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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'll only see here.
We we'll take you through what's moving the markets and answer your questions about investing.
Coming up on today's show, will discuss whether were at a potential turning point for the economy of the bond market with TD Asset Management Alex Gorewicz.
MoneyTalk's Anthony Okolie will have a look at the new TD Cowen report on the outlook for the utility sector and in today's WebBroker education segment Bryan Rogers will walk us through the different research reports you can find a platform. You can email us anytime@moneytalkliveatd.com or if a look of your response under the video player and WebBroker.
Let's get you an update on the markets. I have not checked in lately so I'm just as curious as you are.
A bit of giveback. A couple of strong sessions for the TSX Composite Index, down modestly at this hour just 16 points less than 1/10 of a percent, nothing too dramatic. Among the most actively traded names in the TSX and what is considerably a slower time of year as we head toward Labor Day, Shopify, I want to check on this stock right now making quite a pop today up to the tune of 8 1/2%.
88 bucks and $0.11. They have a little deal they're going with Amazon. It seems to be positive on the name.
Will tell you a bit more about that later in the show.
Checking in on Cenovus, you have the price of crude holding well under 80 bucks a barrel.
A bit at 82 right now. We saw a run at some of the other names.
Day-to-day, there has been a grind higher for these oil and gas companies including Cenovus at 2695 almost a full percent up again today. South of the border a lot of data coming in.
Everyone trying to read the tea leaves to see if the rate hikes are working.
As the economy slowing?
Today the S&P 500, seven points, pretty modest to the upside but green on the screen.
The tech heavy NASDAQ against the broader market, showing a little bit stronger a little more than half a percent to the upside.
Not that kind of story for Dollar General though. The retail company with its latest earnings, the street not liking what they saw at all. We will call about 135 to be generous to round up. Still down more than 14%.
And that's your market update.
The economy is showing some signs of slowing as central banks continue to keep rates at elevated levels. But are we had a potential turning point for borrowing costs and the bond market? Joining us now to discuss his Alex Gorewicz, Portfolio Manager for Active Fixed Income at TD Asset Management. Always great to have you back here.
>> Thanks Greg, great back here.
>> Weather here at Homer's south of the border, we read the tea leaves. What are we seeing lately?
>> May be looking back so far in the third quarter, we still have a month to go, more resilience than anticipated across a number of economic indicators, particularly around labour and how that's been feeding into better-than-expected retail spending and personal spending. Therefore, given how much consumption contributes to GDP, better-than-expected GDP performance, particularly in the US, maybe more in line in Canada.
As these have been feeding into a concern by some investors, probably by more investors that perhaps core inflation, which is really driven by wage growth, by more labour oriented indicators, will remain stickier and will be really hard-pressed to come down to 2% which is with the Fed and Bank of Canada are targeting inflation in the medium term.
That's leading others to say perhaps monetary policy is not restrictive enough and I think that's been playing into very volatile bond market through the Summer.
>> For the past couple of weeks and with all those factors playing out, we did see yields continue to perspire the bond market. In the past couple of days.
It's only a couple of reports but it did feel like perhaps there was some indication. I'm thinking the private payroll south of the border.
In addition of jobs but not as firm as expected. When workers change jobs they're not getting the biggest raises they were getting before the states.
Are we seeing other signs like that were someone's on the other side saying "when are they going to be done?" Some indication that the work is starting to work…?
>> Yeah, so that's where, you know, you have to get into the underlying details and say "perhaps monetary policy is restrictive enough when you realize that labour indicators are usually the last shoe to drop." And although, to your point, it's very early, we saw a couple of indicators just as there is a softening of the picture for example, challenge or job cuts came in through quite substantially for August. You've seen a reversal from pretty impressive beats in initial jobless claims in July. A bit of a reversal of that in August. Job openings were weaker than expected.
EDP numbers were a bit softer. How that all plays out in tomorrow's payroll numbers in the US remains to be seen. But, a bit of a mixed picture when you're looking at the underlying details.
And again, the job market is sort of the last shoe to drop.
But something that is absolutely of note, suggesting monetary policy is tight and is having the intended effect is looking at commercial bankruptcy filings.
Businesses are starting to crumble at the weight of higher interest rates.
But it's not the ones in the S&P 500. It's not the MegaCap companies that we are all tracking and paying attention to.
It's a lot of the smaller and medium-sized businesses and unfortunately, those are the ones that contributed to the majority of job growth coming into this year.
So, if you extrapolate that forward, and that pain in that segment of the economy or of that segment of companies continues because of monetary policy, it suggests that we could see a lot more softening of labour market and in a more visible way in the next several months.
>> Now, by the central banks own metrics and admissions, they are in restrictive territory already.
>> Right.
>> The bond market has been interesting the Summer.
What is a fair value of rates right now?
The 10 year of this, the tenure of that… Should it be there?
>> I don't think fair value is even a consideration in terms of where bond yields are. They were screening as being really cheap. In other words yields are too high, relative to where some of the fundamental data points that historically have been explanatory factors for interest rates. That discrepancy is so wide right now.
With the bond market has been paying attention to his been really initial jobless claims because that serve the most timely indicator of the labour market and again that is sort of the last shoe to drop in terms of a monetary policy cycle.
But thinking through where the fundamentals should be, where it's been very notable in this more recent backup and interest rates through the Summer has been a repricing of long-term policy rate expectations.
That's very positively correlated with this notion of our star, I'm sure you've heard of us talking about that. Me and my colleagues.
What that means is the longer term interest rate that is compatible with an economy in equilibrium. At Jackson Hole, chair Powell kind of alluded to the fact that, you know, our star has been indicated as being higher by certain market observers. But that they still don't feel that they are confident enough in that assessment. In other words the Fed is not really buying this notion that somehow interest rates should be higher for longer in the long run. It's also very interesting and perhaps contradictory that the prevailing narrative of the market is "resilient labour force meaning wage growth will be sticky and that will push core inflation higher in the long run.
When you look at how interest rates have risen in the last couple of months, there haven't been inflation expectations driving that move higher. It's actually been real rates driving that move higher.
So again, not really, the narrative and the reality are sort of not compatible at this time.
So it's really difficult to say "where should the fair value of interest rates be?
And is the market trading based on those factors?" >> You think of some data points a couple of weeks ago.
The fact that we hear about the resilient consumer in the south of the border. Credit card debt. I think I got above $1 trillion for the first time.
People were apparently tapping into those 401(k)s south of the border, the retirement money.
That doesn't speak to me as a consumer with extra money to spend. It points to me with households wondering where they will find the money they need to get through the month.
> Correct and we've anticipated and we have seen this come through. The excess savings that were built up during the pandemic being depleted and that's still on track to happen. And you're starting to see it in ways like drawing on available sources of credit.
But even from a financial market perspective, I think it's noteworthy that if you look at leverage and margin accounts, they are rising at a point where monetary policy is, by its own assessment, by many peoples assessment, already in restrictive territory.
Those are the kinds of things that give you some, you know, reasons to question the sustainability of this more, sort of risk gone or optimistic turning markets during the Summer.
>> Always great insights from Alex Gorewicz.
We will get to your questions for Alex in just a moment's time.
A reminder that you get in touch of us any time by emailing MoneyTalk Live ATD.com or Philip the your response box under the video player on WebBroker.
Now let's get you updated on some of the top stories in the world of business and take a look at how the markets are trading.
Shopify in the spotlight today collaborating with Amazon to bring its "by with prime" function to Shopify merchants in the United States.
The deal will allow those merchants to access Amazon's logistic network including the Amazon delivery service.
Shopify up 8 1/2%. Shares of Dollar General are under pressure today. The discount retailer missing earnings expectations by pretty wide margin. Sales coming in softer than expected.
Dollar General says it's facing higher labour costs, excess inventory, both of which it expects to weigh on earnings going forward. As a result, the retailer's cuttings its earnings forecast for a second quarter in a row.
Not being received well by the street. Down 14% on the session. Salesforce is getting a boost following its latest earnings report. The cloud software company beat expectations for sales and profit despite warning that it is facing an uncertain economy weighing on its growth. Salesforce also touted expansion opportunities when it comes to artificial intelligence. You put it all together, the market has the shares up about three to half percent. A quick check in on the market starting here at home on Bay Street with the TSX Composite Index. We had some nice rallies in our hands in recent days.
Technically that's green on the screen. But barely up to points or just a tick.
South of the border, the S&P 500, as we await jobs in the United States, we have some central-bank decisions in right now not much happening there either.
10 points up, a little shy of a court of a percent.
We are back now with Alex Gorewicz take your questions about fixed income so let's get to them. We have a big going to start.
(Greg reads the question) >> I imagine the viewer is asking about fallen rates as then cut from Bank of Canada or the Fed. What I would say to that is, look, if you look at what bond investors are expecting right now, they have maybe another rate hike Christ in.
Not necessarily in September, which is when both Bank of Canada will be next in September will be the Fed, they expect that to be a pause.
But investors think maybe October or November they will bring another rate hike from both of these central banks.
That's not fully priced in.
And in fact, if the data continues to decelerate the way we've seen at the Summer, around inflation in particular, it's very likely possible that neither central-bank will raise rates again. History has shown that you don't need to see rate cut from a central-bank for bond yields to fall. Usually, in the 3 to 6 months after the last rate hike, government bond yields are noticeably lower to the tune of half a percent to one of the quarter percent.
> Really?
>> Substantial fall in interest rates and that tends to translate into positive total returns of somewhere between mid to high single digits, again and just the 3 to 6 months after the last rate hike.
If history repeats itself this time around, we could end this year, we don't even have to wait for 2024, with decently positive returns in bonds.
>> Now obviously has bond investors await that turn in the market, we are actually seeing yields now.
If you're invested in bonds and got invested in bonds in the past little while, it is a different coupon that you would've got a couple of years ago.
>> Correct.
So in some ways, based on your comment, one could say you are being paid to wait for that turn of the market because you are generating yield you are generating total return through that coupon, through the higher coupon.
>> Let's hone in on the Bank of Canada.
If you are now wondering what we should expect from them next week. He gave us a little flavoured but we have a lot of eyes on him. What a vague enough to say?
>> So I think the Bank of Canada, next week is likely to be a pause because we have seen some softening in the labour market, the way we've seen resilience throughout the Summer in the labour market and the US, we've seen a bit of an opposite of that in Canada.
However, we are also aware that there been a lot of destructions across the country and fortunately from wildfires coast-to-coast. So maybe it's a little bit harder to read through that in a more sustained way for the coming months.
But nevertheless, Bank of Canada has enough reasons to pause from looking at the labour picture.
Of course on the flipside, it is possible that we might see another rate hike, perhaps in October from Bank of Canada because core inflation, or just inflation in general, is still tracking above where the Bank was forecasting for the third quarter. So, I think if either central-bank has cover in the data we've seen to date to hike again, it would actually be Bank of Canada, not fed, that said… September, October, could still bring a lot of perhaps the downside surprises and it's possible the Bank of Canada won't need to hike again.
I used to go up to Ottawa in my old job and every time there was a monetary policy report we met there be a media available with the government. I'm forgetting what time of year used to travel.
We won't get that. But the next day we are going to get it speech from some sort of message that he wants to send, that would be the way to do it the day after the announcement.
>> Correct. And the reality is at this point, central banks by their own admission, have put some Asterix is next to their economic forecast. They acknowledge that the environment remains really uncertain and that they have to be nimble and data dependent. The burden of proof is on the data. To demonstrate if it's coming in with their expectations or not. And they will react accordingly which means it's actually really difficult in this environment for them to provide really confident forward guidance on what's next.
>> We will wait for that next week. Until we wait for that, let's take another question.
US debt downgrade having any lasting impact?
I haven't spoken to you since this happened so I want to hear what Alex Gorewicz has to say about this.
>> Okay (laughing) the reason for the downgrade, if you think about why this keeps happening or why you come across these impasses so frequently is because the deficits just keep accumulating right? Even if they're not growing at the same pace, whether there beating or missing expectations does not change the fact that we have not had a budget surplus in, it feels like for other rather forever. In decades. That's important against a backdrop in which a larger percentage of global trade, still small, but growing percentage of global trade is conducted in other currencies. Not US dollar. What that means is that it forces private investors in the US, domestic investors in the US to take on a bigger and bigger share of the growing US debt pile. And they're going to be selective because they have a very deep markets. A lot of opportunities with which to invest capital and it means from the government's perspective, or if they need those investors to take on more of the debt to buy more of their bonds, it means those investors will want to be properly compensated. This tends to put upward pressure on interest rates.
However, and this is where I give the flipside of this… There isn't yet enough information to suggest that investors, US investors are somehow worried about the debt the sustainability and trajectory of the US. And so they are more than happy to continue buying those bonds at this time. In other words, we haven't actually seen interest rates react to the downgrade. That's not really been the driver of why interest rates have risen through this honour.
>> Great insights as always. And as always at home make sure you do your own research before making any investment decisions.
We will get back to your questions with Alex Gorewicz on fixed income and just moments time.
A reminder that you can email us any time by emailing MoneyTalk Live ATD.com. And now let's get to our educational segment of the day.
If you're looking to do investment research on a sector, WebBroker has resources that can help. Joining us now to discuss is Bryan Rogers, Senior Client Education Instructor with TD Direct Investing.
Ryan always great to see you.
Walk us through it here.
>> WebBroker is kind of a surprise for anyone who is on a little bit of research or exploring within the WebBroker platform. They have a large amount of information in the way of analyst reports and information that is assembled and curated by different companies like MorningStar, Argus, TD Securities… Just to name a few. So these reports can be extremely useful for identifying market trends.
Gaining additional insight and research that analysts or other companies are doing in assembling together.
Then you can have that is a really good start to either identify different investment opportunities or stocks and you could maybe even research further with additional reports and additional information on WebBroker.
So, I want to jump in really quickly and just show you on a general basis, if you're going into WebBroker, you go to the "research" tab, I'm already there now. If you click on "reports " you do the drop-down research and since they have it open already, you can now see this pretty large list.
Before the market opens, reports giving you an idea what's going on for the day in the markets, monthly perspectives, and so on.
You can see down here we have TD Securities, action list, action notes, you can see, as I go through the list, we would not have enough time in this segment obviously to go through all of these but I pulled up a few. Just some of my favourites here. If we do scroll down, one of the ones are, I think it's a TD action list, our best ideas.
Let me see if I can show everyone what that looks like.
So you can see on the screen there is an action list.
As you scroll through, you can see it says brought to you by TD, it has a lot of information here. They give you a lot of stocks and sectors in terms of a share price and a target price and whether there to put it is an action list, buy or sell etc.
These will always show up at a bit of commentary at the bottom as to why they are actually selecting those stocks. Another what I wanted to go back to also… If we go back to WebBroker here, you can see, as we scroll down other ones will give you different lists that are Canadian or US in nature so you can look at a first call recommended, the MorningStar Canadian core pick list. I believe that one is a pure already as well.
I want to show that. It looks like this and you can see, now you have a listing from MorningStar that shows you stocks with the MorningStar rating. If it's five-star rated, usually that means that the stock they feel is undervalued and has a fair market value that usually lists for example, tell us here, $20.50 is the current price and they have a fair market value of 33.
So quickly some highlights, we could spend 1/2 an hour or an hour or more going through this Greg.
We could probably spend all day going through all this material with those are just some examples of the reports that you can explore in WebBroker on a broad basis.
>> So if we had of you are actually going through those reports, as you said, there will be a lot of names within the report. The name catches the eye. They want a little more research to figure out where they may be headed in this.
Can they find specific reports besides the ones related to that one stock?
>> That's a great question. You will see in those broad-based reports a list of Securities and they will have some information in terms of those best ideas.
It will be limited in terms of a lot of detail in a specific stock. So what you find, if you find one that piques your interest, I like to use Apple as an example.
I know you mentioned even Apple earlier in the show. I believe.
If you wanted to take a look at a specific stock you could actually put in the quote. If we jump back to WebBroker again, if we put in the quote at the very top, you're always going to notice this the very top of the screen if I type it in here, I've already got Apple kind of set up as one of the top selections.
If I go into the quote, I have a ton of information here as well. Charts, news, fundamentals.
But one of the things in the through line here is the reports. If I go to that tab, I can click on their and now there's a number of different reports.
Even on the individual stock. You can see some of the left and some of the right.
Ornamentals and recommendations… You can see there's a MorningStar analyst report, MorningStar quad report.
The two are like the most of these quantitative, meaning it is numbers based. And the Thompsons Reuters stock. I have some samples of that as well but I just want to show really quickly.
So if we look here, this is the MorningStar report. And the reason I like it as well is that it does give a star rating. So it has two star rating. If anything at the little overvalued at the moment.
They have a chart of this, a sort of fair market value they think it should be at 169. As of the time they created this report it was 180 so was probably just a few days ago.
August 28 so it was actually just a couple of days ago.
Then you can scroll through and there's a ton of different commentary you can research as well.
Then lastly, my favourite, I have to show you my favourite one here Greg.
The Thompsons report. This is one that will actually rank the stock based on the average score of everything that they review. So it could be all the different things from fundamental analysis, all the different ratios, it could be things related to liquidity.
They give you an average score and then you can scroll through and you can see where they come up with a score.
It can still kind of carry through to the seven and you can see that it has earnings.
You can read a ton of little snippets and commentary.
Throughout the report they give you a great amount of insight into that stock.
>> A lot of material for the viewers to go through.
Thanks for that Bryan.
>> Thanks Greg.
>> Ryan Rogers, Senior Client Education Instructor 82 TD Direct Investing.
And make sure to check out the Learning Center in WebBroker for more educational videos, live interactive master classes and upcoming webinars.
Before we get back to your questions about fixed income for Alex Gorewicz, a reminder of how you can get in touch of us.
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 with Alex Gorewicz taking your questions about fixed income. This one coming in just a couple of moments ago.
What is your view on provincial bonds?
>> I don't think I've ever had a question on provincials before.
So up until now, it's been a sort of one-size-fits-all assessment.
Riding the deterioration fiscal stance because of pandemic related, either text shortfalls or stimulus spending etc.
Now, you're starting to see some divergences.
Amongst the provincial complex. This is where individual economic performance and then commitment to fiscal improvement from here on out early to make a difference. So I will touch on the big three provinces.
They do have the largest outstanding debt programs.
They have the largest populations and economies. So BC, Ontario and Québec.
With BC, for a long time, and even to this day, their debt burden is substantially lower than the likes of Ontario and Québec and that's always played favourably for them.
Unfortunately they have also been the ones in the most recent past to have the wildest swings in terms of budget projections versus the reality of what has come in. And although they have more recently posted a surplus of about 700 million, that was supposed to be, based on their more recent projection, to the tune of like 3 1/2 billion dollars. So relatively big miss.
Also looking forward basis, they are projecting budget deficits. So from a market perspective, in terms of how, let's say BC my trade relative to some of the other provinces, I would suggest some caution there on one or two of their reading agencies that have actually put them on negative outlook. Although they do have the highest rating amongst the provinces.
Then, looking at Québec… Québec is actually struggled economically speaking. It did see last month, some jobs shed across a number of sectors and Québec from the economic growth perspective.
They actually saw contraction. They projected to be in positive growth in GDP territory for the coming month.
But soft overall. The economic picture looks soft and then when you project the medium term, because Québec has the lowest population growth, there is some concerns about how, you know, it's economic engine can perform let's say relative to Ontario. So there are some? Sarah on whether the improving fiscal stance that we've seen over many years, Québec has had a strong commitment to improving its physical fiscal picture rather there are some question marks whether that can continue in the coming quarters and in the coming years.
So perhaps some caution there.
Ontario, is actually the bright spot.
In terms of improving its fiscal stance. Trying to really tackle its debt problem.
Which kind of stands out. Like I said it probably has the highest debt program relative to other provinces and even on a GDP weighted basis.
It's also sing for example, fairly strong labour picture post a lot of job gains the past month. It helped to keep the whole national average up.
It is committed to continuing to improve its fiscal picture and actually has the most, sort of, upgrade from all rating agencies of all the provinces.
So that really matters when you think about how it's bonds will perform. So I would say, within the complex, Ontario is probably the bright spot. Other provinces, perhaps some caution is necessary. But in terms of how the overall complex will behave, provincial bonds do exhibit strong positive correlation with corporate bonds. And just risk assets in general, relative to say, a risk-free Government of Canada bond. So if we do go into a recession, which is still possible in the coming quarters, you could see some underperformance from the provincial complex relative to Government of Canada bonds.
>> I'm glad that question came in for you. Because what you call that?
>> Provies >> Alex makes me look smart. Next question here. This one is about geography.
What geographies are looking interesting in the fixed income space?
>> Great question.
So, Canadian investors were a bit of a bearish bunch collectively around the fall of last year. I know we had anticipated headwinds for the Canadian economy relative to other economies because of high household debt levels.
That's still an overhang. So interest rates continue to be lower than other markets and this is created opportunities for bond investors to go abroad in search of higher yields.
Of course, because Bank of Canada also went on pause.
They were one of the first central banks to do so this year although they resumed rate hikes.
Their policy is now lower than, let's say, the feds.
And so that means that if you're trying to hedge away currency risks, if you invest abroad and want to repatriate, that currency exposure, you're going to reduce the yield. You go to pay to hedge or currency bets.
And so I say that because you have to take that into account when assessing if these higher yields a broader actually attractive or not.
We do that and take that into account, you UK and Australia screen quite attractive relative to Canadian interest rates. And so those are markets that we like investing in. Particularly because we do believe the artist stage of the global rate hikes cycle where we don't anticipate a lot of additional rate hikes from here on out from most advanced economies and, actually a lot of emerging economies are already beginning to cut interest rates.
>> I wanted to say we just had a question come in as we were starting this discussion. Someone asking if investors should look at emerging markets for diversification?
>> Right.
And this is where I would say, they have worked really well to date because they have exhibited very positive real rates, relative to advanced economies.
Of course inflation is coming off the boil quite quickly there. And central banks are now starting to cut their interest rates like Brazil central-bank this Summer.
Once that happens, the real rate differential starts to compress and you don't see on a currency hedge bases these attractive yields well it should relative to the whole market.
So I would say it's not a one-size-fits-all. There are still some opportunities in emerging markets. But again, be aware how, when you hedge away the currency risk, how those yields actually compared to domestic real or other advanced economies. Like I said Australia and UK look quite attractive and if we don't see more rate hikes it from anywhere, most central banks globally anymore, this is a good environment to harvest.
It's going to generate looking at more enhanced deals and will generate improved total returns. So we like those two markets.
BC in Canada.
> We will get back to your questions with Alex Gorewicz on fixed income. As always make sure you do your own research before making any investment decisions. A reminder that you can get in touch with us anytime.
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 have been through another earnings season with big utilities players with some exceptions over the second quarter. We did see results rise year-over-year.
Pipeline and midstream results were somewhat mixed. Our Anthony Okolie joins us now to break down what drove Q2 results and TD Securities outlook for these sectors.
>> Thanks Greg. TD Securities says the average benchmark for the second quarter 2023 for utility names actually rolls year-over-year with only a few that were higher versus TD Securities estimates. Now utilities results that fell below expectations really due to a number of key factors including differences in weather assumptions. Some time related to expenses among other factors during the quarter. Year-over-year, growth for pipeline and midstream gains results were mixed but most came in above X estimates of the second quarter.
TD Securities did observe solid contribution from supportive production levels that actually benefited transportation volumes as compared to their conservative assumptions for the quarter.
Now, TD Securities does say that companies and their coverage universe continues to generally deliver strong results driven by supportive industry fundamentals.
Resilient business models as well as the energy transition.
But midstream pipeline companies however acknowledged software commodity prices and some expected modest Marketing business results for the rest of this year.
Now, in the long term however, TD Securities says that energy infrastructure firms appeared to be well positioned to a lower carbon Energy Future. Taking a look at valuations, TD Securities says that utility, equities, coverage universe rather, it is trading at about 2.3 times price-earnings ratio below the historical 10 year average. When it comes to mainstream equities, they are currently trading at a discount of nearly 3 times relative to their historical average.
Given their outlook, TD Securities expects some valuation expansion over the next year.
Now they also note that management teams have reiterated their 2023 guidance emphasizing resilience of the core business relatively stable cash flows and long-term growth opportunities with respect to the energy transition. Finally, a discipline approach to capital investments remains unchanged. As companies aim to exit 2023 with financial flexibility or progress on achieving their deleveraging target's.
>> Interesting stuff there. What about the risks?
>> We've heard about some of these risks that these companies are faced in the near term. Things like natural disasters like the wildfires across Alberta and BC. Those continue to be a risks for some of the utility companies.
Weaker economic growth, weaker energy prices as well as higher operating costs among others. When it comes to pipeline in companies, they do face some risks in terms of facing natural disasters, refinery averages and also government regulation as well as weaker commodity prices and higher power expenses.
>> Interesting stuff. Thanks Anthony.
>> My pleasure.
>> MoneyTalk's Anthony Okolie. Now the markets. Let's look at the TSX today. We had some moneymaking sessions but today were down a modest nine points, just about five ticks. Nothing too dramatic happening.
South of the border, Canadian investors are watching this as well. Tomorrow morning we will get the latest payroll numbers at a United States. A pretty key data point. If you're tracking inflationary pressures, the strength of the economy and with the Fed might do next.
It's good to be a big one. So a little bit of calm before that.
Up to points now, the S&P 500 grade that is good for five ticks.
>> Back now with Alex Gorewicz from TD Asset Management, talking fixed income. This question coming in the past couple of seconds.
Have GIC rates peaked?
>> I'm going to get my crystal ball.
>> Notwithstanding just broader interest rate back up that we've seen throughout the Summer, it's really been driven by the fact that investors got the message from central banks that they are not going to cut rates quickly.
And so what you've actually seen in terms of expectations for 2024 is that a lot of the rate hikes that were supposed to come in let's say the first quarter or second quarter are now being pushed out a little bit in 2024.
And if anything, probably in Canada specifically over the balance of the next year, investors don't see a rate cut. They might even see, as we discussed earlier a rate hike sometime earlier this year of one more.
Now when you think about what I also mentioned, once the central-bank stops raising rates, you tend to see interest rates fall.
You know, I should probably put in Asterix around that.
The reality is if you see Mrs. with interest rates this high, if you see Mrs. then, let's say, labour data in particular, you tend to get these massive drops and interest rates.
So bonds generate a lot more returns in the here and now.
That will also have the impact of lowering GIC rates.
It is so have GIC rates peaked? To answer that question you have to ask if bond interest rates and feet. The answer is probably considering some of the Mrs. that we've had. Even south of the border. That also drives how Canadian interest rates move. And in fact, you are probably better off at this point going into public bond markets that might generate faster returns.
Where is your GIC rates will very likely stay at this level until interest rates fall and if you've invested, once they mature, what you actually can recuperate or what you can actually reinvest and will very likely be lower from here based on the shape of the yield curve which is downward sloping.
>> Always an insightful program with Alex Gorewicz.
Great having you here and looking forward to the next time.
>> Thanks Greg great to be here.
>> Our thanks to Alex Gorewicz, Portfolio Manager for Active Fixed Income a TD Asset Management.
As always be sure to do your own research before making investment decisions. Stay tuned, we will be back tomorrow with their reaction and analysis of the latest Canadian GDP and US jobs report. On Tuesday after the Labor Day weekend, we will be back with Anna Castro, Senior Portfolio Manager with TD Asset Management taking your questions about asset allocation. And a reminder that you get a head start, just email MoneyTalk Live ATD.com. If that's all the time we have for today take care.
[music]
Every day I'll be joined by guests from across TD, many of whom you'll only see here.
We we'll take you through what's moving the markets and answer your questions about investing.
Coming up on today's show, will discuss whether were at a potential turning point for the economy of the bond market with TD Asset Management Alex Gorewicz.
MoneyTalk's Anthony Okolie will have a look at the new TD Cowen report on the outlook for the utility sector and in today's WebBroker education segment Bryan Rogers will walk us through the different research reports you can find a platform. You can email us anytime@moneytalkliveatd.com or if a look of your response under the video player and WebBroker.
Let's get you an update on the markets. I have not checked in lately so I'm just as curious as you are.
A bit of giveback. A couple of strong sessions for the TSX Composite Index, down modestly at this hour just 16 points less than 1/10 of a percent, nothing too dramatic. Among the most actively traded names in the TSX and what is considerably a slower time of year as we head toward Labor Day, Shopify, I want to check on this stock right now making quite a pop today up to the tune of 8 1/2%.
88 bucks and $0.11. They have a little deal they're going with Amazon. It seems to be positive on the name.
Will tell you a bit more about that later in the show.
Checking in on Cenovus, you have the price of crude holding well under 80 bucks a barrel.
A bit at 82 right now. We saw a run at some of the other names.
Day-to-day, there has been a grind higher for these oil and gas companies including Cenovus at 2695 almost a full percent up again today. South of the border a lot of data coming in.
Everyone trying to read the tea leaves to see if the rate hikes are working.
As the economy slowing?
Today the S&P 500, seven points, pretty modest to the upside but green on the screen.
The tech heavy NASDAQ against the broader market, showing a little bit stronger a little more than half a percent to the upside.
Not that kind of story for Dollar General though. The retail company with its latest earnings, the street not liking what they saw at all. We will call about 135 to be generous to round up. Still down more than 14%.
And that's your market update.
The economy is showing some signs of slowing as central banks continue to keep rates at elevated levels. But are we had a potential turning point for borrowing costs and the bond market? Joining us now to discuss his Alex Gorewicz, Portfolio Manager for Active Fixed Income at TD Asset Management. Always great to have you back here.
>> Thanks Greg, great back here.
>> Weather here at Homer's south of the border, we read the tea leaves. What are we seeing lately?
>> May be looking back so far in the third quarter, we still have a month to go, more resilience than anticipated across a number of economic indicators, particularly around labour and how that's been feeding into better-than-expected retail spending and personal spending. Therefore, given how much consumption contributes to GDP, better-than-expected GDP performance, particularly in the US, maybe more in line in Canada.
As these have been feeding into a concern by some investors, probably by more investors that perhaps core inflation, which is really driven by wage growth, by more labour oriented indicators, will remain stickier and will be really hard-pressed to come down to 2% which is with the Fed and Bank of Canada are targeting inflation in the medium term.
That's leading others to say perhaps monetary policy is not restrictive enough and I think that's been playing into very volatile bond market through the Summer.
>> For the past couple of weeks and with all those factors playing out, we did see yields continue to perspire the bond market. In the past couple of days.
It's only a couple of reports but it did feel like perhaps there was some indication. I'm thinking the private payroll south of the border.
In addition of jobs but not as firm as expected. When workers change jobs they're not getting the biggest raises they were getting before the states.
Are we seeing other signs like that were someone's on the other side saying "when are they going to be done?" Some indication that the work is starting to work…?
>> Yeah, so that's where, you know, you have to get into the underlying details and say "perhaps monetary policy is restrictive enough when you realize that labour indicators are usually the last shoe to drop." And although, to your point, it's very early, we saw a couple of indicators just as there is a softening of the picture for example, challenge or job cuts came in through quite substantially for August. You've seen a reversal from pretty impressive beats in initial jobless claims in July. A bit of a reversal of that in August. Job openings were weaker than expected.
EDP numbers were a bit softer. How that all plays out in tomorrow's payroll numbers in the US remains to be seen. But, a bit of a mixed picture when you're looking at the underlying details.
And again, the job market is sort of the last shoe to drop.
But something that is absolutely of note, suggesting monetary policy is tight and is having the intended effect is looking at commercial bankruptcy filings.
Businesses are starting to crumble at the weight of higher interest rates.
But it's not the ones in the S&P 500. It's not the MegaCap companies that we are all tracking and paying attention to.
It's a lot of the smaller and medium-sized businesses and unfortunately, those are the ones that contributed to the majority of job growth coming into this year.
So, if you extrapolate that forward, and that pain in that segment of the economy or of that segment of companies continues because of monetary policy, it suggests that we could see a lot more softening of labour market and in a more visible way in the next several months.
>> Now, by the central banks own metrics and admissions, they are in restrictive territory already.
>> Right.
>> The bond market has been interesting the Summer.
What is a fair value of rates right now?
The 10 year of this, the tenure of that… Should it be there?
>> I don't think fair value is even a consideration in terms of where bond yields are. They were screening as being really cheap. In other words yields are too high, relative to where some of the fundamental data points that historically have been explanatory factors for interest rates. That discrepancy is so wide right now.
With the bond market has been paying attention to his been really initial jobless claims because that serve the most timely indicator of the labour market and again that is sort of the last shoe to drop in terms of a monetary policy cycle.
But thinking through where the fundamentals should be, where it's been very notable in this more recent backup and interest rates through the Summer has been a repricing of long-term policy rate expectations.
That's very positively correlated with this notion of our star, I'm sure you've heard of us talking about that. Me and my colleagues.
What that means is the longer term interest rate that is compatible with an economy in equilibrium. At Jackson Hole, chair Powell kind of alluded to the fact that, you know, our star has been indicated as being higher by certain market observers. But that they still don't feel that they are confident enough in that assessment. In other words the Fed is not really buying this notion that somehow interest rates should be higher for longer in the long run. It's also very interesting and perhaps contradictory that the prevailing narrative of the market is "resilient labour force meaning wage growth will be sticky and that will push core inflation higher in the long run.
When you look at how interest rates have risen in the last couple of months, there haven't been inflation expectations driving that move higher. It's actually been real rates driving that move higher.
So again, not really, the narrative and the reality are sort of not compatible at this time.
So it's really difficult to say "where should the fair value of interest rates be?
And is the market trading based on those factors?" >> You think of some data points a couple of weeks ago.
The fact that we hear about the resilient consumer in the south of the border. Credit card debt. I think I got above $1 trillion for the first time.
People were apparently tapping into those 401(k)s south of the border, the retirement money.
That doesn't speak to me as a consumer with extra money to spend. It points to me with households wondering where they will find the money they need to get through the month.
> Correct and we've anticipated and we have seen this come through. The excess savings that were built up during the pandemic being depleted and that's still on track to happen. And you're starting to see it in ways like drawing on available sources of credit.
But even from a financial market perspective, I think it's noteworthy that if you look at leverage and margin accounts, they are rising at a point where monetary policy is, by its own assessment, by many peoples assessment, already in restrictive territory.
Those are the kinds of things that give you some, you know, reasons to question the sustainability of this more, sort of risk gone or optimistic turning markets during the Summer.
>> Always great insights from Alex Gorewicz.
We will get to your questions for Alex in just a moment's time.
A reminder that you get in touch of us any time by emailing MoneyTalk Live ATD.com or Philip the your response box under the video player on WebBroker.
Now let's get you updated on some of the top stories in the world of business and take a look at how the markets are trading.
Shopify in the spotlight today collaborating with Amazon to bring its "by with prime" function to Shopify merchants in the United States.
The deal will allow those merchants to access Amazon's logistic network including the Amazon delivery service.
Shopify up 8 1/2%. Shares of Dollar General are under pressure today. The discount retailer missing earnings expectations by pretty wide margin. Sales coming in softer than expected.
Dollar General says it's facing higher labour costs, excess inventory, both of which it expects to weigh on earnings going forward. As a result, the retailer's cuttings its earnings forecast for a second quarter in a row.
Not being received well by the street. Down 14% on the session. Salesforce is getting a boost following its latest earnings report. The cloud software company beat expectations for sales and profit despite warning that it is facing an uncertain economy weighing on its growth. Salesforce also touted expansion opportunities when it comes to artificial intelligence. You put it all together, the market has the shares up about three to half percent. A quick check in on the market starting here at home on Bay Street with the TSX Composite Index. We had some nice rallies in our hands in recent days.
Technically that's green on the screen. But barely up to points or just a tick.
South of the border, the S&P 500, as we await jobs in the United States, we have some central-bank decisions in right now not much happening there either.
10 points up, a little shy of a court of a percent.
We are back now with Alex Gorewicz take your questions about fixed income so let's get to them. We have a big going to start.
(Greg reads the question) >> I imagine the viewer is asking about fallen rates as then cut from Bank of Canada or the Fed. What I would say to that is, look, if you look at what bond investors are expecting right now, they have maybe another rate hike Christ in.
Not necessarily in September, which is when both Bank of Canada will be next in September will be the Fed, they expect that to be a pause.
But investors think maybe October or November they will bring another rate hike from both of these central banks.
That's not fully priced in.
And in fact, if the data continues to decelerate the way we've seen at the Summer, around inflation in particular, it's very likely possible that neither central-bank will raise rates again. History has shown that you don't need to see rate cut from a central-bank for bond yields to fall. Usually, in the 3 to 6 months after the last rate hike, government bond yields are noticeably lower to the tune of half a percent to one of the quarter percent.
> Really?
>> Substantial fall in interest rates and that tends to translate into positive total returns of somewhere between mid to high single digits, again and just the 3 to 6 months after the last rate hike.
If history repeats itself this time around, we could end this year, we don't even have to wait for 2024, with decently positive returns in bonds.
>> Now obviously has bond investors await that turn in the market, we are actually seeing yields now.
If you're invested in bonds and got invested in bonds in the past little while, it is a different coupon that you would've got a couple of years ago.
>> Correct.
So in some ways, based on your comment, one could say you are being paid to wait for that turn of the market because you are generating yield you are generating total return through that coupon, through the higher coupon.
>> Let's hone in on the Bank of Canada.
If you are now wondering what we should expect from them next week. He gave us a little flavoured but we have a lot of eyes on him. What a vague enough to say?
>> So I think the Bank of Canada, next week is likely to be a pause because we have seen some softening in the labour market, the way we've seen resilience throughout the Summer in the labour market and the US, we've seen a bit of an opposite of that in Canada.
However, we are also aware that there been a lot of destructions across the country and fortunately from wildfires coast-to-coast. So maybe it's a little bit harder to read through that in a more sustained way for the coming months.
But nevertheless, Bank of Canada has enough reasons to pause from looking at the labour picture.
Of course on the flipside, it is possible that we might see another rate hike, perhaps in October from Bank of Canada because core inflation, or just inflation in general, is still tracking above where the Bank was forecasting for the third quarter. So, I think if either central-bank has cover in the data we've seen to date to hike again, it would actually be Bank of Canada, not fed, that said… September, October, could still bring a lot of perhaps the downside surprises and it's possible the Bank of Canada won't need to hike again.
I used to go up to Ottawa in my old job and every time there was a monetary policy report we met there be a media available with the government. I'm forgetting what time of year used to travel.
We won't get that. But the next day we are going to get it speech from some sort of message that he wants to send, that would be the way to do it the day after the announcement.
>> Correct. And the reality is at this point, central banks by their own admission, have put some Asterix is next to their economic forecast. They acknowledge that the environment remains really uncertain and that they have to be nimble and data dependent. The burden of proof is on the data. To demonstrate if it's coming in with their expectations or not. And they will react accordingly which means it's actually really difficult in this environment for them to provide really confident forward guidance on what's next.
>> We will wait for that next week. Until we wait for that, let's take another question.
US debt downgrade having any lasting impact?
I haven't spoken to you since this happened so I want to hear what Alex Gorewicz has to say about this.
>> Okay (laughing) the reason for the downgrade, if you think about why this keeps happening or why you come across these impasses so frequently is because the deficits just keep accumulating right? Even if they're not growing at the same pace, whether there beating or missing expectations does not change the fact that we have not had a budget surplus in, it feels like for other rather forever. In decades. That's important against a backdrop in which a larger percentage of global trade, still small, but growing percentage of global trade is conducted in other currencies. Not US dollar. What that means is that it forces private investors in the US, domestic investors in the US to take on a bigger and bigger share of the growing US debt pile. And they're going to be selective because they have a very deep markets. A lot of opportunities with which to invest capital and it means from the government's perspective, or if they need those investors to take on more of the debt to buy more of their bonds, it means those investors will want to be properly compensated. This tends to put upward pressure on interest rates.
However, and this is where I give the flipside of this… There isn't yet enough information to suggest that investors, US investors are somehow worried about the debt the sustainability and trajectory of the US. And so they are more than happy to continue buying those bonds at this time. In other words, we haven't actually seen interest rates react to the downgrade. That's not really been the driver of why interest rates have risen through this honour.
>> Great insights as always. And as always at home make sure you do your own research before making any investment decisions.
We will get back to your questions with Alex Gorewicz on fixed income and just moments time.
A reminder that you can email us any time by emailing MoneyTalk Live ATD.com. And now let's get to our educational segment of the day.
If you're looking to do investment research on a sector, WebBroker has resources that can help. Joining us now to discuss is Bryan Rogers, Senior Client Education Instructor with TD Direct Investing.
Ryan always great to see you.
Walk us through it here.
>> WebBroker is kind of a surprise for anyone who is on a little bit of research or exploring within the WebBroker platform. They have a large amount of information in the way of analyst reports and information that is assembled and curated by different companies like MorningStar, Argus, TD Securities… Just to name a few. So these reports can be extremely useful for identifying market trends.
Gaining additional insight and research that analysts or other companies are doing in assembling together.
Then you can have that is a really good start to either identify different investment opportunities or stocks and you could maybe even research further with additional reports and additional information on WebBroker.
So, I want to jump in really quickly and just show you on a general basis, if you're going into WebBroker, you go to the "research" tab, I'm already there now. If you click on "reports " you do the drop-down research and since they have it open already, you can now see this pretty large list.
Before the market opens, reports giving you an idea what's going on for the day in the markets, monthly perspectives, and so on.
You can see down here we have TD Securities, action list, action notes, you can see, as I go through the list, we would not have enough time in this segment obviously to go through all of these but I pulled up a few. Just some of my favourites here. If we do scroll down, one of the ones are, I think it's a TD action list, our best ideas.
Let me see if I can show everyone what that looks like.
So you can see on the screen there is an action list.
As you scroll through, you can see it says brought to you by TD, it has a lot of information here. They give you a lot of stocks and sectors in terms of a share price and a target price and whether there to put it is an action list, buy or sell etc.
These will always show up at a bit of commentary at the bottom as to why they are actually selecting those stocks. Another what I wanted to go back to also… If we go back to WebBroker here, you can see, as we scroll down other ones will give you different lists that are Canadian or US in nature so you can look at a first call recommended, the MorningStar Canadian core pick list. I believe that one is a pure already as well.
I want to show that. It looks like this and you can see, now you have a listing from MorningStar that shows you stocks with the MorningStar rating. If it's five-star rated, usually that means that the stock they feel is undervalued and has a fair market value that usually lists for example, tell us here, $20.50 is the current price and they have a fair market value of 33.
So quickly some highlights, we could spend 1/2 an hour or an hour or more going through this Greg.
We could probably spend all day going through all this material with those are just some examples of the reports that you can explore in WebBroker on a broad basis.
>> So if we had of you are actually going through those reports, as you said, there will be a lot of names within the report. The name catches the eye. They want a little more research to figure out where they may be headed in this.
Can they find specific reports besides the ones related to that one stock?
>> That's a great question. You will see in those broad-based reports a list of Securities and they will have some information in terms of those best ideas.
It will be limited in terms of a lot of detail in a specific stock. So what you find, if you find one that piques your interest, I like to use Apple as an example.
I know you mentioned even Apple earlier in the show. I believe.
If you wanted to take a look at a specific stock you could actually put in the quote. If we jump back to WebBroker again, if we put in the quote at the very top, you're always going to notice this the very top of the screen if I type it in here, I've already got Apple kind of set up as one of the top selections.
If I go into the quote, I have a ton of information here as well. Charts, news, fundamentals.
But one of the things in the through line here is the reports. If I go to that tab, I can click on their and now there's a number of different reports.
Even on the individual stock. You can see some of the left and some of the right.
Ornamentals and recommendations… You can see there's a MorningStar analyst report, MorningStar quad report.
The two are like the most of these quantitative, meaning it is numbers based. And the Thompsons Reuters stock. I have some samples of that as well but I just want to show really quickly.
So if we look here, this is the MorningStar report. And the reason I like it as well is that it does give a star rating. So it has two star rating. If anything at the little overvalued at the moment.
They have a chart of this, a sort of fair market value they think it should be at 169. As of the time they created this report it was 180 so was probably just a few days ago.
August 28 so it was actually just a couple of days ago.
Then you can scroll through and there's a ton of different commentary you can research as well.
Then lastly, my favourite, I have to show you my favourite one here Greg.
The Thompsons report. This is one that will actually rank the stock based on the average score of everything that they review. So it could be all the different things from fundamental analysis, all the different ratios, it could be things related to liquidity.
They give you an average score and then you can scroll through and you can see where they come up with a score.
It can still kind of carry through to the seven and you can see that it has earnings.
You can read a ton of little snippets and commentary.
Throughout the report they give you a great amount of insight into that stock.
>> A lot of material for the viewers to go through.
Thanks for that Bryan.
>> Thanks Greg.
>> Ryan Rogers, Senior Client Education Instructor 82 TD Direct Investing.
And make sure to check out the Learning Center in WebBroker for more educational videos, live interactive master classes and upcoming webinars.
Before we get back to your questions about fixed income for Alex Gorewicz, a reminder of how you can get in touch of us.
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 with Alex Gorewicz taking your questions about fixed income. This one coming in just a couple of moments ago.
What is your view on provincial bonds?
>> I don't think I've ever had a question on provincials before.
So up until now, it's been a sort of one-size-fits-all assessment.
Riding the deterioration fiscal stance because of pandemic related, either text shortfalls or stimulus spending etc.
Now, you're starting to see some divergences.
Amongst the provincial complex. This is where individual economic performance and then commitment to fiscal improvement from here on out early to make a difference. So I will touch on the big three provinces.
They do have the largest outstanding debt programs.
They have the largest populations and economies. So BC, Ontario and Québec.
With BC, for a long time, and even to this day, their debt burden is substantially lower than the likes of Ontario and Québec and that's always played favourably for them.
Unfortunately they have also been the ones in the most recent past to have the wildest swings in terms of budget projections versus the reality of what has come in. And although they have more recently posted a surplus of about 700 million, that was supposed to be, based on their more recent projection, to the tune of like 3 1/2 billion dollars. So relatively big miss.
Also looking forward basis, they are projecting budget deficits. So from a market perspective, in terms of how, let's say BC my trade relative to some of the other provinces, I would suggest some caution there on one or two of their reading agencies that have actually put them on negative outlook. Although they do have the highest rating amongst the provinces.
Then, looking at Québec… Québec is actually struggled economically speaking. It did see last month, some jobs shed across a number of sectors and Québec from the economic growth perspective.
They actually saw contraction. They projected to be in positive growth in GDP territory for the coming month.
But soft overall. The economic picture looks soft and then when you project the medium term, because Québec has the lowest population growth, there is some concerns about how, you know, it's economic engine can perform let's say relative to Ontario. So there are some? Sarah on whether the improving fiscal stance that we've seen over many years, Québec has had a strong commitment to improving its physical fiscal picture rather there are some question marks whether that can continue in the coming quarters and in the coming years.
So perhaps some caution there.
Ontario, is actually the bright spot.
In terms of improving its fiscal stance. Trying to really tackle its debt problem.
Which kind of stands out. Like I said it probably has the highest debt program relative to other provinces and even on a GDP weighted basis.
It's also sing for example, fairly strong labour picture post a lot of job gains the past month. It helped to keep the whole national average up.
It is committed to continuing to improve its fiscal picture and actually has the most, sort of, upgrade from all rating agencies of all the provinces.
So that really matters when you think about how it's bonds will perform. So I would say, within the complex, Ontario is probably the bright spot. Other provinces, perhaps some caution is necessary. But in terms of how the overall complex will behave, provincial bonds do exhibit strong positive correlation with corporate bonds. And just risk assets in general, relative to say, a risk-free Government of Canada bond. So if we do go into a recession, which is still possible in the coming quarters, you could see some underperformance from the provincial complex relative to Government of Canada bonds.
>> I'm glad that question came in for you. Because what you call that?
>> Provies >> Alex makes me look smart. Next question here. This one is about geography.
What geographies are looking interesting in the fixed income space?
>> Great question.
So, Canadian investors were a bit of a bearish bunch collectively around the fall of last year. I know we had anticipated headwinds for the Canadian economy relative to other economies because of high household debt levels.
That's still an overhang. So interest rates continue to be lower than other markets and this is created opportunities for bond investors to go abroad in search of higher yields.
Of course, because Bank of Canada also went on pause.
They were one of the first central banks to do so this year although they resumed rate hikes.
Their policy is now lower than, let's say, the feds.
And so that means that if you're trying to hedge away currency risks, if you invest abroad and want to repatriate, that currency exposure, you're going to reduce the yield. You go to pay to hedge or currency bets.
And so I say that because you have to take that into account when assessing if these higher yields a broader actually attractive or not.
We do that and take that into account, you UK and Australia screen quite attractive relative to Canadian interest rates. And so those are markets that we like investing in. Particularly because we do believe the artist stage of the global rate hikes cycle where we don't anticipate a lot of additional rate hikes from here on out from most advanced economies and, actually a lot of emerging economies are already beginning to cut interest rates.
>> I wanted to say we just had a question come in as we were starting this discussion. Someone asking if investors should look at emerging markets for diversification?
>> Right.
And this is where I would say, they have worked really well to date because they have exhibited very positive real rates, relative to advanced economies.
Of course inflation is coming off the boil quite quickly there. And central banks are now starting to cut their interest rates like Brazil central-bank this Summer.
Once that happens, the real rate differential starts to compress and you don't see on a currency hedge bases these attractive yields well it should relative to the whole market.
So I would say it's not a one-size-fits-all. There are still some opportunities in emerging markets. But again, be aware how, when you hedge away the currency risk, how those yields actually compared to domestic real or other advanced economies. Like I said Australia and UK look quite attractive and if we don't see more rate hikes it from anywhere, most central banks globally anymore, this is a good environment to harvest.
It's going to generate looking at more enhanced deals and will generate improved total returns. So we like those two markets.
BC in Canada.
> We will get back to your questions with Alex Gorewicz on fixed income. As always make sure you do your own research before making any investment decisions. A reminder that you can get in touch with us anytime.
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 have been through another earnings season with big utilities players with some exceptions over the second quarter. We did see results rise year-over-year.
Pipeline and midstream results were somewhat mixed. Our Anthony Okolie joins us now to break down what drove Q2 results and TD Securities outlook for these sectors.
>> Thanks Greg. TD Securities says the average benchmark for the second quarter 2023 for utility names actually rolls year-over-year with only a few that were higher versus TD Securities estimates. Now utilities results that fell below expectations really due to a number of key factors including differences in weather assumptions. Some time related to expenses among other factors during the quarter. Year-over-year, growth for pipeline and midstream gains results were mixed but most came in above X estimates of the second quarter.
TD Securities did observe solid contribution from supportive production levels that actually benefited transportation volumes as compared to their conservative assumptions for the quarter.
Now, TD Securities does say that companies and their coverage universe continues to generally deliver strong results driven by supportive industry fundamentals.
Resilient business models as well as the energy transition.
But midstream pipeline companies however acknowledged software commodity prices and some expected modest Marketing business results for the rest of this year.
Now, in the long term however, TD Securities says that energy infrastructure firms appeared to be well positioned to a lower carbon Energy Future. Taking a look at valuations, TD Securities says that utility, equities, coverage universe rather, it is trading at about 2.3 times price-earnings ratio below the historical 10 year average. When it comes to mainstream equities, they are currently trading at a discount of nearly 3 times relative to their historical average.
Given their outlook, TD Securities expects some valuation expansion over the next year.
Now they also note that management teams have reiterated their 2023 guidance emphasizing resilience of the core business relatively stable cash flows and long-term growth opportunities with respect to the energy transition. Finally, a discipline approach to capital investments remains unchanged. As companies aim to exit 2023 with financial flexibility or progress on achieving their deleveraging target's.
>> Interesting stuff there. What about the risks?
>> We've heard about some of these risks that these companies are faced in the near term. Things like natural disasters like the wildfires across Alberta and BC. Those continue to be a risks for some of the utility companies.
Weaker economic growth, weaker energy prices as well as higher operating costs among others. When it comes to pipeline in companies, they do face some risks in terms of facing natural disasters, refinery averages and also government regulation as well as weaker commodity prices and higher power expenses.
>> Interesting stuff. Thanks Anthony.
>> My pleasure.
>> MoneyTalk's Anthony Okolie. Now the markets. Let's look at the TSX today. We had some moneymaking sessions but today were down a modest nine points, just about five ticks. Nothing too dramatic happening.
South of the border, Canadian investors are watching this as well. Tomorrow morning we will get the latest payroll numbers at a United States. A pretty key data point. If you're tracking inflationary pressures, the strength of the economy and with the Fed might do next.
It's good to be a big one. So a little bit of calm before that.
Up to points now, the S&P 500 grade that is good for five ticks.
>> Back now with Alex Gorewicz from TD Asset Management, talking fixed income. This question coming in the past couple of seconds.
Have GIC rates peaked?
>> I'm going to get my crystal ball.
>> Notwithstanding just broader interest rate back up that we've seen throughout the Summer, it's really been driven by the fact that investors got the message from central banks that they are not going to cut rates quickly.
And so what you've actually seen in terms of expectations for 2024 is that a lot of the rate hikes that were supposed to come in let's say the first quarter or second quarter are now being pushed out a little bit in 2024.
And if anything, probably in Canada specifically over the balance of the next year, investors don't see a rate cut. They might even see, as we discussed earlier a rate hike sometime earlier this year of one more.
Now when you think about what I also mentioned, once the central-bank stops raising rates, you tend to see interest rates fall.
You know, I should probably put in Asterix around that.
The reality is if you see Mrs. with interest rates this high, if you see Mrs. then, let's say, labour data in particular, you tend to get these massive drops and interest rates.
So bonds generate a lot more returns in the here and now.
That will also have the impact of lowering GIC rates.
It is so have GIC rates peaked? To answer that question you have to ask if bond interest rates and feet. The answer is probably considering some of the Mrs. that we've had. Even south of the border. That also drives how Canadian interest rates move. And in fact, you are probably better off at this point going into public bond markets that might generate faster returns.
Where is your GIC rates will very likely stay at this level until interest rates fall and if you've invested, once they mature, what you actually can recuperate or what you can actually reinvest and will very likely be lower from here based on the shape of the yield curve which is downward sloping.
>> Always an insightful program with Alex Gorewicz.
Great having you here and looking forward to the next time.
>> Thanks Greg great to be here.
>> Our thanks to Alex Gorewicz, Portfolio Manager for Active Fixed Income a TD Asset Management.
As always be sure to do your own research before making investment decisions. Stay tuned, we will be back tomorrow with their reaction and analysis of the latest Canadian GDP and US jobs report. On Tuesday after the Labor Day weekend, we will be back with Anna Castro, Senior Portfolio Manager with TD Asset Management taking your questions about asset allocation. And a reminder that you get a head start, just email MoneyTalk Live ATD.com. If that's all the time we have for today take care.
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