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Fresh credit concerns at Credit Suisse are raising jitters about the global financial sector. Michael Craig, Head of Asset Allocation at TD Asset Management, discusses how having an appropriate fixed income allocation may be beneficial in these market conditions.
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* [AUDIO LOGO]
* - Investors are keeping a careful eye on headlines surrounding the global financial sector. Joining us with perspective on this fast-evolving situation is Michael Craig, head of asset allocation at TD Asset Management. Michael, always good to have you with us.
* - Pleasure to be here, Greg.
* - So let's start with the broad strokes. A lot has happened in just a short period of time. What is going on with the financial sector? How do you approach this market?
* - Oh, there's a few cross-currents. Last week, it was the US regionals. Today, it's Credit Suisse. Look, we're about a period of very tight financial conditions. Historically, this is not unsurprising. You do start to see firms start to falter with those, and that's what we're seeing today. And as a result, the markets are behaving accordingly with bonds rallying and stocks selling off.
* - So let's talk about that rally that we've seen in bonds. We've seen yields come back pretty dramatically in just the past couple of days. That means money is moving in to that space. So what do we expect for fixed income for the rest of this year? What were we expecting heading into this year?
* - We've been, for some time now, been buying fixed income. It's a bit of a fool's errand to try and time it perfectly, so we just continue to add. And so that's worked out well. The bond market-- the short end of the bond market, the two-year rate is almost trading like a penny stock right now to be totally frank. It's always a bit of a loaded term when you use "historic moves," but these are historic moves in terms of how much the short end of the curve is moving. Even out to 10 and 30s are really running right now.
* So the bond market is telling you that there is stress, and it really sets up for challenging policy decisions for central banks as they still are dealing with inflation. But now they are having to deal with financial stability as well. So that's kind of what's happening.
* In terms of our positioning, look, the market's kind of come to where our thinking was. Sometimes the best course of action is to do nothing. And right now, I think we're pretty happy with our positioning, and we'll look to manage it as we go through whatever we're going through in terms of the slowdown/recession.
* - And you did mention the fact that things have changed pretty quickly in just the past couple of days-- big shifts when it comes to flows into bonds. And then you've got policy makers, monetary policy makers having to make sense of it all. The Fed's going to have to make some sort of proclamation on all this in a week's time. I mean, what do they need? They've got a lot on their plate right now. What do they need to be thinking about?
* - Yeah, I mean, this is very fluid. And a lot can happen. Just like a lot's happened last fortnight, a lot can happen over the next week. The way I would kind of cut it is that I would expect them to still hike another quarter point. I think the terminal rate has been moved down now, and I think this might be it. The other two kind course of action is there's actually some banks that they're calling for a cut, if you can believe it, and some calling for no action.
* I think that if they were to go and do nothing or even cut, that would send a message to the market that they're panicking. I actually think that'd be probably almost counterproductive. But who am I to say? So we get another hike, but it really is now-- we're kind of at the end of the beginning, to be frank. The economic data in some areas is still OK, but with this shock in the banking sector, the natural fall-in effect is that credit conditions are going to tighten. That's going to put stress on industry and will ultimately lead to a material slowdown.
* And I think that's the bigger issue now is in terms of what kind of-- there's initial financial stability for today, but also more so the tightening of financial conditions. And if you look at senior loan officer surveys, they had been tightening for some time now. This recent move, and particularly the regionals in the US, is going to just lead to that even being more tight and, hence, much more challenging conditions for corporates to operate in.
* - When I think about Silicon Valley Bank, obviously, in the early innings of the story-- and early innings, we're only talking four or five days ago-- Credit Suisse-- these seem to be conditions quite specific to these institutions. As an investor, take some breath, steps back from the headlines so it takes a look around at the state of the markets and where we're headed this year, what should investors have top of mind?
* - Yeah, a few things-- first, we've been very clear that as you go into these types of periods, you want to upgrade the quality of your investments. I would argue that firms that are struggling right now would not classify as high quality institutions relative to peers. So that's one thing.
* Second, you know, depending on the type of investor you are-- today, the stock market is off like a percent and a half today-- not the end of the world. For kind of long-term growth investors, look, it's going to be a challenging period, but ultimately, with markets repricing, your expected returns in the future actually go higher as we have better entry points. And for conservative investors, I would expect our conservative investors-- look, market's moving around a lot today.
* I've actually looked at-- the returns at the end of today will be probably somewhere between zero into positive because the offset in fixed income is more than compensated for the selloff in equity. So for investors, I don't think there's-- there's been a lot of people who have moved into cash. There's 5% rates, what they're earning. That doesn't make-- that doesn't-- not the craziest thing in the world to do.
* But now, as things start to reprice, financial assets are looking interesting again. So I think there's probably some room to go. But as I was chatting with Stav just before I came down, our next kind of major shift will be to look into-- to buy equity at some point. We're not close, but that's ultimately where our head is right now, and I think that decision will be at some point later this year.
* [AUDIO LOGO]
* [MUSIC PLAYING]
* - Investors are keeping a careful eye on headlines surrounding the global financial sector. Joining us with perspective on this fast-evolving situation is Michael Craig, head of asset allocation at TD Asset Management. Michael, always good to have you with us.
* - Pleasure to be here, Greg.
* - So let's start with the broad strokes. A lot has happened in just a short period of time. What is going on with the financial sector? How do you approach this market?
* - Oh, there's a few cross-currents. Last week, it was the US regionals. Today, it's Credit Suisse. Look, we're about a period of very tight financial conditions. Historically, this is not unsurprising. You do start to see firms start to falter with those, and that's what we're seeing today. And as a result, the markets are behaving accordingly with bonds rallying and stocks selling off.
* - So let's talk about that rally that we've seen in bonds. We've seen yields come back pretty dramatically in just the past couple of days. That means money is moving in to that space. So what do we expect for fixed income for the rest of this year? What were we expecting heading into this year?
* - We've been, for some time now, been buying fixed income. It's a bit of a fool's errand to try and time it perfectly, so we just continue to add. And so that's worked out well. The bond market-- the short end of the bond market, the two-year rate is almost trading like a penny stock right now to be totally frank. It's always a bit of a loaded term when you use "historic moves," but these are historic moves in terms of how much the short end of the curve is moving. Even out to 10 and 30s are really running right now.
* So the bond market is telling you that there is stress, and it really sets up for challenging policy decisions for central banks as they still are dealing with inflation. But now they are having to deal with financial stability as well. So that's kind of what's happening.
* In terms of our positioning, look, the market's kind of come to where our thinking was. Sometimes the best course of action is to do nothing. And right now, I think we're pretty happy with our positioning, and we'll look to manage it as we go through whatever we're going through in terms of the slowdown/recession.
* - And you did mention the fact that things have changed pretty quickly in just the past couple of days-- big shifts when it comes to flows into bonds. And then you've got policy makers, monetary policy makers having to make sense of it all. The Fed's going to have to make some sort of proclamation on all this in a week's time. I mean, what do they need? They've got a lot on their plate right now. What do they need to be thinking about?
* - Yeah, I mean, this is very fluid. And a lot can happen. Just like a lot's happened last fortnight, a lot can happen over the next week. The way I would kind of cut it is that I would expect them to still hike another quarter point. I think the terminal rate has been moved down now, and I think this might be it. The other two kind course of action is there's actually some banks that they're calling for a cut, if you can believe it, and some calling for no action.
* I think that if they were to go and do nothing or even cut, that would send a message to the market that they're panicking. I actually think that'd be probably almost counterproductive. But who am I to say? So we get another hike, but it really is now-- we're kind of at the end of the beginning, to be frank. The economic data in some areas is still OK, but with this shock in the banking sector, the natural fall-in effect is that credit conditions are going to tighten. That's going to put stress on industry and will ultimately lead to a material slowdown.
* And I think that's the bigger issue now is in terms of what kind of-- there's initial financial stability for today, but also more so the tightening of financial conditions. And if you look at senior loan officer surveys, they had been tightening for some time now. This recent move, and particularly the regionals in the US, is going to just lead to that even being more tight and, hence, much more challenging conditions for corporates to operate in.
* - When I think about Silicon Valley Bank, obviously, in the early innings of the story-- and early innings, we're only talking four or five days ago-- Credit Suisse-- these seem to be conditions quite specific to these institutions. As an investor, take some breath, steps back from the headlines so it takes a look around at the state of the markets and where we're headed this year, what should investors have top of mind?
* - Yeah, a few things-- first, we've been very clear that as you go into these types of periods, you want to upgrade the quality of your investments. I would argue that firms that are struggling right now would not classify as high quality institutions relative to peers. So that's one thing.
* Second, you know, depending on the type of investor you are-- today, the stock market is off like a percent and a half today-- not the end of the world. For kind of long-term growth investors, look, it's going to be a challenging period, but ultimately, with markets repricing, your expected returns in the future actually go higher as we have better entry points. And for conservative investors, I would expect our conservative investors-- look, market's moving around a lot today.
* I've actually looked at-- the returns at the end of today will be probably somewhere between zero into positive because the offset in fixed income is more than compensated for the selloff in equity. So for investors, I don't think there's-- there's been a lot of people who have moved into cash. There's 5% rates, what they're earning. That doesn't make-- that doesn't-- not the craziest thing in the world to do.
* But now, as things start to reprice, financial assets are looking interesting again. So I think there's probably some room to go. But as I was chatting with Stav just before I came down, our next kind of major shift will be to look into-- to buy equity at some point. We're not close, but that's ultimately where our head is right now, and I think that decision will be at some point later this year.
* [AUDIO LOGO]
* [MUSIC PLAYING]
