Bruce Cooper, CIO, TD Asset Management gives an in-depth look at what investors can expect in 2016 with Kim Parlee on BNN’s MoneyTalk.
Tonight: 2015 is now history, a year in which many investors may be saying, "Good riddance." With stocks dogged by depressed oil prices, a slowing Chinese economy, and the spectre of rising U.S. interest rates, will we see more roller coaster market action around the world in 2016?
And where are investors most likely to find opportunities?
With over 290 billion dollars in assets under management, Bruce Cooper, Chief Investment Officer of TD Asset Management will tell us what he sees as the key investment themes for this year.
That's coming up on Money Talk.
Hello, and thank you so much for joining us tonight.
Well, what a start to the trading year.
China sells off by about 7% on the first day of trading; its currency is dropping.
Oil is dropping sharply to a 12-year low, and the loonie and North American markets have been moving down with them again.
For those who are looking for a change of pace from last year our next guest says that probably will not happen.
In fact, some of what was happening last year may intensify this year.
We're lucky to have with us tonight Bruce Cooper--he is Chief Investment Officer with TD Asset Management--to have a long conversation about everything that he sees.
It is nice to see you.
Great to be here.
Um, that was an interesting start to the year.
Yeah, a bit of a--bit of a tough start.
We're only three days in; it feels like we've been back from holiday for two months probably.
Yes, I know exactly--the vacation glow was gone just like that.
I want to start things off with just some perspective on a little bit of what happened last year and then we can kind of, you know, talk about themes for next year.
Let's bring up a chart of--we have a year of-- this is a 2015--price returns on the market.
So people can take a look at that.
Again, not total returns, price returns.
And it kind of tells a story of what happened last year; not a fantastic year.
Not a fantastic year, obviously.
The green line there is Canadian equities, which had a particularly tough year on the back of commodities being very weak, especially oil.
And you know, other markets like the U.S. kind of wobbling in and around zero in local currency terms.
Of course for Canadians, if they owned U.S. stocks, they actually did pretty well because the currency was so strong or the Canadian dollar was so weak, depending on which way you want to look at it.
So diversification did actually help you in 2015 if you owned some bonds and some foreign equities because of the currency component, but it was a volatile year and certainly there were times when it didn't feel very good.
And Canadian equities, in particular, were--were very difficult.
We talked before--I know you had said last year it was going to be low growth, low yield, low returns, and more volatility.
Is this--are we going to have a rhyming year with 2016, with 2015?
Yeah, I think it's--it is a little bit more of the same.
You know, the low growth theme is one we've been talking about, really, for six years and it's a global phenomenon.
Of course here in Canada the economy is sluggish, but it goes well beyond Canada and I think is a global phenomenon.
And underlying that are lots of secular forces like demographics and high debt and--so we think that the low growth theme will be pretty persistent.
And because of that we think interest rates will stay low; it's going to be more challenging for companies to grow their earnings and that will kind of feed into equity returns.
So, yeah, a challenging environment, you know, kind of across the board.
Let me--what I was hoping to do if we could--if you're okay with this--I'd like to start and kind of--you know, start with the big picture and then we're going to narrow this down, and by the end of the show people will understand kind of where you--where your recommendations--you move forward.
So we have a chart that I actually got from your folks, and let's bring it up here.
The title here is Opportunity Or Risk and it shows of course, you know, the world.
Nice little map there.
It's a nice little map.
U.S. Federal Reserve, of course, was the big news in the States.
You know, weak Canadian growth, European imbalances, slowing growth in China, and Middle East unrest.
So let's dissect that, if we can.
And where would you like to start on that map?
Yeah, why don't we start in China?
You know, always people interested in China, obviously; one of the largest economies in the world and always lots of news and views on that country.
And I just interject because I mean just in the past two days--and we had service--you know, data that came out.
You know, slowest growth in 17 months; manufacturing data came down.
So it's really--I mean it's always a centre of attention but, you know, it kind of slapped us in the first few days of trading.
I think from our perspectives, too, big things went on in China.
One is growth is slowing; you know, that really happened last year.
The official number is not so much but I think the real economy probably slowed more than the official numbers would indicate.
So I think growth is slowing is one big theme in China.
And then the other theme is that you're going through this transition where they're trying to move from a--an economy driven by investment and manufacturing to one that's driven more by consumption and consumer activity that we would recognize.
So both of those things going on at the same time can create risk and volatility, and there's no guarantee that that transition will be smooth.
We hope it will be, but there's no guarantee.
And so I think a lot of the choppiness you see out of China in the numbers--in the economic numbers or indeed in the market trading comes from kind of the journey along this path is not a smooth one.
I wonder, you know--and you bring up a really good point, you know.
They have--and I can't remember if it's a five-year plan or--I don't have the--this plan in place--of which, you know, they're not--their intent is not to, you know, manage the market, their intent is to transform the economy...
...and the country.
So should we be paying as close attention to what's happening in the Chinese market, given that they are undergoing structural change and doing so much?
I think the Chinese stock market for Canadians is a bit of a red herring; you know, it's something we shouldn't pay that much attention to.
But it seems to trigger, you know, wide...
Yeah, it can create a little bit of noise.
But I think, um, from a longer-term perspective--even months and quarters in a single year--it doesn't have that much impact.
Of course very few Canadians have actual investments in China.
But it's more commodities in oil and that sort of thing.
And I think the Chinese economy is important for Canada because it consumes a lot of commodities.
And of course as they move from an investment-driven economy to a consumer-driven economy, there are concerns that they will consume fewer commodities like steel and iron ore.
And that does appear to be happening, by the way, so--you know, that is at the margin negative for commodities.
And so I think it's the real economy in China that we should be worried about or--or not necessarily worried about but focused on...
...and then think about the impact that has on, you know, our economy and our markets.
And I think--one perspective I've had is we live in this low growth world and as China slows it just reinforces or exacerbates this problem we have with low growth.
So it's not that China created this problem, you know, it's Europe's been growing slowly and North America's been growing slowly.
But it reinforces this.
Let's--in terms of that map, Middle East unrest, getting...
Very topical, obviously...
...with some of the events in Iran...
And Saudi Arabia.
...and Saudi Arabia.
From a political perspective this is one of the things I worry most about.
We've got, obviously, a deep divide between these two Islamic communities--the Shiites and the Sunnis--which are represented in these two big countries, Saudi Arabia and Iran.
You know the big economic importance of the Middle East has historically been as a producer of oil and, you know, you could imagine volatility in the region could have an impact on oil.
But, of course, it could have other impacts on broader movements of refugees--we're seeing that with Syria--terrorist incidents.
You know, risk of war.
And so I think from a sort of long-term or mid-term geopolitical perspective it is a worrisome situation in the Middle East for sure.
And I think it's gotten worse in the last 12 months, would be my impression.
And interesting, too--you mentioned, obviously the impact of, you know, what's happening in Syria.
Those refugees moving en masse into Germany, being absorbed; the impact that's going to have there as well.
I think it's a very meaningful issue, in Germany particularly.
I mean when we think in Canada we're looking to take in 25,000 or whatever, which is terrific, I think, but in Germany they've taken in, you know, a million or whatever it is.
It's a--that's a huge commitment and politically challenging, you know, at the time--you know, Germany's economy's okay but Europe as a whole the economy's not great.
And, you know, when the 25,000 refugees come to Canada, of course we selected all those; a lot of those million refugees going to Germany, you know, just arrived on the shores of Greece or--or wherever.
Um, and so, you know, it's a little less manageable than the situation we have here.
So, yeah, I think that's a challenging political situation and a challenging economic situation that Europe's addressing.
Stay with us.
When we come back--we've got through part of that map.
We're going to bring the conversation back to North America right after the break and then we'll be talking a bit about what companies are facing.
You're watching Money Talk.
I'm here with Bruce Cooper, Chief Investment Officer at TD Asset Management.
We'll be right back.
And welcome back.
I'm here with Bruce Cooper.
He's Chief Investment Officer at TD Asset Management.
We've been talking about the climate of the world, the-- metaphorically speaking, in terms of what is happening and all the challenges in terms of the big global economic picture.
Let's bring up the map.
We've been talking about slowing growth in China, Middle East unrest.
We've been talking about European imbalances, both fiscal and perhaps population as--you know is coming in.
And that leads us to the left side of the screen here, about the United States economy, the weak Canadian growth.
I want to start with Canada...
...just because--but I mean, you know, we talked a bit about China; slowing commodity growth, oil--and therefore Canada.
You know I think the Canadian economy is clearly sluggish.
It's--obviously regionally there's a-- there are differences.
Um, oil prices being low is having a very dramatic impact on spending by companies so we're seeing, you know, dramatically reduced capital expenditures in the oil sector in Alberta.
I think that's going to persist, you know, for sure through all of 2016, probably through 2017 as well.
Even if oil recovered from where it is today, a company's not going to want to invest unless oil gets much, much higher.
So I think the economic impact of oil prices will be with Canada for quite a while.
Um, obviously the first half of '15 growth was, you know, somewhere around zero; you know, maybe it got a little better.
But I think we're in this kind of sub-par growth environment for Canada.
Housing has been pretty strong--clearly in Toronto and Vancouver--but, you know, you can't drive the whole of economy just by housing in--to market.
So I think the Canadian dollar being low will facilitate a transition of the Canadian economy over time, which is one reason we think the Canadian dollar will stay low, you know, for you know, a reasonably long period.
Yeah--I don't know.
You know I'm not--it's obviously hard to call direction; we're pretty close to 70 as we sit here.
So if we went to 69...
It only takes half a cent to get there.
...that wouldn't be a big move.
I'm not saying it will certainly go much lower, but I could see it staying at this low level for quite a long period of time.
Because at this low level I think the Canadian economy is more competitive, which means we can attract investment maybe outside of those traditional commodity sectors.
In the company side, in terms of, you know, government side I mean the spectre of negative interest rates certainly is going to have an impact as well.
Um, you know I think the Bank of Canada has been trying to get the dollar down, I think is part of it, because they understand that the low dollar-- just what I've been saying, the low will help transition the Canadian economy.
So, you know, my guess is as long as the dollar is kind of staying weak they don't need to go to negative interest rates.
I don't think it will have a big impact-- if we went to negative rates it wouldn't have a big impact on borrowing costs, which are already at, you know, exceptionally low levels.
I'm not sure lower rates would stimulate much economic activity but I think it's true the currency mechanism--that it could help, you know, over the kind of medium-term.
I've saved the best to last.
Yes, the United States.
The--I'm not sure.
You know, "In the land of the blind the one-eyed man is king." But we'll-- you know the Fed has come out, of course; made their move.
Very well telegraphed.
I mean it was the biggest non-event event that we've probably had in a long time.
Yeah, that's right.
But the U.S. economy--you know, what is your sense?
Because you know, the data we've seen recently--and I'm going to say we've seen manufacturing weakening, we've seen inventory build up.
Well, you know, it's not been tilting in a really positive direction.
I think that's right.
You know the U.S. economy is--I would--a technical word, I would call it okay.
Yeah, which is pretty good right now.
Um, you know it's been growing at about 2%; there have been pockets of strength.
You know, the job market's been pretty good, the housing market's been pretty good.
Obviously new car sales have been pretty good.
Um, but you know the flip side of the Canadian dollar being weak is the U.S. dollar's been strong.
Obviously it's been strong against not just Canada but...
...the European currency and the whole kit and caboodle.
And that is having an impact.
Of course low oil prices is having a huge impact on Canada, but they're having an impact on the United States too.
All these shale producers; CAPEX is being slashed there very dramatically and manufacturing-- as your referred to--is under a little bit of pressure.
So you know, I think the U.S. is okay; it's still growing.
I anticipate it will continue to grow.
But, you know, I talked earlier about we live in this low-growth world; the U.S. is the largest economy in the world and, you know, it is one of the engines of that low growth, if I could put it that way.
You know it's sputtering, compared to what we saw in the '80s, the '90s, or the 2000s before the financial crisis; it's just slow.
What does this mean, then, for--I mean one of the big trends we saw in 2015 was these big mergers; companies, you know, looking to grow by buying.
So, you know, Budweiser and Miller, Dow Chemical and Dupont, Pfizer and Allergan--I mean the list goes on.
Are we going to see more of that, do you think?
I think it's possible.
I think if--I think the rationale for that is two big drivers that I see.
One is interest rates are very low so money is cheap, and so if you're taking over a company using debt, it's cheap financing.
So I think that's a big driver.
Um, and second of all, you know coming back to these, um, ideas of slow growth, for companies it's hard to grow their revenues.
And so if they're...
...trying to grow their earnings they can buy another company.
And often when you buy another company you can reduce costs.
And so I think it's a--companies are hoping they can grow earnings that way.
Of course mergers, historically, have been risky; some work and some don't.
But they're hoping they can grow earnings through that mechanism, partly because, you know, organic growth is very challenging in this environment.
Stay with us.
When we come back we're going to draw it all to a big conclusion.
We'll get Bruce's thoughts on equities, valuations, and outlook; what their group is recommending as they look ahead.
You're watching Money Talk.
We'll be right back.
I'm Kim Parlee.
I'm here with Bruce Cooper.
He's Chief Investment Officer at TD Asset Management.
We have been, again, talking about the state of the world as it is in terms of what is going on, what it means for investors.
And so we've talked about geographically what's going on, and I want to just quickly ask you about valuations.
Where are we?
I mean we've seen, you know, the markets come off a bit in the first few days, but where--where are we sitting right now?
So on the equity side we view valuations as in the range of fair.
So we don't think stocks are outrageously expensive.
But, you know, of course they bottomed 2009 and then have gone up a lot in the last six or seven years.
We don't think they're outrageously cheap either.
So, you know, if you had to put a P on it, you know in the U.S. equities we're somewhere around 16 times earnings.
We have a bunch of fancy quantitative models which tell us that the AP multiple should be around 16 times.
So we don't think there's a big story there that tells you they're either too cheap or too expensive; they're around fair value, what is what our view would be.
Now your group has something called the Wealth Asset Allocation Committee.
Just--what is it and--because you basically meet on a regular basis to decide strategically what needs to happen, so...
So we meet on a monthly basis.
It brings together leaders from across our business in the U.S. and Canada, people that focus on fixed income and equities and asset allocation as a separate discipline.
And we're really trying to provide kind of advice and guidance to our clients and our internal portfolio managers about how they should construct portfolios by saying, "Here's where we see opportunities.
Here's where we see risks." You know.
And we come out with return expectations for different asset classes.
Well, let's talk a bit about it, then, if we could.
So what--what is the latest recommendation, like, given the state of the world and what we've talked about?
You know, so obviously some of the comments I have made today would suggest that we are cautious.
And we are cautious.
That's different from saying we're outright negative.
We're just, you know, cautious, which to me means you want a diversified portfolio of quality assets, I think is the way I think of it.
I think for Canadians the role of diversification came through so powerfully in 2015 where, as we talked off the top of the show, you know lots of things were going wrong.
Lots of things were going right, too.
...if you had some--if you had some U.S. dollars--U.S.
dollar assets in your portfolio, either bonds or stocks, you did okay.
It's like, in this risky environment having a diversified portfolio is very important.
I think from my perspective that would include both what we would call high quality equities; you know, companies that can pay good dividends and grow their dividends over time.
It would also include some fixed income assets; it would include some global exposure, including U.S. exposure.
It would probably include today some cash; you know, so you have a bit of dry powder in case prices fall and you can redeploy then.
Um, so you know, diversified portfolio.
You know that will help you navigate this turbulent environment and very much up the quality curve.
You know, companies that are built to last that pay good dividends, have strong balance sheets, generate consistent cash flow; that's where you want to focus.
This is not a time to swing for the fences.
This is a time to be conservative; you know, live to fight another day.
I don't think you're going to get rich in 2016 but, you know, if you've got a well diversified portfolio you'll be fine.
You talked about-- having looked at (indiscernible) expecting low--low single digit returns in 2016 for equities.
Uh, low single digit returns in fixed income and low to mid-single digit returns in equities.
So, you know, those are modest expectations.
You know, be similar to last year in a lot of ways.
Of course the U.S. market was basically flat last year and Canada was down.
Europe was up a little bit.
So I think it's consistent with what we saw in 2015.
This is just my active listening.
I'm repeating back to make sure I understood everything.
So geographic preference.
You're saying also developed markets over emerging, especially right now.
We find emerging to be an area of risk.
Of course the emerging world is a pretty big world.
You know Latin America is probably having the biggest problems because it's very commodity-focused and the slowdown in China, ironically, is having a bigger impact on, you know, a place like Brazil than it is on China itself.
But do you think also we could see some impacts of, like, the Chinese currency falling and then other currencies in Asia?
Like, you know, people--you know, is this an Asian currency crisis we could see kind of starting up?
Well, you know, we are cautious on the emerging world because, you know, we see risks like that.
We see currency risks.
Also you tend to have lower governance--lower quality governance at companies in the emerging world.
So, you know, if the world's a slower place I'd rather stick with higher quality.
You know, management and legal structures you understand, as opposed to chasing risk in--in the emerging world.
How--and I guess the tough part for a lot of people--though when they see how 2026 has started, you know, and I'm talk about the high quality dividend growers, I mean you talk about them being a fair valuation in '16 but they feel expensive, I think, for some people.
I mean it just seems like, you know that's--that's--everybody's going after the same thing or...
Um, you know they're-- they're not bargains in a lot of cases.
But our view has been if you could put together a portfolio of high quality stocks that have dividend yields of 2.5, 3.5, 4% even, those should perform reasonably well in an environment where bonds yield 1 or 2. Mm, hmm.
Obviously they will be more volatile and there will be downs as well as ups but, you know, we encourage people to take a long-term perspective.
For most people they're trying to think about their retirement, you know, which in many cases could be many years hence.
And you know, stocks will go up and down.
That's the nature of the beast.
But if you own a portfolio of stocks that, you know, year in, year out grow their earnings, grow their dividends over a ten-year period, you know that will produce a good outcome.
So at times like this you want to have the right asset mix; conservative.
And then don't get too caught up in the daily noise because, you know, you'll pull your hair out and you'll end up looking like me.
On that we'll leave it.
Bruce Cooper, thanks so much.
Bruce Cooper, Chief Investment Officer at TD Asset Management.
Thank you for joining us tonight.
Any comments or questions that-- you've seen anything on this show, or if you would like someone to take a look at your portfolio, you have some planning questions, you can always email me at [email protected]
I will get you in touch with someone who could answer those questions for you.
Thanks so much, and we'll see you again next week.
The preceding paid commercial program was brought to you by TD Wealth.