A slowing Chinese economy, Brexit and continued trade tension between U.S. and China are the key factors impacting markets. Kim Parlee talks to Bruce Cooper, CEO and CIO at TD Asset Management about the changes to asset allocation for equities and fixed income stemming from these factors.
Given everything that's been going on, I'd say you sound-- you sounded not pessimistic, not optimistic, but neutral.
And you've made some changes to your outlook for equities and fixed income, which sound, to me, optimistic.
Yeah. We actually are more optimistic about stocks today than we would have been, say, six or 12 months ago, which you're right. There's a lot of things going on in the world. There's a lot of things to worry about.
But there's really three things that make us more optimistic. And the first thing is valuations. It's the whole thing when prices go down, do you want to buy more or do you want to buy less? If you're-- price of your house goes down, you're-- you feel good.
Good time to buy.
Good time to buy. So stocks have gone down. All markets went down last year. And some markets-- take Canada, emerging markets-- they've really been going down for two years or more.
And the US really took it on the chin.
Yeah. US took it on the chin, particularly in the fourth quarter. And so if we look at the valuations in the United States-- say, 15 times earnings-- in Canada, 13 times earnings-- some emerging markets are trading high single digit multiples, in a lot of cases, dividend yields that are higher than bond yields, companies generating very strong cash flow-- so I think the valuation environment just implies that slower growth, which is going to happen, is already discounted in today's stocks. So I think that's a key reason we're more optimistic.
Second one would be, just right back to what we were talking about before, which is central banks. They were hiking. We think they're going to stop hiking. And so if we get interest rates stabilizing in this 2% to 3% area, that should support reasonable valuations for stocks. As I said, you got a lot of stocks where dividend yields are higher than bond yields. And in this environment, 13, 14, 15 times earnings doesn't look that bad against the 3% bond yields. So that's the second thing.
And the third thing is just our view that we're not going to get recession. If we get a recession, stocks will go down. Our view is we won't get a recession. We'll just get this slowdown. And then stocks take a breather. And they start to go up again, as they tend to do over very long periods of time.
We've got a chart here we can show. And so what the-- how this is manifested for you is I believe you have-- you looked at equities and fixed income. You had a neutral outlook--
--on the overall categories. You've essentially split them in two directions. We've got equities here first, which we can see you've moved to overweight, modestly overweight.
That's right. That's right.
And let's just run through everything else we hear. So equities overall-- modestly overweight. Canadian equities?
Yeah. We're in the middle on Canadian equities. It's not our favorite market. And stocks in Canada are very cheap. There's no issue about that. But we know there's a lot of things overhanging. And the two big ones, from our perspective, are quite high household debt, which probably will slow economic growth.
Then the other is this whole debate that's happening in the energy sector, the challenge we have in getting pipelines built. And that is really casting a pall over Canada from an international investor perspective. And so we're just not getting a lot of inflows into our market from outside. And I think there's a good chance we won't until there's a bit more clarity on how we're going to drive economic growth in the country.
US equities you also have-- I think it's here under modestly overweight. Is this, again, a valuation-driven?
Well, we've been overweight the US. The US has been our favorite market for some time.
And that's-- hasn't changed?
That hasn't changed. We continue to like it-- strong technology component. The US economy, although slowing, is still, I think, the strongest of the major markets in the world, very diversified market, companies generating great cash flow-- so continue to like it.
And international equities-- I don't believe you changed that. You are modestly underweight.
We're still more cautious. The biggest part of international equities is Europe-- slow growth, political challenges continue-- obviously, a lot of focus on Brexit. The one I worry about just as much, I'll say, is Italy. You've got very high debt and very low growth, which is a bit of a toxic combination. And I think there's still this existential debate within Europe about the euro and can you have all these countries existing within one currency zone. So we're just a bit more cautious there.
And emerging market-- you're a little more optimistic.
Yeah. Emerging markets--
Just a risk one, yeah.
We've historically been more cautious. But those markets have been very poor in the last couple of years. And valuations, I think, are quite attractive. And you could have-- China talked about the fact that growth was slower. But the Chinese government continues to provide stimulus. And so you could see an environment where growth actually improves in the emerging world, which, combined with the relatively low valuations, could be a bit of a catalyst.
Let me ask you-- I'm not going to spend as much time on the fixed here. But we'll bring this up. You've gone, again, from neutral overall in fixed to modestly underweight.
And I know you-- it looks as though you've gone a little more optimistic or overweight on investment-grade corporate bonds, high-yield bonds-- basically, the riskier types of bonds.
Yeah. So it's consistent with the view on equities. We're a little more-- we think you're getting paid to take risk in this environment, whereas government bonds we downgraded. Look, it's just a reflection of the fact that yields are relatively low. Yields on bonds or government bonds are in that 2% to 3% zone. They can provide stability to a portfolio, a modest amount of income. But you're not going to make much money.
Spreads on something like high-yield have blown out quite a bit in the last, say, three, four months. And the yields on high-yield-- you're getting into that mid to upper single digits-- say, 7%, that kind of zone-- which is actually, we think, quite attractive if you pick the right high-yield securities, which is-- you really want to, in many cases, have a professional do that for you. It's a pretty complex area.
Active management has gotten-- it's even more active than it used to be, I think.
Final question for you-- we only got about a minute here. But for someone who's watching, it was not a good time to be watching the markets in December. So when people are getting their statements or opening things up, what-- how should they be digesting what's going on right now?
So last year was a tough year. Most asset classes were either down or had modest performance. But investing's a long-term game. And the most important variable is the price you pay for something. I think the price you're paying for assets now is more attractive than it was, say, a year or two ago. I think people should stick with it for the long term.
We always tell people, focus on quality assets. It's not a time to speculate. This is a time to focus on stocks that pay good dividends, grow their dividends over time, protect you from inflation. And that solid, Steady Eddie approach will serve you well-- we think more attractive today than it would have been a year ago.
Bruce, always a pleasure-- thanks so much.
Nice to be here.