30 minutes of the trading hour.
>> When we talk about the kind of activity, if were talking about balancing ETF's, it sounds like big institutions are at play here.
>> Yes. A combination. Big institutions are definitely at play. On ETF's, on portfolio rebalancing.
That happens at the end of the day.
But don't discount the retail investors.
They may come almost 20% of the overall trading volume so they can have a profound impact, especially in the single stock side and what we have seen is retail investors tend to cluster. That's because part of the reason why they are clustering is a social media.
They are talking with her traits, the positions and people tend to pile on the momentum.
Especially in a single stock side when there is an investment liquidity, it really amplifies.
Their activities can really amplify the moves.
> Another question now, this one about, tied the toll that increases we see in interest rates this year.
GICs.
Will the rates keep going up?
>> Yeah. I think the conversation of GICs is interesting.
Rates could potentially still rise in the GICs given how, if the bank of Canada keeps increasing rates more than what's already expected.
But I think the conversation with GICs and other alternatives are a bit more nuanced. So if you like the Canadian fixed income market, yielding the overall market, it's not all that different from a GIC. So if you invest in fixed income, if interest rates to decline, night and get some capital appreciation.
Fixed income investments that you don't get in a GIC.
But of course a trade-off that is you're going to have to take on a bit more volatility.
GIC as investment, I think GIC is very well suited if you have cash flow within the next one, two years. That can match your cash flows very nicely.
With a guaranteed return as the name suggests. It's very suitable. From an investment perspective, yields on GICs typically lower than the interest rates. So you were earning negative real return. Look at the history of GICs of the last 20 years.
It works once out of every 20 years.
So, maybe it continues to work next year. But the odds are probably stacked against it.
The way rates are today.
>> This one, I think this a webinar coming up.
With Nugwa, we shared some information on the platform.
Never wondering if this 60/40 is dead?
>> I think this is the year of the resurgence of the 60/40 portfolio. At the end of last year where we were going to get returns.
If fixed income yields of 1/2%.
Given the reset in validations, if you look at TD Asset Management's counter market assumptions, they are over 1% higher than what they were last year.
So it's getting quite attractive.
Having said that,, fixed income and equities do not diversify each other, it's important to maybe think about complementing your 60/40 portfolio with alternative investments that has a lower correlation to both assets such as commodities, which is done tremendously well this year. Real assets, infrastructure, alternative market neutral strategies.
I think those will become more important part of the tools justification to a 60/40 portfolio going forward.
But certainly, from a return perspective, it's a lot more attractive this year compared to last.
>> I imagine a key risk going into next year, we talked about how the central banks are close to the end now of the rate hiking cycle. Perhaps some have ended but we will find out in the coming months and then they stick there for a while.
But as I said earlier, inflation just can't be wrestled to the ground and they have to keep raising rates. I imagine that the pressure will have continual pressure from this year onto the long portfolio.
> Absolutely.
If interest rates continue to rise due to inflationary pressures, fixed income portfolios will be under pressure again from higher yield. With equity portfolios are going to be in a pressure to from two sources.
One is valuations.
When rates goes up, valuation follows. Second, so quickly and so aggressively in a short period of time, you really constrain growth.
So corporate earnings will also be challenged.
It will be another perfect storm of this year. If rates keep going to rise, that equity and bond portfolio might still have some headwinds which is why it's important to look at having alternative assets in your portfolio to tender diversify against that.
>> We will get back to your questions on Jimmy Xu on asset allocation in just a moment's time.
As always make sure you do your own research before making investment decisions. A reminder that you can get in touch with us any time.
Do you have a question about investing, or what is driving the markets? Our guests are eager to answer your questions so send them to us here at MoneyTalk Live. You can send your questions two ways: you can send us an email any time at moneytalklive@td.com or you can use the question box at the bottom screen right here on WebBroker just type your question and hit "send". We will see if one of our guests can get you the answer right here at MoneyTalk Live.
>> No surprise that much of the inflationary pressure in Canada has been influenced by supply related factors beyond our borders. But for some provinces, domestic drivers play a bigger role.
Our Anthony Okolie joins us now with a look at TD Economics report on some of these key factors shaping provincial inflation. Anthony?
> Thanks Greg. TD Economics estimates that as much a 65% of Canada's year-over-year inflation is influenced by supply related or external driven factors.
Not consummately, at the provincial level, more than a percent of inflation in the Atlantic region can be chalked up to the same factors. I brought along a chart that looks like the impact of these external supply chains of sensitive inflation by province.
At the extreme, nearly all of the inflation in Newfoundland and Labrador can be traced to these external factors.
This is primarily food and energy prices. The reason is because these items account for a big share of the regions consumer price index or CPI basket. The same logic holds true across most of the prairies as well.
When we look at Alberta though, inflation and goods other than food and energy such as autos, auto parts, household furnishings, has made the biggest impact compared to most other provinces.
Now, outside of the Atlantic region, food is the largest contributor to overall inflation in Québec.
That's because Québec has grown a bit faster versus the country overall. Have the highest weighting of any province.
Meanwhile, when we look at Ontario and BC, the inflation story there is a little different. Inflation in these two provinces has really been bolstered mostly by domestically driven factors like service suspending.
Within services, shelter cost is a big part of that.
Again, as the chart shows, it's not surprising in Ontario housing affordability has been loaded in Ontario and BC were prices of soap soared since start of the pandemic.
The rapid growth of shelter inflation has been driven by higher mortgage rates, interest costs of Canadians renewing mortgages at higher interest rates. TD Economics notes that service inflation in provinces like Ontario and BC has historically been stickier than goods inflation which is more prominent in Atlantic region and Prairie provinces. Greg?
> Interesting dynamics there as you move from province to province to province. Given those dynamics, what is TD Economics think about inflationary pressures in 2023?
>> TD Economics express expects inflation to grind lower in 2023 and all provinces next year.
But because of the inflation dynamics it will be an uneven performance. When we look at the Atlantic province rather the Atlantic regions on the prairies, inflation in these areas could see the steeper disinflation from lower energy prices and lower good prices.
Again, this is because we are seeing and easing and supply chains. By contrast though, Ontario and BC, inflation there is likely to be stickier and these two provinces due to higher services inflation pressures particularly shelter costs which have increased substantially. In Québec, they expect the records will be somewhere in the middle of the package of the performance.
> Interesting stuff as always. Thanks Anthony.
>> My pleasure.
> MoneyTalk Live's Anthony Okolie. Let's see how the markets are faring now right here at home on Bay Street with the TSX Composite Index up 25 point a little modest up more than 1/10 of a percent. Some affirming the price of crude but nothing too impressive on that front.
Some of the energy names have kind of come back from their highs. Checking on Crescent point right now.
Coming from its high earlier this session, falling into negative territory now, nine bucks and $0.12 a share.
Crescent point down.
Text seems to be holding onto its gains.
South of the border, check in the S&P 500. Right now you up 23 points to the upside.
Good for a gain of a little more than half percent. The tech heavy NASDAQ doing a bit better in the broader market earlier this session. Let's see if it's on onto its status there. Indeed it has. The NASDAQ up, we will call that 1%.
ExxonMobil, one of the big energy names, hanging in there of course on the top of the show, they are five, their five-year plan which seems to have some money moving in the right direction. A little shy than hundred five bucks a share, up a little more than 1%.
We are back now with Jimmy Xu from TD Asset Management, talking asset allocation. Let's get back to questions: what kind of return can one expect in US fixed income?
>>I think whether it is US or Canadian market, it will be similar. From a yield perspective, yields are fixed incomes are a lot higher now. If you're entering the fixed market today, you can expect is from a yield perspective, somewhere around four, 4 1/2% just on a carry from interest rate. But if you think about the sensitivity of bond returns to underlying changes in interest rate, roughly speaking, 100 basis point change could result in plus/-6% in capital gains or losses. So if you are entering a fixed income market today, think about two components: what you can get from a yield on your forward and second the direction of interest rating decline that you are going to get some benefit from the capital gains if interest rates rise, then the opposite will happen. This is very different from the conversation at the beginning of the year where interest rates were at 1/2%.
>> If we end up in a recession next year, what does that mean for fixed income?
If it's a recession where central banks can't cut in the face because they need to tame inflation. As I get more complicated?
> Absolutely. This is where we need to be very, again, very nuanced in the type of recession that winter next year.
It's impact on inflation. So we get into a stagflation area environment, there are not a lot of hiding spots.
Fixed income will continue to be challenged.
But if it's a variety of recession where we see inflation persistently coming down, I think the central banks will be more welcoming to cut interest rates.
Especially in Canada where consumers are being hit with impact higher servicing costs. One of the more… We are leasing evidence of demand. So that's scenario of lower growth but persistently higher inflation, I think that risk is starting to diminish.
>> Okay. What geographies do we have looking interesting going forward? I've heard criticism in the past that Canadian investors can be a little too Canadian centric. So let's look around the world.
> I think over the short term, one area that are asset-allocation team is looking at is Japan.
Japan is starting to look more attractive. More interesting at these levels because first of all, the Japanese yen is very significant this year. This currency value is actually looking very cheap relative to what fair value would be. Obviously currencies can deviate from fair value for a very long time. So that's a word of caution. But from a validation perspective, yet is looking very cheap and if that rallies,… Investors in equities market both a currency pack and a stock impact from the… From a stock perspective, there consumers are roughly growing at 4% below trend. As China reopens, as Japan continue their recovery process, we can see some upside in Japanese equities as well.
Combined with equities and currencies, I think it's an area that… >> Over the years we've heard criticism of Japan structurally as a society in terms of their demographics being a big challenge for them. Are they starting to work through that early still having problems?
>> These challenges have not gone away in Japan.
Structurally, Japan still suffers from low growth, low inflation, demographics issues, immigration challenges as well.
So these structures have not gone away.
But over the very short term, it could be interesting country to look at when we are thinking about overall country allocation.
>> Okay.
Another question here.
This is the big one. I don't know if there's an easy answer. If there was, we would have it. Do you think the bottom is in? I assume they mean for the market selloff that we saw.
>> Yes I'm assuming that question through the market.
I think there are a couple ways to look at it.
This year, equity decline, the bulk of the equity decline is through changes in multiples.
If you actually saw equity multiples and interest rates inverted, they actually sit on top of each other. So what that tells us is the decline that we saw on the market is caused by higher rates. We don't think that recessionary risk going into next year is quite pricey to the equity market at this moment. So we look at consensus earnings feedback, still too high relative to TD Asset Management's model.
We think next year's earnings might be zero. So, if you get, take this year's earnings, if you don't get any multiple expansion from falling interest rates, then the fair value of equities 2023 could be similar to where we are today.
If the economy does prove to be maybe a little worse than what people would expect, then it could be some more downside pressure off of equities.
So the risk in equities, at this point, may be skewed to the downside. Whether we retest the bottom that we saw this year, I think that will really depend on interest rate policies going forward.
>> Jimmy, a pleasure having you. Fascinating conversation we will see you again soon.
>> Thanks for having me.
>> Thanks to Jimmy Xu Portfolio Manager at TD Asset Management.
as always wrote or do your own research before making market decisions.
I will be back tomorrow with an update in the markets and highlights from some of our best interviews this week. And stay tuned on Monday when we will be joined by Chris Graja, Senior retail analyst at Argus research taking your questions or retail stocks.
A reminder to email us to get a head start at moneytalklive@td.com. That's our chauffeur today take care.
[music]
every day I'll be joined by guests from across TD, many of whom you will only see here. We we'll take you through it's moving the markets and answer your questions about investing.
Coming up and today show: will have a look at popular new option strategy that could be bringing more risks to the market with TD Asset Management Jimmy Xu. And in today's WebBroker education segment, Nugwa Haruna will show us how you can find different types of exchange traded funds using the platform.
Here's how you can get in touch with us: email MoneyTalkLive@td.com or Philip that of your response box under the video player on WebBroker. Before we get to our guest today, let's get you an update on the markets. The TSX up about 23 points and we saw but affirming a bit in the price of crude, hanging in positive territory just a little north of 72 bucks a barrel.
Thinking in some of the big energy names, thinking of Suncor this hour, sliding from its highs of the day up about three quarters of a percent. Some of the mining names, quantum up 3 1/3%.
South of the border, let's check on that broader really the American market, the S&P 500, of course all the talk of the year has been the Fed, interest rates and impressive rate hikes and what that means for a possible recession. In recent days, we've been worried about the R word. Today we have some modest green on the screen, almost 30 points.
Let's check in on the NASDAQ right now and see what's happening in that space, the tech heavy indices up more than a full percent to a bit of money moving back, perhaps cautiously into the market.
Chevron, an energy names south of the border, 173 bucks and change, probably almost hundred $74 a share. Still in positive territory but a little less than one percent and answer are connected. If you've been a bit confused by the price movements in the stock you hold, it may be because of the new option strategy. A short dated options have become an increasing part of trading volumes in our featured guest today says it can also mean more vulnerability in the markets. Joining us now for more on this is Jimmy Xu, Portfolio Manager at TD Asset Management. Welcome.
>> Thanks for having me here.
It's been a really interesting year considering what's happened on interest rates. It seems like investors are still very happy to trade and that's the theme that has come across and continue to carry through since the pandemic.
>> And using this kind of options strategy, I want to explain to the audience because I had a few gifts mentioned to me on the side after shows that it's pretty interesting and we needed to find someone to talk about it and Jimmy is the one. How do they work?
>> Historically, if you go back prior to the financial crisis, these strategies have been implanted by institution investors. But the same type of strategies are now being seen and invested by everyone. These is zero, in hopes when the options expire, they can capture that premiumfrom what they've sold.
It's interesting because since April and May of this year, the US option exchange has put out daily options with daily expiry's so investors can do this every day, day in and day out.
What they are trying to capture on is the decay of the options.
They sell the option in the morning and they hope by the end of the day becomes worthless and they buy it back at a lower price.
What's interesting about the strategies and why they are so popular is because they are very capital efficient. It only requires margin in the account liquid which makes the popular and second, they are popular because they don't have to take overnight risks. They can sleep at night knowing they have closed by the end of the day.
>> We should make sure that this is something that is happening in the markets and recommendations about how you should structure your trades… Let's talk about some of the risks though that can be associated.
An option that expires in one day… What's the risk?
>> There is a lot of risk involved. Anytime you are short selling options.
The strategies have, for lack of a better word, blown up historically prior to the great financial crisis.
So it's interesting that we are seeing a resurgence of this.
It appeared that conditions are tightening in volatility is rising.
So investors aren't implementing the strategies, they are usually selling options because they are short maturity by definition.
They only collect a small amount of premium.
However, if the market moves the wrong way or moves too much or more than what they expected, losses could be four, five, six even 10 times the amount of premiums that people had varied so there's a lot of risk involved. Here's a good thing: when we look at some statistics the talk about these trading strategies, it seems like the hit rates are positive. Sometimes one in to 50%. I think there's a psychological aspect of this right? You do this day in and day out and in terms of a small profit every day, you get really confident in this strategy.
Maybe you start to increase your size. You start selling options when it's not really attractive.
That can get you into a lot of trouble. I think Nicolas… Wrote a book and had a great example with a turkey farm.
Every day his turkeys were getting fat, it's a great life.
Then when Thanksgiving rolls around, the markets move more than what you expected, lights out.
>> Some caution right there. You don't want to be the turkey on Thanksgiving.
So that's the strategy and those of the wrists around strategy.
How popular is this strategy?
> I think what surprises the most is the popularity of the strategies.
Since these weekly options were listed earlier this year. So, just look at market stats over the last month, almost 40% of all traded options are these zero day maturity or expired options. That's quite remarkable.
Just put that in context, it's $2.
4 trillion.
Granted not all these volumes are related to these trades.
If people still use the same day maturity options for other activities, but it still a large chunk of the market. I think if popular because now, trading is getting easier and easier. We tell investors rather retail investors can trade on their mobile apps, take seconds to do it on the phone and in the US, commissions are free for trading options so when there is no explicit transaction cost, it makes the strategies a lot more attractive to the average investor.
When you look at the trading volumes, these traders typically 5 to 10 contracts which is, for the most part, too small for institutional investors so our theory is that these strategies are dominated by retail investors. And I think that is a trend that we are seeing post pandemic where retail volumes are becoming a greater portion of the overall market activities and we are seeing it in the space as well.
I would never assume to fully understand as well why a market is moving in either direction.
Even after the years of enjoying this.
There've been times where I wonder why it's doing what it is doing.
I don't know. It's just doing it. This is having an impact on some of the wild moves you've seen this year?
>> It's possible but it's hard to tell what is causing the wild moves. We know based on trading activities with these investors, they are selling options in the morning and are seeing it pick up in the morning and most of the fun comes at the end of the day where investors are trying to close off especially things are starting to move in an average direction. What that could cause is more volatility at the end of the day where investors are trying to close these positions, just giving you an example, if you are short of an option, the market goes against you, to close that option position, you have to sell more stock which puts more downward pressure and that can cause wild swings in the market when you hit pockets of liquidity.
Especially a year like this.
>> That can cause perhaps an explanation, we talked with the risk for an individual investor. We are not recommending the strategy.
We are trying to unravel it because it is playing a role in the market. As we talk about the risk of this training against individual investors, what about longer-term or overall vulnerabilities for the market.
There is some activity there in the trade.
>> I think we need to separate the difference between the short-term activities which is what the strategy is in sort of longer-term.
Let's call it normal activities.
>> Longer-term? About two days?
haha> For most investors in the office space, they typically buy and sell options that are one month or longer maturity. So, if you look at what's happening in the… Index, the S&P 500 this year, it's actually pretty muted despite the volatility.
They actually don't show up for the vix index.
… Actually quite limited but on the short end, I think what's interesting is given all of this open interest, all of this volume being up sorted by absorbed by the market easily, marketmakers are really happy to take that flow even though there is no Commission. We know that bit offers are wider so having that to a volume, selling in the morning, buying in the afternoon, is really profitable for the marketmakers. So these flows, despite the fact that they are 40% or more of the market, they have have been absorbed by the marketmakers actually quite easily. So if you're not watching, you might just miss out on the trading that's happening.
>> Fascinating stuff and a great start to the program.
We will get your questions with asset allocation with Jimmy Xu and just moments time, a reminder you get in touch was any time by emailing moneytalklive@td.com or if you what that fewer response box here in WebBroker.
Now let's get you updated on the top stories.
Exxon Mobil is expanding its share buyback program to $50 billion through 2024. The energy giant says the program will include $15 billion in share repurchases for this year.
The announcement came as Exxon laid out a five-year corporate plan that includes annual capital investments of up to $25 billion. An oil leak into Nebraska Creek has forced the shutdown of TC energy's Keystone pipeline. The company says it detected a pressure drop last night and is working to contain the spill. The Keystone pipeline runs more than 4300 km from Canada to the US and can ship more than 600,000 barrels of crude a day.
Ottawa is proposing tougher oversight of foreign takeovers, pointing to national security concerns. The Trudeau government's says the changes to the investment Canada ACT! are necessary to address challenges that could threaten Canada's economic and national security.
Part of the proposed changes focus on the transfer of intellectual property. And here's of the main benchmark index in Canada is trading: the S&P 500, now up about three quarters of a percent.
We are back now with Jimmy Xu taking your questions about asset allocation.
Will 2023 have the same sort of volatility the 2022 did?
>> As we close this year out, it's been quite a remarkable year.
think about what happened during the pandemic.
This year, equities are down. Let's call it low 10% – but volatility this year, equities has actually been quite muted.
So vix only spike about 40, a handful of times this year. Very short-lived. From a volatility perspective, yes volatility in equity was higher but a significantly lower was what we would expect to see in moments of crisis. That tells us where the investors mindset are at. But were we saw volatility this year is interest rates.
So long term interest rates in the US, from a volatility perspective is now high equity volatility.
You think about investors. When we tell investors?
Fixed income has lower volatility, lower risk investors should be buying more fixed income products but this year, the complete opposite. Fixed income volatility has been a source of pain for all investors especially considering… I think looking at next year, we don't think the volatility is going to go away.
There is still a significant amount of uncertainty on the path of central-bank rate hikes across the globe.
There is significant uncertainty about growth. What earnings might look like.
So I think from an investor's perspective, even though this year has been, we have seen volatility this year, we should continue for them to expect that to continue next year.
There will be pockets of opportunity to take advantage of it.
>> We saw interest-rate vulnerability. I can imagine if I was having this discussion a year ago.
About "by 2022, what will that look like?" If someone said they think central banks will raise rates probably 75 basis points, I would've laughed that person out of the studio. Thanks for your time, thanks for joining us and we will have the back anytime soon.
People try to wrap your head around what could be next.
>> We think back of conversations the end of 2020, 2021, what were people talking about?
We were worried about if we were going to get returns.
Equity validations were near the highs at the end of 2022.
People were worried about equity returns. Fixed income yields at that time were 1/2%. So, for a balance for investor by the end of last year, we were all worried about how we would make money.
But the reset industry interest-rate this year, the reset in equity volatility actually creates a more optimistic view into 2023.
There is obviously still a lot of downside risks. A lot of uncertainty. But returns of fixed income just from a yield perspective are looking a lot more attractive today than they were in the past.
So fixed income is like looking a lot more attractive and there is still some vulnerabilities in the equities market from the earnings perspective, probably TD Asset Management model is showing we are probably going to enter a newer recession next year.
So with those two things together, I think fixed income sets vary on time has become a lot more interesting to look at verses previous years.
> Interesting stuff indeed.
Let's get to another question now. Once we get to the next bull market, what types of sectors will lead?
>> That's a fantastic question.
I think at this point of the cycle, having not entered into a recession yet, it's a little premature to call sectors.
I think we have some theories of what could happen. For one, if interest rates could decline from this point forward, especially in the 10 year and the third year, technology stocks, growth stocks could benefit. These stocks have been re-rated because as interest rates got higher, their valuations of fallen but once that reverses, I'm assuming earnings can hold, they could lead. But there's another thought that over the last decade or so, we've been under invested in commodities space.
There hasn't been a lot of reinvestment in that space.
We have seen a lot of talk about commodity shortages, energy shortages area so for the next decade, but the next, I think a decade is a long to call but next couple of years, energy could be another place, commodities could be another place where investors need to look at the next leaders in the next cycle.
> Commodities, people ask questions about the future of electric vehicles. Not only that, the electrification of everything. That's pretty intensive. The same argument again.
Okay, if we need this much copper, this much this this much that at the top the investments in the mines actually produce in the future?
>> I think this is where the opportunities are for these commodity producers. Obviously, commodity producers are quite cyclical. So we do enter into a slowdown going into next year, there will be some headwinds but will we look projecting forward, I think the world is going to be in a stage where there will be a shortage of things that we need to produce.
>> Okay. Another question now hear about the big overriding theme of the year.
Borrowing costs. How close are we to peak rates?
>> That the $2 million question. Bank of Canada yesterday hiked another 50 basis points which is maybe a bit higher than people would've expected.
But it seems like we are nearing peak interest rate.
Going forward, it's not so much how fast they're going to hike that matters it's going to be when they stop and for how long they stop. I think all of that is going to involve around with the inflation outlook looks like.
Inflation remains stubbornly high like we saw this year. We think that rates will stay high and might stay high for a while.
But inflation can slow down.
And combined with the fact that growth slowdowns, interest rates may be in the process of topping.
> Process of topping to try to tame inflation.
A lot of people think if there is a recession they will start cutting right?
This is sort of the playbook.
Has that playbook been altered considering what we've been through the past three years?
>> I think of you is a lot more nuanced than it was in the past. Traditionally you are right. When you enter into a growth slowdown we loose monetary policy, cut interest rates and may do things like quantitative easing.
But this time around, things might be different and that really depends on inflation. We have an environment where inflation slows.
When growth slows down significantly but inflation stay stubbornly high because of supply chain issues,, when that happens, we are not confident that the playbook from the bank will be exactly the same. It will be hard to see, given the communications that they have been providing to cut rates when inflation is above target.
I think that is counterintuitive to what they have communicated this year.
>> Very interesting stuff as always. At home, make sure you do your own research before making any investment decisions.
We will get back to your questions with Jimmy Xu in just moments time.
Email us anytime with your questions of MoneyTalk Live ATD.com and now for education segment.
If you're looking to do research on different types of exchange traded funds, WebBroker has tools that can help.
Nugwa Haruna commerce Senior Client Education Instructor has more on this report.
>> : Various derivatives and the idea behind these ETF's us to track a decline or downward value in an underlying benchmark or an index.
Investors who utilize inverse ETF's, they do this because they're looking to make a profit during the market decline or they may seek to use this to protect her hedge their portfolio during a period of market decline. Now, for this reason, it inverse ETF's can also be known as bear ETF's are short ETF's. Investors are able to find these… Once in WebBroker, an investor would click on research, and under tools you would go to "readers". This tool lets investors filter through different investments for information important to them. So in this case, were going to go ETF's or exchange traded funds.
Once here, were going to go to create a custom screen.
Under our categories section, were going to choose "inverse".
Click to add criteria.
Scrolling down, we are going to select "Canada" and we are going to select "show only inverse funds". We will review these matches by clicking on here.
They are looking to track a decline in a specific underlying benchmark.
In this case, on the development example. For instance, this specific index, inverse ETF is looking to track a decline in the TSX 60.
Some notable that up on a chart.
Now, once here, I'm also going to pull up and ETF that seeks to track the performance of the TSX 60.
And once I do this, an investor is then able to see just how well an inverse ETF actually mirrors in the opposite direction the performance of a specific index.
Now, a word of caution that I will mention for investors, because inverse ETF's utilize derivatives, which tend to be traded more on a short-term basis, investors want to be aware that inverse ETF's tend to be reset on a daily basis. So for investors looking for a more longer-term investment, they may want to consider other kinds of investments as opposed to using an inverse ETF. Because of the daily nature of trades by the inverse ETF, it may actually have more of a traded expense fee and so investors want to be aware of these additional costs as well.
Look for investors looking to taking manage of market declines or are looking to protect a portfolio during a market decline, they may then consider using inverse ETF's.
>> Our thanks to Nugwa Haruna, Senior Client Education Instructor at TD Direct Investing. Make sure to check WebBroker for upcoming webinars and master classes.
And a reminder of how you can get in touch with us before we get back to our questions with Jimmy Xu.
Do you have a question about investing, or what is driving the markets? Our guests are eager to answer your questions so send them to us here at MoneyTalk Live. You can send your questions two ways: you can send us an email any time at moneytalklive@td.com or you can use the question box at the bottom screen right here on WebBroker just type your question and hit "send". We will see if one of our guests can get you the answer right here at MoneyTalk Live.
We are back now with Jimmy Xu taking your questions about asset allocations. Let's get back to them. A lot coming in the past couple of minutes. Are there options trading driving as part of the discussion are they driving markets higher or lower?
>> When we think about options, there are probably two times more demand for put options and call options.
That makes sense because people typically use options to protect and the downside.
Trying to use it as insurance to protect the portfolios. But with these zero expiring options, the volumes between our very balanced. So investors creating equal numbers of calls an equal number of puts. On the surface, that doesn't put any pressure in the direction of the equities whether the price is higher or lower. Because call and put volumes are balanced. But what does happen is near the end of the day, when invest investors a try to cover these positions, the market becomes rather it behaves a lot better with more momentum. The higher prices tent to be even higher prices and lower prices conspire to follow lower prices. So it exaggerates the moves of the direction of the market. That's onlydoes that when we look on the long term it doesn't drive the direction of equities. It's the fundamentals that really matters.
>> Fascinating stuff. Another question off the platform: why do large volumes of shares trade late in the day?
>> The typical trading volume of any stock or options is there's a lot of volume. It is U-shaped. There's a lot of volume during the start of the day. Also a lot of volume at the end of the day.
I think this year, there might, we might be seeing more volume at the end of the date due to a couple of things.
One is the strategy I talked about because investors typically try to close the book at the end of the day which means that hedging activities… Creating extra volume, second, there is also structure reasons. like ETF's. Rebalancing.
Considering the growth in ETF's, I would say the last few years, attempts to create more volume at the end of the day and also as a potential to amplify volatility over the last 30 minutes of the trading hour.
>> When we talk about the kind of activity, if were talking about balancing ETF's, it sounds like big institutions are at play here.
>> Yes. A combination. Big institutions are definitely at play. On ETF's, on portfolio rebalancing.
That happens at the end of the day.
But don't discount the retail investors.
They may come almost 20% of the overall trading volume so they can have a profound impact, especially in the single stock side and what we have seen is retail investors tend to cluster. That's because part of the reason why they are clustering is a social media.
They are talking with her traits, the positions and people tend to pile on the momentum.
Especially in a single stock side when there is an investment liquidity, it really amplifies.
Their activities can really amplify the moves.
> Another question now, this one about, tied the toll that increases we see in interest rates this year.
GICs.
Will the rates keep going up?
>> Yeah. I think the conversation of GICs is interesting.
Rates could potentially still rise in the GICs given how, if the bank of Canada keeps increasing rates more than what's already expected.
But I think the conversation with GICs and other alternatives are a bit more nuanced. So if you like the Canadian fixed income market, yielding the overall market, it's not all that different from a GIC. So if you invest in fixed income, if interest rates to decline, night and get some capital appreciation.
Fixed income investments that you don't get in a GIC.
But of course a trade-off that is you're going to have to take on a bit more volatility.
GIC as investment, I think GIC is very well suited if you have cash flow within the next one, two years. That can match your cash flows very nicely.
With a guaranteed return as the name suggests. It's very suitable. From an investment perspective, yields on GICs typically lower than the interest rates. So you were earning negative real return. Look at the history of GICs of the last 20 years.
It works once out of every 20 years.
So, maybe it continues to work next year. But the odds are probably stacked against it.
The way rates are today.
>> This one, I think this a webinar coming up.
With Nugwa, we shared some information on the platform.
Never wondering if this 60/40 is dead?
>> I think this is the year of the resurgence of the 60/40 portfolio. At the end of last year where we were going to get returns.
If fixed income yields of 1/2%.
Given the reset in validations, if you look at TD Asset Management's counter market assumptions, they are over 1% higher than what they were last year.
So it's getting quite attractive.
Having said that,, fixed income and equities do not diversify each other, it's important to maybe think about complementing your 60/40 portfolio with alternative investments that has a lower correlation to both assets such as commodities, which is done tremendously well this year. Real assets, infrastructure, alternative market neutral strategies.
I think those will become more important part of the tools justification to a 60/40 portfolio going forward.
But certainly, from a return perspective, it's a lot more attractive this year compared to last.
>> I imagine a key risk going into next year, we talked about how the central banks are close to the end now of the rate hiking cycle. Perhaps some have ended but we will find out in the coming months and then they stick there for a while.
But as I said earlier, inflation just can't be wrestled to the ground and they have to keep raising rates. I imagine that the pressure will have continual pressure from this year onto the long portfolio.
> Absolutely.
If interest rates continue to rise due to inflationary pressures, fixed income portfolios will be under pressure again from higher yield. With equity portfolios are going to be in a pressure to from two sources.
One is valuations.
When rates goes up, valuation follows. Second, so quickly and so aggressively in a short period of time, you really constrain growth.
So corporate earnings will also be challenged.
It will be another perfect storm of this year. If rates keep going to rise, that equity and bond portfolio might still have some headwinds which is why it's important to look at having alternative assets in your portfolio to tender diversify against that.
>> We will get back to your questions on Jimmy Xu on asset allocation in just a moment's time.
As always make sure you do your own research before making investment decisions. A reminder that you can get in touch with us any time.
Do you have a question about investing, or what is driving the markets? Our guests are eager to answer your questions so send them to us here at MoneyTalk Live. You can send your questions two ways: you can send us an email any time at moneytalklive@td.com or you can use the question box at the bottom screen right here on WebBroker just type your question and hit "send". We will see if one of our guests can get you the answer right here at MoneyTalk Live.
>> No surprise that much of the inflationary pressure in Canada has been influenced by supply related factors beyond our borders. But for some provinces, domestic drivers play a bigger role.
Our Anthony Okolie joins us now with a look at TD Economics report on some of these key factors shaping provincial inflation. Anthony?
> Thanks Greg. TD Economics estimates that as much a 65% of Canada's year-over-year inflation is influenced by supply related or external driven factors.
Not consummately, at the provincial level, more than a percent of inflation in the Atlantic region can be chalked up to the same factors. I brought along a chart that looks like the impact of these external supply chains of sensitive inflation by province.
At the extreme, nearly all of the inflation in Newfoundland and Labrador can be traced to these external factors.
This is primarily food and energy prices. The reason is because these items account for a big share of the regions consumer price index or CPI basket. The same logic holds true across most of the prairies as well.
When we look at Alberta though, inflation and goods other than food and energy such as autos, auto parts, household furnishings, has made the biggest impact compared to most other provinces.
Now, outside of the Atlantic region, food is the largest contributor to overall inflation in Québec.
That's because Québec has grown a bit faster versus the country overall. Have the highest weighting of any province.
Meanwhile, when we look at Ontario and BC, the inflation story there is a little different. Inflation in these two provinces has really been bolstered mostly by domestically driven factors like service suspending.
Within services, shelter cost is a big part of that.
Again, as the chart shows, it's not surprising in Ontario housing affordability has been loaded in Ontario and BC were prices of soap soared since start of the pandemic.
The rapid growth of shelter inflation has been driven by higher mortgage rates, interest costs of Canadians renewing mortgages at higher interest rates. TD Economics notes that service inflation in provinces like Ontario and BC has historically been stickier than goods inflation which is more prominent in Atlantic region and Prairie provinces. Greg?
> Interesting dynamics there as you move from province to province to province. Given those dynamics, what is TD Economics think about inflationary pressures in 2023?
>> TD Economics express expects inflation to grind lower in 2023 and all provinces next year.
But because of the inflation dynamics it will be an uneven performance. When we look at the Atlantic province rather the Atlantic regions on the prairies, inflation in these areas could see the steeper disinflation from lower energy prices and lower good prices.
Again, this is because we are seeing and easing and supply chains. By contrast though, Ontario and BC, inflation there is likely to be stickier and these two provinces due to higher services inflation pressures particularly shelter costs which have increased substantially. In Québec, they expect the records will be somewhere in the middle of the package of the performance.
> Interesting stuff as always. Thanks Anthony.
>> My pleasure.
> MoneyTalk Live's Anthony Okolie. Let's see how the markets are faring now right here at home on Bay Street with the TSX Composite Index up 25 point a little modest up more than 1/10 of a percent. Some affirming the price of crude but nothing too impressive on that front.
Some of the energy names have kind of come back from their highs. Checking on Crescent point right now.
Coming from its high earlier this session, falling into negative territory now, nine bucks and $0.12 a share.
Crescent point down.
Text seems to be holding onto its gains.
South of the border, check in the S&P 500. Right now you up 23 points to the upside.
Good for a gain of a little more than half percent. The tech heavy NASDAQ doing a bit better in the broader market earlier this session. Let's see if it's on onto its status there. Indeed it has. The NASDAQ up, we will call that 1%.
ExxonMobil, one of the big energy names, hanging in there of course on the top of the show, they are five, their five-year plan which seems to have some money moving in the right direction. A little shy than hundred five bucks a share, up a little more than 1%.
We are back now with Jimmy Xu from TD Asset Management, talking asset allocation. Let's get back to questions: what kind of return can one expect in US fixed income?
>>I think whether it is US or Canadian market, it will be similar. From a yield perspective, yields are fixed incomes are a lot higher now. If you're entering the fixed market today, you can expect is from a yield perspective, somewhere around four, 4 1/2% just on a carry from interest rate. But if you think about the sensitivity of bond returns to underlying changes in interest rate, roughly speaking, 100 basis point change could result in plus/-6% in capital gains or losses. So if you are entering a fixed income market today, think about two components: what you can get from a yield on your forward and second the direction of interest rating decline that you are going to get some benefit from the capital gains if interest rates rise, then the opposite will happen. This is very different from the conversation at the beginning of the year where interest rates were at 1/2%.
>> If we end up in a recession next year, what does that mean for fixed income?
If it's a recession where central banks can't cut in the face because they need to tame inflation. As I get more complicated?
> Absolutely. This is where we need to be very, again, very nuanced in the type of recession that winter next year.
It's impact on inflation. So we get into a stagflation area environment, there are not a lot of hiding spots.
Fixed income will continue to be challenged.
But if it's a variety of recession where we see inflation persistently coming down, I think the central banks will be more welcoming to cut interest rates.
Especially in Canada where consumers are being hit with impact higher servicing costs. One of the more… We are leasing evidence of demand. So that's scenario of lower growth but persistently higher inflation, I think that risk is starting to diminish.
>> Okay. What geographies do we have looking interesting going forward? I've heard criticism in the past that Canadian investors can be a little too Canadian centric. So let's look around the world.
> I think over the short term, one area that are asset-allocation team is looking at is Japan.
Japan is starting to look more attractive. More interesting at these levels because first of all, the Japanese yen is very significant this year. This currency value is actually looking very cheap relative to what fair value would be. Obviously currencies can deviate from fair value for a very long time. So that's a word of caution. But from a validation perspective, yet is looking very cheap and if that rallies,… Investors in equities market both a currency pack and a stock impact from the… From a stock perspective, there consumers are roughly growing at 4% below trend. As China reopens, as Japan continue their recovery process, we can see some upside in Japanese equities as well.
Combined with equities and currencies, I think it's an area that… >> Over the years we've heard criticism of Japan structurally as a society in terms of their demographics being a big challenge for them. Are they starting to work through that early still having problems?
>> These challenges have not gone away in Japan.
Structurally, Japan still suffers from low growth, low inflation, demographics issues, immigration challenges as well.
So these structures have not gone away.
But over the very short term, it could be interesting country to look at when we are thinking about overall country allocation.
>> Okay.
Another question here.
This is the big one. I don't know if there's an easy answer. If there was, we would have it. Do you think the bottom is in? I assume they mean for the market selloff that we saw.
>> Yes I'm assuming that question through the market.
I think there are a couple ways to look at it.
This year, equity decline, the bulk of the equity decline is through changes in multiples.
If you actually saw equity multiples and interest rates inverted, they actually sit on top of each other. So what that tells us is the decline that we saw on the market is caused by higher rates. We don't think that recessionary risk going into next year is quite pricey to the equity market at this moment. So we look at consensus earnings feedback, still too high relative to TD Asset Management's model.
We think next year's earnings might be zero. So, if you get, take this year's earnings, if you don't get any multiple expansion from falling interest rates, then the fair value of equities 2023 could be similar to where we are today.
If the economy does prove to be maybe a little worse than what people would expect, then it could be some more downside pressure off of equities.
So the risk in equities, at this point, may be skewed to the downside. Whether we retest the bottom that we saw this year, I think that will really depend on interest rate policies going forward.
>> Jimmy, a pleasure having you. Fascinating conversation we will see you again soon.
>> Thanks for having me.
>> Thanks to Jimmy Xu Portfolio Manager at TD Asset Management.
as always wrote or do your own research before making market decisions.
I will be back tomorrow with an update in the markets and highlights from some of our best interviews this week. And stay tuned on Monday when we will be joined by Chris Graja, Senior retail analyst at Argus research taking your questions or retail stocks.
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