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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 and we we'll take you through with moving the markets to answer your questions about investing.
Coming up in today's show we will discuss the process of rate cuts on the horizon and what it means for the corporate bond markets.
TD Asset Management's Ben Chim joins us.
MoneyTalk's Anthony Okolie will see if households of slow their spending and in today's WebBroker education segment Caitlin Cormier will show us how to use the goals tool. Here is how you can get in touch with us. Just me email MoneyTalkLive@td.com or Philip the viewer response box under the video player on WebBroker.
Forget to our guest of the day let's get you an update on the markets. We will start here with the TSX Composite Index.
It is day three of the short and trading week. The last trading day of the week. We have 79 points on the screen. Good for the third of a percent. One of the most actively traded names including Kinross Gold. Notice the price of gold continuing to push higher lifting some of our minors along with it.
Ken Ross at seven bucks and $0.90 a share all about 2%.
Now the energy space, apparently resources in the states building on the oil and gas side.
Some of the energy names under pressure today. TC energy off the lows but now it is still down about have a percent.
South of the border let's check in the S&P 500.
The tech stocks are not really showing as much today. With the broader indexes to the upside.
Other parts of the market showing some strength in bearing some fruit today of 12 points for the S&P 500. Cordova percent.
The tech heavy NASDAQ though, a bit under pressure today. Nothing too dramatic.
Pretty much just flat.
Down a very modest four points. An Nvidia, not participating today as the market bounces back from a couple of, I think it was a three day for the S&P 500. Maybe hanging in but Nvidia, not one of the companies doing did today. 898 a share.
Down almost 3%. And that's her market update.
The US Federal Reserve is still signalling that it expects three rate cuts this year.
While it has been a boon to equities what does that mean for the corporate bond market? Joining us now discusses is Ben Chim.
, VP director and lead of high-yield fixed income team at TD Asset Management.
What is this mean on corporate's?
>> I think last time with you guys we were talking but the fall of last year, October 2023. Then I was talking a lot about the resilience of the corporate bond market in light of what was quite a bit of volatility, quite a bit of weakness in the government bond space.
And of course, since then, as you know, we have had the mother of all, you know, government bond rallies at the end of 2023.
And that has dramatically changed the investor perception around investing bonds overall and overall corporate bonds have definitely been benefiting from that and so the demand for corporate has continue to improve from that.
We are seen demand increased to the extent that it is well offset supplied and receiving which is been pretty meaningful as well.
So spreads of continue to type their tight levels right now.
Titus we've seen in the last 15 or 20 years or so.
And you know, the bond markets, fund metals remain fairly healthy. So when you step back and think about it, it's pretty easy to see why the bond market is so popular right now. There is so much demand for corporate spirit we are kind of in this place right now where the really challenging component of the Fed cycle is behind us. We had a lot of rate hikes in the last couple of years but inflation is coming down fairly comfortable.
Sometimes not as quickly as what the market would like but overall, in a pretty steady trajectory. And wage increases are actually coming off as well. That's really a key metric that the central banks are watching to think about what their next move is.
I think their next move is pretty clear that it will be something on the death of outside so likely a rate cut maybe something in terms of reducing quantitative tightening. That of course is going to be very positive for bonds overall. Including corporate bonds.
As you asked about.
One of the reasons why corporate bonds are specifically look pretty good in this kind of backdrop is you know, the Fed has not made their next move yet. They have not cut rates of the reason why there's been this delay is because the global economic backdrop remains quite strong.
And very resilient. Strong global economy obviously is very good for company fundamentals, good for credit metrics, and so, corporate bond investors can feel pretty confident at least in the near term. That spreads are not going to move much wider, you know, corporate bond market is going to trade fairly healthy.
Despite how tight spreads are today.
And so when you take that back and think about why corporate bonds are propelling, you got this situation where your earning higher potential returns, right? The yields and corporate bonds are about 5% in Canadian investor great space, 4% US investor grade, 7/2% for US high-yield, and they are benefiting also from this strong economic backdrop. So you're kind of getting better conversation as a way for the Fed's next move and you still will benefit if you do seek rate cuts and bonds rally from there.
I do want to caveat by saying a lot depends on how these rate cuts play out right?
Right now, the base case is, and are based cases as well, from the market, we will seek rate cuts because the central banks feel that the current policy rate is very high.
Quite restrictive. Given where the trajectory of inflation is right now. If they are cutting rates because of that, the economy is fairly solid, that's the Goldilocks scenario corporate bonds.
Corporate bonds will do very well that backdrop. If however, they are cutting rates because of something else, because, let's say there is some exogenous shock to the economy, causing you know, us to re-rate expectations lower, big sharp decline there… That would be much more negative corporate bonds. Because of the spreads. They are not really compensating investors for that kind of scenario.
Spreads could widen to the extent that they offset a lot of the escaped death of that that we expect to get with rate cuts and offset a lot of… That is kind of your worst-case scenario.
We should watch out for that and continue to be a you know, continue to be where the tracks go. I will say right now as we look at things going forward, we don't see the potential for an exhaustion astride of any kind are a big rate. Some of our base case is that former scenario where, you know, the rate cuts happen because of a normal course of you know, central-bank policy, economy remains fairly healthy and that is very constructive corporate bonds.
>> That is our technical backdrop of that is some of the important caveats that you laid out.
People gravitate and when actually think with the Fed, when that first rate cut comes they will gravitate to work towards the 10 year yield.
They always think about governments. How should we be thinking about corporate's against governments, vice versa, when that day comes?
> Yeah.
I mean, I would say right now, there is good reasons to own both corporate bonds and government bonds.
For corporate bonds, of course, you're getting more yields. You are getting a lot more potential volatility if the economy becomes chained to the global economic backdrop, things slow down more than what is currently expected right now. I think that's particularly true, like I said given where expenses are.
On the other hand, government bonds will give you more protection in that scenario.
And they will perform fairly well if, you know, the Goldilocks scenario does not play out. I think, you know, you have to consider that going forward.
I would say right now, with how we are seeing the economy and how corporate fundamentals are performing, company earnings, it's better to have more carry than credit corporate bonds are probably slightly a better place to be.
But we could see a situation not too far down in the future, maybe sometime this year, where it makes more sense to have government bonds. So I think it will make a lot less sense in your portfolio and the focus should be on that.
>> You mention some of the caveats earlier Ben, what are some of the biggest risks to all this? The economy? Valuations ?
Mark >> Yeah. I think both of those are big concerns that we have. Big factors to look out for.
As we think of how we position within the bond space in our portfolios.
In terms of the economy, the big question still remains in our opinion about inflation right?
Does inflation continue to move in this current trajectory? Or do we see something in terms of maybe animal spirits as a results of strong appetite the causes inflation to start to move back higher?
Or do we see a policy where maybe the central banks are the least monitored policy we see and that causes a resurgence of spending and it causes the economy to overheat.
In either of those cases, if we start to see inflation start to rear its ugly head, you will get a lot worse. We can start to see the market, you know, start a price of those rate cuts that we expect. We expect three this year, we expect another three next year both in Canada and the US. And that would cause volatility of the bond market overall.
As corporate funding can be challenged as interest rates remain high.
And I think that would be a pretty negative scenario.
The other thing that we are thinking about is valuations as you said, they are quite tight and to us, really not compensating you for some of the land lines that you can have a bit.
While the economy remains fairly strong, funding remains solid, there are a number of companies that are struggling.
You know, the default rate has risen over the last few years.
It was close to zero. Significant 1% from 2021 and 2022. Last year, in high yields rose to about 3 1/2%.
It's not alarming, it's a rather long term but it certainly is not zero. We expect that to continue to be the case to be around 3 1/2%.
Maybe a little bit higher.
For this year… And it's the small concentrated companies that don't have a lot of avenues for flexibility in terms of funding needs that are seeing, predicting the ones we are in the sectors that are under pressure.
You know… Advertising etc. And it's a large capital structure. Companies that have had too much debt appear where debt was cheap.
And you know, are struggling to, you know, make positive cash flows as a result of that and now facing financing or interest rates are even higher and that's going to get into the cash flows more.
They still capital spending needs if they can't fund those companies. They are the ones defaulting and continue to be a risk to the market going forward in a risk to the stability.
>> Fascinating stuff.
A great start of the program.
We'll get to your questions about corporate bonds with Ben Chim in just a moment's time.
You can send us your questions and money Doc's hot live@ti.com or Phil at the viewer response box and web broker.
Right now it's get a look at some of the top stories and to go into the markets are trading.
Let's check in on shares of fast fashion retailer H&M in the spotlight today. The Swedish company beating profit expectations by a pretty wide margin in its most recent quarter.
H&M is been focusing on profitability as it faces growing competition in the last while in the fast fashion space for names such as China's Shein.
Shares of game stop or under pressure today the videogame retailer is reporting a nearly 20% drop in sales revenue for its most recent quarter. Shares of game stop sword during the pandemic as the company found itself at the centre of the meme stock craze of the time.
We have some dealmaking in the Canadian mining industry close to home.
Alamosa Gold has agreed to by Argonaut gold mug I know mine in Northern Ontario.
Alamo says it can achieve significant savings by sharing infrastructure with its neighbouring island gold mine.
On this news up about 30% for the markets.
A quick check in on the markets. Starting here on Bay Street with a TSX Composite Index, 21,976, we have 64 points on the table up about 1/3 of a percent.
An south of the border, the S&P 500 managing to be modestly in positive territory even though the tech heavy NASDAQ pretty much flat on the day, Nvidia, not just the big tech names today.
They're putting the market higher.
Up 12 points about 1/4%.
We are back now with Ben Chim taking your questions about corporate bonds.
So it is a question about structured notes, especially Bank linked.
>> Yeah. Those are very interesting types of products out there.
I think the potential returns are pretty appealing. But I think with everything that gives you in return, that is significant a higher then, you know, your traditional sort of base product you really have to think about what the catch is. What is the fine print here that you are taking on in terms of risk.
You are allowing the structure products that you have specific sort of, knockout type revisions in their right? If the S&P moves to a certain level or if the yield moves to a certain level, your return profile changes. So it's really important to be comfortable with what that knockout is and whether in that scenario, and understand the kind of risk that you are taking there.
So we don't have, I don't have a problem with the Securities, Vic it's important to just do your due diligence and really fully understand why you want to invest in them.
We don't invest in those kind of products really because you know, I think there's a lot of opportunity right now in the fixed income market even without trying to tap into something a little bit more exotic in terms of structure.
One of the areas where, you know, we are able to retain a lot of yield as well, maybe not as much of some of these structure vehicles is still getting very good overall yield and carry, that we find interesting is in the leveraged loan space. So for example, leverage loans are for those who don't know, there are floating-rate products that… Tied to issuers in the bond market.
They trade off the secure overnight funding rate insult for which is yielding about 5.3% right now. And so they give you a spread on that, typically we invest in and typically they are secure and so you're done with these secures.
I yield based on a 3% spread of about 8 1/2%… And that's with, you know, fairly minimal downsides I guess maybe with some credit risk on there. But of course the volatility is the floating rate. There is a cash to leverage loans as well, you know, they are at par at any time from the issuer so they are likely, there is not a lot of upside there. They won't trade above par if they do.
If they do, the company will call them and refinance at lower yields.
Also, of course, because they are floating-rate, you don't get any kind of offside leverage to rate cuts will help the bond market overall. In fact, rate cuts were hurting grizzly will reduce the offer and take away some your coupon. But the way we think about it is right now, a leveraged loan gives you an 8 1/2% yield.
The equivalent bond is actually the exact same company and the exact same ranking unsecure bond. Gives you a yield of say six and 5:45 and 1/2. See you get about 200 basis points and that additional yield a potential return from that… So even if you get the three rate cuts we expect this year, you know 75 basis points, you're still looking at an all in yield at the end of the day that is higher.
Significant higher than the bond market.
>> Interesting parts of the market therefore our viewers to do the research on. Let's take another question ever been.
Of your wants to get your take on Rogers.
What you think of their 80% debt?
>> Yeah. We really liked Rogers debt when they came to market for the shot acquisition.
When you kind of take a step back, there is a lot of rate to buying Shaw but we need to go to their assets they were a collection of, they are a collection of probably the strongest telecom media assets in Canada right? You have a very strong media content franchise.
You have the largest cable network in the country and you also have of course, arguably the largest wireless tap network.
And so did you have a strong cash flow.
With the acquisition, it is put some pressure on the credit rating and force the company to, you know, address their down levels and use the free cash flow to try to pay down which is, the less characteristically we would like in terms of any corporate bond. We felt pretty confident because of the quality assets and because of who they were in the market, that while the leverage was very high, it was still good to be investing credit and that certainly was how things played out in terms of the credit rating.
They are steadily taking down their debt levels. So I'm not sure what the 80% number is what we do, we measured and we think about it in terms of debt compared to their earnings. So debt per turn of… Which is about 5.1 times at the time of the acquisition.
They're currently sitting at about 4.7 times and they are targeting down to about 4.2 by the end of this year.
So that's a significant improvement.
The challenge right now for us in terms of Rogers bonds is the fact that they are trading like that stuff about where is when they came, discount compared to the other Tellico companies, Telus and Bell.
Now Rogers spreads her around 10 or 15 basis points wider than Telus and Bell.
Telus of course there debt levels of 3.8.
Where Rogers is predicted to be by the end of the year. So you know not as much value in our economy today as there was.
We have been taking down her exposure a little bit but overall we still like the credit.
>> Interesting stuff there on Rogers.
Another media company, not quite as big as Rogers (Greg reads the question) >> Sure.
You know I think last time we had a bit of a chat and touched on that a bit. The big issue I think and has been and will continue to be the fact that ad revenues remain challenged and especially in Canada were in economy is notably bigger than the US. So, their earnings continue to be no way by ad revenues.
But also reducing the… They are steadily declining earning base on top of having quite a bit of debt they have over five times a day and they need to get there… But as their backdrop remains challenging they don't have a lot of free cash flow to do that. They will need some kind of recovery in terms of the advertising sector.
Still recovering in terms of subscription revenues and revenues on that front before they can really materially deliver the balance sheet and they could be a long way before that happens.
They did have some encouraging quarterly reports in the last little bit. They benefited from a couple of things.
You know, there was Smith's capital spending during COVID that had come off and so rolling that off has really helped them in terms of profitability and then the writer's strike actually meant that, you know, they did have to have some costs that were taken away for… So that help them as well. So you know, recently, things have been trending a little bit better. Nonetheless, they're going to need a lot more help to be able to, you know, get that debt down and make sure at some point they are able to right size that balance sheet.
> Interesting stuff as well. Make sure you do your own research at home before making any investment decisions.
Look about your questions with Ben on corporate bonds in just a moment. A reminder you can get in touch with us any time by emailing MoneyTalk Live ATD.com.
Let's get to our educational segment of today.
In today's education segment, Caitlin Cormier, Client Education Instructor at TD Direct Investing will take us through how to use the goal to will on WebBroker.
>> As a self-directed investor, you kinda become your own Portfolio Manager. But the good news is we have tools within WebBroker that can help you to build your portfolio.
So let's go ahead and hop into WebBroker.
You're going to look at the goals tool today. So right here at the top of the tabs on WebBroker. And what when energy was were going to click on "get started" to start a goal. So within this tool, you can select what you're saving for. So whatever type of saving goal you have, you can choose retirement, a major purchase, or just your money to grow.
I'm going to go with retirement for today.
You're gonna put in your current age. And we are going to put in the income you're currently earning.
In the age that you'd like to retire at.
So we will just throw some numbers in here.
The next thing it's gonna ask us is what we would like to earn as far as income in our retirement. It's giving us some idea here of a couple of different options.
So let's just go with a little less. 80% of our current income.
You'll notice to some helpful tips as you move along to give you an idea of what might be appropriate to choose. And, let's just go ahead and name our goal.
All right. Next up it's going to ask us to choose an investor profile. So you kind of have to know a little bit about yourself here as far as what your risk tolerances, what your timeframe is, and those are things that kind of understand which one of these portfolios might be most appropriate for you.
You can compare them, choose "compare" and put them side-by-side. And compare which one might make the most sense for you.
It has quite a bit of information as far as historical returns, levels and assets… Then you can go ahead and choose whichever profile is appropriate for you and go ahead and click "save and continue".
Next up we are going to say how much money we have that we are already using to save for this particular goal.
In this case, I'm gonna say that we have some money already so let's just say we have 30,000.
We are going to put in a contribution not that we are currently making into the account.
So let's just choose a biweekly contribution.
We will click "save and continue". And here we have the projection for what our plan is. So it shows us how much money were to have and how much we need to have a retirement. And how much we are projected to have. Obviously there's a bit of a gap here between the two so we kind of need to make some adjustments to get a little closer in line.
One thing I went to show you is I can actually click here to view assumptions and I will see that this particular goal is taking into account the average amount of CPP, per Canadian.
The minimum amount of O a.
s.
and you can add things like other income here for example if you have a pension plan and you know how much money you will receive per year from that plan you can put it here.
If you have rental properties, you can plan on working, any other types of income you can add them here.
You can also change your life expectancy here.
Or if you know what your amount for CPP would be you can, or OAS, you'll know here. The goal gets readjusted based on the fact that we will have that pension income and that we can go ahead and play with some of these numbers, maybe we say… Well, maybe I can take a little less income and take a couple of more years before I retire.
And click "recalculate".
We are a lot closer there!
So let's say a small amount more contribution and there we go, we are overall goal.
So it kind of gives us a way to understand how we can easily make adjustments to our current plan in order to meet that goal.
If we click "start with this plan" we will be able to go to our goal dashboard and keep an eye on this goal as time goes on.
We will see whether we are on target or not to actually meet our goal. We can go in as well and click "view details" and make any adjustments us time changes, as life changes, you can go in and make changes to any of these things that might've changed during the time frame.
Maybe you were a little bit more conservative, maybe you want to change some of the other inputs.
You can do that at any point in time. So this tool is a great tool in order for self-directed investors to use to kind of keep track of goals and make sure that you are on track to meeting them.
>> Our thanks to Caitlin Cormier, Client Education Instructor at TD Direct Investing. Make sure to check out the Learning Center and WebBroker for more educational videos, live interactive master classes and upcoming webinars.
Now before we get back to your questions about corporate bonds with Ben Chim a reminder of how you can get in touch of us. There are two ways you can get in touch of us. You can send us an email anytime@moneytalkliveatd.
com or click the question box right below the screen here on WebBroker.
Just writing 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 Ben Chim taking her questions were corporate bonds. (Greg reads the question) >> Yeah. You know, I would say first of all, when I think about credit ratings, the important thing is to do your own credit work right?
And you know, you know, be able to assess for yourself what the quality of a company is and what the credit quality of a bond is.
And I find credit ratings obviously to be a little bit backward looking.
And so that always, to me, creates more of an opportunity than something I really rely on.
Or we really rely on as a team to invest.
That being said, it is important to have a credit rating and the reason why is twofold. First is, there are a lot of nuances to an individual security that, you know, a lot of investors who have been living corporate analysis like I have are not really up to speed on.
For example, you know, it's good to know who is the actual lender a rather lender that you're borrowing to write?
What is your claim?
We have a claim against?
What cash flows are really kind of supported.
The interest payments that this bond is making. So that's really critical to understand. Then, just the documentation component of it right?
You know, there are a lot of nuances in terms of where do we rank in the search?
Are we secure?
Are we supported? Are we unsupported?
If the company goes bankrupt, we will get nothing?
It's really important understand what happens when things go wrong and there's a lot around that.
Credit rating analysts as well as analysts like in the market, will have a good experience with that and they'll be factored into the credit rating. So it's really important to have the credit rating to know that that kind of analysis is already been vetted and fully understood.
In the second thing of course is liquidity. Having more, having a credit rating, he allows other investors and other potential buyers to feel pretty confident that the security has been vetted as well. And fully analyse it and so there's going to be potentially quite a few more buyers if Sony has a credit rating versus something that doesn't.
>> Interesting stuff there on credit ratings. Another question for the audience, what high yield bond sectors are attractive? Which ones should be avoided?
>> Yeah this is a tough question because I would say that there aren't really any sectors in high-yield markets that are struggling quite dramatically. You know, it's been a fairly strong market overall with the companies as I mention that are struggling really the small specific characteristics in terms of leverage or in terms of size are creating problems. That being said, there are some sectors that we like more than others.
For example, we really like in terms of some parts of the sector, specifically the cruise lines, we also like the airlines… These are credits that do give you some yield still bugs are steadily improving in terms of their balance sheets in terms of their operating profile. There is very strong, if you take up occupancy levels, however you want to characterize it for especially cruise lines, but airlines as well : that allows them to continue to generate strong earnings and free cash flow and pay on their debt. We expect the cruise lines to ultimately get back to being investor grade.
They were there prior to COVID and of course COVID changed their dynamic quite dramatically.
But they are doing very well and Carnival just reported today very strong results.
And they will we think they will be able to generate free cash flow to keep that debt level shrinking and continue to see her re-revving of their credit quality higher. So we like that sector quite a bit. Another is the consumer-products and consumer sector in general. We like restaurants, as well as consumer staples and whatnot in high-yield market.
Those companies are doing well. Largely because you know, inflation is coming down so they are seeing less pressure on their wages. They are seeing less pressure on their cost and that is exceeding some of the, you know, weakness or some other deterioration that might be happening because of inflation on the revenue side.
And so margins are improving again, that is helping their cash flow in helping them to you know, cover their interest costs and their debt levels better. So that is a sector that is also, we really kind of like and we will still continue to add to our exposures there. Then finally, the leverage loan Marketing which I talked about. It's not a sector but it's a part of the market that we see as quite attractive and we have a fairly high allocation relative to explore in our high-yield bonds today. In terms of sectors that we are more wary of, that we are avoiding, the biggest one, the biggest shift for us in the last year or so has been the Tellico sector where we become, telecom media becomes significant and more cautious on it.
Most, even though it's quite a sector, most of these company's are quite a bit of debt on a balance sheet that they need to address. And they have had quite a decent amount of challenges just trying to refinance that in trying to return their debt so they can continue to pay off their rising and ever expensive capital expenditure costs. And so what we've been seeing in that sector more more is what's called credit earned, credit revivals. And I'm not sure how many people are familiar with that. With that it is something, one group of creditors and the secure vendors for example, are talking to the company to try to figure out ways to extract some value while reducing the overall debt of the company at the expense of other creditors.
So enriching themselves, hurting the others, and helping the company to have a lower debt going forward and reduce charges and survive. And that's a scenario where you need a lot of expertise in terms of you know, historical precedence with you also need of course a lot of legal expertise to release sort through that and navigate it properly.
So we have been pretty cautious about how these things are playing out from that perspective and we have been reducing our exposure to the Tellico sector overall.
And you know, in addition to that, you know, we are also fairly nervous and quite cautious on the media sector.
Particularly broadcasters, radio and television broadcasters where you know, advertising revenues are still unsteady decline. This year, might be a little bit better because it's an election cycle and typically during elections, there is more spending on advertising. Nonetheless, the trend continues to move further downward.
They are not giving you, some of them are not giving them a shield of the of the day.
We have serious concerns about what the values of these companies are at the end of the day when they, you know, over time, particularly are they going to be able to actually have enough asset value to cover their debts.
So that's another area that we can pretty much avoid.
>> Fascinating stuff.
For some of our viewers to do their homework on. We will get back your questions on corporate bonds with Ben Chimand a reminder on how you can get in touch with 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!
Let's talk with the Canadian consumer. TDs is spending data suggested Canadians loosen their purse strings to start the year. Defying the elevated borrowing costs and sticky inflation. Anthony Okolie joins us today with a new TD Economics report on what's driving the strong consumer growth and whether it's here to stay.
>> TD Economics spending data indicates the Canadian households kept their wallets open in the first two months of the year potentially driven by more warmer than expected weather as well as gains in household wealth thanks to solid rebound in both equity and bond markets in the fourth quarter of last year. Now, as a first chart shows the strong momentum of year-over-year growth in tools came in just a tick under 6% through January and February.
Now, when we break it out by services versus goods, some interesting trends here. We will start by looking at services. And the next chart shows there is a significant pickup in services spending in February. After a much weaker January. TD Economics says at the February rebound was really led by Canadians is spending in things like recreation and entertainment.
Even as travel related spending slowed, because of course we have seen higher prices for travel toward February versus January due to seasonal demand for travel to various destinations into the US, Mexico… Now when we break it up by goods, goods related card spending according to TD Economics dropped and that was largely driven by Canadians spending less on things like clothing and general merchandise categories like grocery stores, possibly due to some softer prices that we saw last month in the inflation data.
Stats Canada reported grocery prices increasing rather cooled from just over 3% year-over-year in January 2 slightly over 2% in February.
That marks the first time since 2021 that grocery inflation was below headline inflation.
Now, will be take a look at provinces, TD Economics notes that the combined regions of Atlantic provinces, Ontario, Manitoba and Québec topped the national spending benchmark during the review.
. Ontario spending pattern largely driven by her rebound in housing, that likely contributed to the strong growth overall.
Strong growth in overall numbers in Canada. Now, given the latest solid spending data combined with solid growth in auto sales, TD Economics is forecasting that real consumer spending growth will increase by 3% on an annualized basis in the first quarter of this year.
That will make a positive contribution to real GDP, TD Economics is forecasting around 1.3% in their latest quarterly economic forecast of this year.
>> Alright.
So we keep hearing about when it comes to the economy… You know, consumer economy, that we have very strong population growth. We know this. How we keep talking about per capita statistics. You put all that together, what are your thoughts there?
>> Now that you mention it, we want to look at per capita expenditure which is important because it sort of measure is the standard of living in any economy. And it measures the yearly use of goods by each person to kind of get a measure to determine personal economic well-being.
Now, while consumer spending growth is looking a little bit better in the first quarter as the data shows, getting boosted by auto sales, when we consider the population is expected to grow at more than 3% in the first quarter of this year, consumer spending is still projected to underperform at a per capita basis. Now, TD Economics says that this whole extended downward trend which has been ongoing since the Bank of Canada started hiking rates in 2022. That is akin to the weakness seen in the past recessions. It is likely why Canadians will feel a little consolation with all the talk of the economy potentially hitting a soft landing this year.
Greg?
>> I saw this morning to make sure I saw correctly, population growth last year in 2023 in this country, going at the highest rate since 1957.
So there is definitely a lot going on.
>> Yes and it is projected to grow more than 3% in the first quarter this year.
>> Interesting times thanks Anthony.
>> My pleasure.
>> MoneyTalk Live's Anthony Okolie. Now for an update on the markets.
Having a look at tedious advanced dashboard, the platform designed for active traders here with TD Direct Investing. Let's jump into the heat map function. Viewers of the market will risk, the price and volume, what is going on today. We have some modest green of the screen for the top line number and what is behind it? It would appear to be have some of the financials to the upside and nothing big in terms of moves here about a percent or more.
But indeed, these are heavyweights when it comes to the top line numbers, so definitely putting some points on. In the material space, including Kinross Gold, Barrick Gold, some of the gold names and also First Quantum. Making a sizable move today on the session up about 5%.
Now south of the border, I want to check in the S&P 100, if it's not the tech names that are putting the modestly in positive territory today. What is going on south of the border?
Tesla is taking up a lot of real estate on that screen. You have Tesla up almost 2%.
You also are some of the telecom names there.
Including a Verizon shares showing some strength there as well. And UPS, a bit of a bounce back from yesterday's selloff from some concerns about their projections this year for growth after a pretty tough 2023 for their gold shipping giants. For more information on TD advanced dashboard, you can visit td.com/advanced dashboard.
We are back now with Ben Chim from TD Asset Management talking about corporate bonds.
What is your view on REITs right now?
>> The office real estate sector itself is obviously very challenged.
There is, I think a lot more dislocation to go.
In that market. You still have a lot of employers who are, you know, trying to right size their office inventory. And you know, still trying to cut the space that they have, trying to find and cut meaningfully. That is of course pretty dire difficult consequences in terms of the operating income for a lot of these office properties.
I think class B and C property specifically are struggling much more than class A. Recent advances still. And at some point, we are going to have to see in that space is properties advocating, you know, being renovated or repurposed. And as those properties, if that starts to happen, and as employees do finally get to that point where they are finished cutting their space, we will, you know hit a trajectory where demand can finally meet supply again, that market starts to behave more rationally. Right now, I think there's a lot of challenges there. We generally have been avoiding and you would think it's going to be messy for just the foreseeable future. Where we are really more focused on in the REIT sector, we like the retail REITs as well as the industrial REITs. Retail REITs more so because of to tap it in the last while in the more challenged sectors in the market.
And so, they do trade with higher yield and a wider spread as a result of what we think they're actually in a pretty good spot today. In fact when I think about it, they are probably in a spot today where commercial real estate might be five or six years.
It's been, you know, tenure. I so of, you know, rationalizing retail real estate.
You know, both the US and Canadian markets were over retail for quite some time physically.
And they have had to readjust that, of course driving that over retailing was e-commerce was considered behaviour and that was a trend that happened for most of 2010 to 2020 and of course 2020 happened with the pandemic of the shutdowns and not just kind of accelerated the whole rationalization process.
Now we've got to the point where, you know, the restructurings in the repurposed thing in retail REITs has kinda played out. And there is really good demand for retail.
Activity is picked up.
You see that with spending as you guys are talked about.
As Anthony talked about. And so the demand is actually increasing.
And it's going quite well.
You know, occupancy levels are now some of the highest levels you see in the last 10 years. Over 90%.
And when you see these, you've actually seen higher rentals.
These companies are generating good feed absolutely and they've been able to prove their credibility as part of the market.
Industrial REITs, more straightforward story. They've been doing well for quite some time. Industrial REITs typically factories or fair or warehouses : e-commerce warehouses for example would be a typical client for industrial REITs. You know, they are there more economically insensitive so they have been some Epson flows particularly during the pandemic and concerns around the economy there.
But nonetheless they have come out of that and we are still seeing strong take up there as well. Not as much value but still a good sector to be in.
>> Interesting stuff as always.
Benjamin thank you so much for joining us today on the show we look forward to the next chat.
>> No problem. Thanks a lot for having me appreciated.
>> Our thanks to Ben Chim, VP director and head of high-yield fixed income to meet TD Asset Management as always do your own research. Before making any investment decisions. Stay tuned on Thursday for Andres Rincon, Managing Director and ETF sales and strategy with Securities will be our guest taking questions about exchange traded funds. That's all the time we have today thank you for joining and will see you tomorrow.
[music]
Every day I'll be joined by guests from across TD and we we'll take you through with moving the markets to answer your questions about investing.
Coming up in today's show we will discuss the process of rate cuts on the horizon and what it means for the corporate bond markets.
TD Asset Management's Ben Chim joins us.
MoneyTalk's Anthony Okolie will see if households of slow their spending and in today's WebBroker education segment Caitlin Cormier will show us how to use the goals tool. Here is how you can get in touch with us. Just me email MoneyTalkLive@td.com or Philip the viewer response box under the video player on WebBroker.
Forget to our guest of the day let's get you an update on the markets. We will start here with the TSX Composite Index.
It is day three of the short and trading week. The last trading day of the week. We have 79 points on the screen. Good for the third of a percent. One of the most actively traded names including Kinross Gold. Notice the price of gold continuing to push higher lifting some of our minors along with it.
Ken Ross at seven bucks and $0.90 a share all about 2%.
Now the energy space, apparently resources in the states building on the oil and gas side.
Some of the energy names under pressure today. TC energy off the lows but now it is still down about have a percent.
South of the border let's check in the S&P 500.
The tech stocks are not really showing as much today. With the broader indexes to the upside.
Other parts of the market showing some strength in bearing some fruit today of 12 points for the S&P 500. Cordova percent.
The tech heavy NASDAQ though, a bit under pressure today. Nothing too dramatic.
Pretty much just flat.
Down a very modest four points. An Nvidia, not participating today as the market bounces back from a couple of, I think it was a three day for the S&P 500. Maybe hanging in but Nvidia, not one of the companies doing did today. 898 a share.
Down almost 3%. And that's her market update.
The US Federal Reserve is still signalling that it expects three rate cuts this year.
While it has been a boon to equities what does that mean for the corporate bond market? Joining us now discusses is Ben Chim.
, VP director and lead of high-yield fixed income team at TD Asset Management.
What is this mean on corporate's?
>> I think last time with you guys we were talking but the fall of last year, October 2023. Then I was talking a lot about the resilience of the corporate bond market in light of what was quite a bit of volatility, quite a bit of weakness in the government bond space.
And of course, since then, as you know, we have had the mother of all, you know, government bond rallies at the end of 2023.
And that has dramatically changed the investor perception around investing bonds overall and overall corporate bonds have definitely been benefiting from that and so the demand for corporate has continue to improve from that.
We are seen demand increased to the extent that it is well offset supplied and receiving which is been pretty meaningful as well.
So spreads of continue to type their tight levels right now.
Titus we've seen in the last 15 or 20 years or so.
And you know, the bond markets, fund metals remain fairly healthy. So when you step back and think about it, it's pretty easy to see why the bond market is so popular right now. There is so much demand for corporate spirit we are kind of in this place right now where the really challenging component of the Fed cycle is behind us. We had a lot of rate hikes in the last couple of years but inflation is coming down fairly comfortable.
Sometimes not as quickly as what the market would like but overall, in a pretty steady trajectory. And wage increases are actually coming off as well. That's really a key metric that the central banks are watching to think about what their next move is.
I think their next move is pretty clear that it will be something on the death of outside so likely a rate cut maybe something in terms of reducing quantitative tightening. That of course is going to be very positive for bonds overall. Including corporate bonds.
As you asked about.
One of the reasons why corporate bonds are specifically look pretty good in this kind of backdrop is you know, the Fed has not made their next move yet. They have not cut rates of the reason why there's been this delay is because the global economic backdrop remains quite strong.
And very resilient. Strong global economy obviously is very good for company fundamentals, good for credit metrics, and so, corporate bond investors can feel pretty confident at least in the near term. That spreads are not going to move much wider, you know, corporate bond market is going to trade fairly healthy.
Despite how tight spreads are today.
And so when you take that back and think about why corporate bonds are propelling, you got this situation where your earning higher potential returns, right? The yields and corporate bonds are about 5% in Canadian investor great space, 4% US investor grade, 7/2% for US high-yield, and they are benefiting also from this strong economic backdrop. So you're kind of getting better conversation as a way for the Fed's next move and you still will benefit if you do seek rate cuts and bonds rally from there.
I do want to caveat by saying a lot depends on how these rate cuts play out right?
Right now, the base case is, and are based cases as well, from the market, we will seek rate cuts because the central banks feel that the current policy rate is very high.
Quite restrictive. Given where the trajectory of inflation is right now. If they are cutting rates because of that, the economy is fairly solid, that's the Goldilocks scenario corporate bonds.
Corporate bonds will do very well that backdrop. If however, they are cutting rates because of something else, because, let's say there is some exogenous shock to the economy, causing you know, us to re-rate expectations lower, big sharp decline there… That would be much more negative corporate bonds. Because of the spreads. They are not really compensating investors for that kind of scenario.
Spreads could widen to the extent that they offset a lot of the escaped death of that that we expect to get with rate cuts and offset a lot of… That is kind of your worst-case scenario.
We should watch out for that and continue to be a you know, continue to be where the tracks go. I will say right now as we look at things going forward, we don't see the potential for an exhaustion astride of any kind are a big rate. Some of our base case is that former scenario where, you know, the rate cuts happen because of a normal course of you know, central-bank policy, economy remains fairly healthy and that is very constructive corporate bonds.
>> That is our technical backdrop of that is some of the important caveats that you laid out.
People gravitate and when actually think with the Fed, when that first rate cut comes they will gravitate to work towards the 10 year yield.
They always think about governments. How should we be thinking about corporate's against governments, vice versa, when that day comes?
> Yeah.
I mean, I would say right now, there is good reasons to own both corporate bonds and government bonds.
For corporate bonds, of course, you're getting more yields. You are getting a lot more potential volatility if the economy becomes chained to the global economic backdrop, things slow down more than what is currently expected right now. I think that's particularly true, like I said given where expenses are.
On the other hand, government bonds will give you more protection in that scenario.
And they will perform fairly well if, you know, the Goldilocks scenario does not play out. I think, you know, you have to consider that going forward.
I would say right now, with how we are seeing the economy and how corporate fundamentals are performing, company earnings, it's better to have more carry than credit corporate bonds are probably slightly a better place to be.
But we could see a situation not too far down in the future, maybe sometime this year, where it makes more sense to have government bonds. So I think it will make a lot less sense in your portfolio and the focus should be on that.
>> You mention some of the caveats earlier Ben, what are some of the biggest risks to all this? The economy? Valuations ?
Mark >> Yeah. I think both of those are big concerns that we have. Big factors to look out for.
As we think of how we position within the bond space in our portfolios.
In terms of the economy, the big question still remains in our opinion about inflation right?
Does inflation continue to move in this current trajectory? Or do we see something in terms of maybe animal spirits as a results of strong appetite the causes inflation to start to move back higher?
Or do we see a policy where maybe the central banks are the least monitored policy we see and that causes a resurgence of spending and it causes the economy to overheat.
In either of those cases, if we start to see inflation start to rear its ugly head, you will get a lot worse. We can start to see the market, you know, start a price of those rate cuts that we expect. We expect three this year, we expect another three next year both in Canada and the US. And that would cause volatility of the bond market overall.
As corporate funding can be challenged as interest rates remain high.
And I think that would be a pretty negative scenario.
The other thing that we are thinking about is valuations as you said, they are quite tight and to us, really not compensating you for some of the land lines that you can have a bit.
While the economy remains fairly strong, funding remains solid, there are a number of companies that are struggling.
You know, the default rate has risen over the last few years.
It was close to zero. Significant 1% from 2021 and 2022. Last year, in high yields rose to about 3 1/2%.
It's not alarming, it's a rather long term but it certainly is not zero. We expect that to continue to be the case to be around 3 1/2%.
Maybe a little bit higher.
For this year… And it's the small concentrated companies that don't have a lot of avenues for flexibility in terms of funding needs that are seeing, predicting the ones we are in the sectors that are under pressure.
You know… Advertising etc. And it's a large capital structure. Companies that have had too much debt appear where debt was cheap.
And you know, are struggling to, you know, make positive cash flows as a result of that and now facing financing or interest rates are even higher and that's going to get into the cash flows more.
They still capital spending needs if they can't fund those companies. They are the ones defaulting and continue to be a risk to the market going forward in a risk to the stability.
>> Fascinating stuff.
A great start of the program.
We'll get to your questions about corporate bonds with Ben Chim in just a moment's time.
You can send us your questions and money Doc's hot live@ti.com or Phil at the viewer response box and web broker.
Right now it's get a look at some of the top stories and to go into the markets are trading.
Let's check in on shares of fast fashion retailer H&M in the spotlight today. The Swedish company beating profit expectations by a pretty wide margin in its most recent quarter.
H&M is been focusing on profitability as it faces growing competition in the last while in the fast fashion space for names such as China's Shein.
Shares of game stop or under pressure today the videogame retailer is reporting a nearly 20% drop in sales revenue for its most recent quarter. Shares of game stop sword during the pandemic as the company found itself at the centre of the meme stock craze of the time.
We have some dealmaking in the Canadian mining industry close to home.
Alamosa Gold has agreed to by Argonaut gold mug I know mine in Northern Ontario.
Alamo says it can achieve significant savings by sharing infrastructure with its neighbouring island gold mine.
On this news up about 30% for the markets.
A quick check in on the markets. Starting here on Bay Street with a TSX Composite Index, 21,976, we have 64 points on the table up about 1/3 of a percent.
An south of the border, the S&P 500 managing to be modestly in positive territory even though the tech heavy NASDAQ pretty much flat on the day, Nvidia, not just the big tech names today.
They're putting the market higher.
Up 12 points about 1/4%.
We are back now with Ben Chim taking your questions about corporate bonds.
So it is a question about structured notes, especially Bank linked.
>> Yeah. Those are very interesting types of products out there.
I think the potential returns are pretty appealing. But I think with everything that gives you in return, that is significant a higher then, you know, your traditional sort of base product you really have to think about what the catch is. What is the fine print here that you are taking on in terms of risk.
You are allowing the structure products that you have specific sort of, knockout type revisions in their right? If the S&P moves to a certain level or if the yield moves to a certain level, your return profile changes. So it's really important to be comfortable with what that knockout is and whether in that scenario, and understand the kind of risk that you are taking there.
So we don't have, I don't have a problem with the Securities, Vic it's important to just do your due diligence and really fully understand why you want to invest in them.
We don't invest in those kind of products really because you know, I think there's a lot of opportunity right now in the fixed income market even without trying to tap into something a little bit more exotic in terms of structure.
One of the areas where, you know, we are able to retain a lot of yield as well, maybe not as much of some of these structure vehicles is still getting very good overall yield and carry, that we find interesting is in the leveraged loan space. So for example, leverage loans are for those who don't know, there are floating-rate products that… Tied to issuers in the bond market.
They trade off the secure overnight funding rate insult for which is yielding about 5.3% right now. And so they give you a spread on that, typically we invest in and typically they are secure and so you're done with these secures.
I yield based on a 3% spread of about 8 1/2%… And that's with, you know, fairly minimal downsides I guess maybe with some credit risk on there. But of course the volatility is the floating rate. There is a cash to leverage loans as well, you know, they are at par at any time from the issuer so they are likely, there is not a lot of upside there. They won't trade above par if they do.
If they do, the company will call them and refinance at lower yields.
Also, of course, because they are floating-rate, you don't get any kind of offside leverage to rate cuts will help the bond market overall. In fact, rate cuts were hurting grizzly will reduce the offer and take away some your coupon. But the way we think about it is right now, a leveraged loan gives you an 8 1/2% yield.
The equivalent bond is actually the exact same company and the exact same ranking unsecure bond. Gives you a yield of say six and 5:45 and 1/2. See you get about 200 basis points and that additional yield a potential return from that… So even if you get the three rate cuts we expect this year, you know 75 basis points, you're still looking at an all in yield at the end of the day that is higher.
Significant higher than the bond market.
>> Interesting parts of the market therefore our viewers to do the research on. Let's take another question ever been.
Of your wants to get your take on Rogers.
What you think of their 80% debt?
>> Yeah. We really liked Rogers debt when they came to market for the shot acquisition.
When you kind of take a step back, there is a lot of rate to buying Shaw but we need to go to their assets they were a collection of, they are a collection of probably the strongest telecom media assets in Canada right? You have a very strong media content franchise.
You have the largest cable network in the country and you also have of course, arguably the largest wireless tap network.
And so did you have a strong cash flow.
With the acquisition, it is put some pressure on the credit rating and force the company to, you know, address their down levels and use the free cash flow to try to pay down which is, the less characteristically we would like in terms of any corporate bond. We felt pretty confident because of the quality assets and because of who they were in the market, that while the leverage was very high, it was still good to be investing credit and that certainly was how things played out in terms of the credit rating.
They are steadily taking down their debt levels. So I'm not sure what the 80% number is what we do, we measured and we think about it in terms of debt compared to their earnings. So debt per turn of… Which is about 5.1 times at the time of the acquisition.
They're currently sitting at about 4.7 times and they are targeting down to about 4.2 by the end of this year.
So that's a significant improvement.
The challenge right now for us in terms of Rogers bonds is the fact that they are trading like that stuff about where is when they came, discount compared to the other Tellico companies, Telus and Bell.
Now Rogers spreads her around 10 or 15 basis points wider than Telus and Bell.
Telus of course there debt levels of 3.8.
Where Rogers is predicted to be by the end of the year. So you know not as much value in our economy today as there was.
We have been taking down her exposure a little bit but overall we still like the credit.
>> Interesting stuff there on Rogers.
Another media company, not quite as big as Rogers (Greg reads the question) >> Sure.
You know I think last time we had a bit of a chat and touched on that a bit. The big issue I think and has been and will continue to be the fact that ad revenues remain challenged and especially in Canada were in economy is notably bigger than the US. So, their earnings continue to be no way by ad revenues.
But also reducing the… They are steadily declining earning base on top of having quite a bit of debt they have over five times a day and they need to get there… But as their backdrop remains challenging they don't have a lot of free cash flow to do that. They will need some kind of recovery in terms of the advertising sector.
Still recovering in terms of subscription revenues and revenues on that front before they can really materially deliver the balance sheet and they could be a long way before that happens.
They did have some encouraging quarterly reports in the last little bit. They benefited from a couple of things.
You know, there was Smith's capital spending during COVID that had come off and so rolling that off has really helped them in terms of profitability and then the writer's strike actually meant that, you know, they did have to have some costs that were taken away for… So that help them as well. So you know, recently, things have been trending a little bit better. Nonetheless, they're going to need a lot more help to be able to, you know, get that debt down and make sure at some point they are able to right size that balance sheet.
> Interesting stuff as well. Make sure you do your own research at home before making any investment decisions.
Look about your questions with Ben on corporate bonds in just a moment. A reminder you can get in touch with us any time by emailing MoneyTalk Live ATD.com.
Let's get to our educational segment of today.
In today's education segment, Caitlin Cormier, Client Education Instructor at TD Direct Investing will take us through how to use the goal to will on WebBroker.
>> As a self-directed investor, you kinda become your own Portfolio Manager. But the good news is we have tools within WebBroker that can help you to build your portfolio.
So let's go ahead and hop into WebBroker.
You're going to look at the goals tool today. So right here at the top of the tabs on WebBroker. And what when energy was were going to click on "get started" to start a goal. So within this tool, you can select what you're saving for. So whatever type of saving goal you have, you can choose retirement, a major purchase, or just your money to grow.
I'm going to go with retirement for today.
You're gonna put in your current age. And we are going to put in the income you're currently earning.
In the age that you'd like to retire at.
So we will just throw some numbers in here.
The next thing it's gonna ask us is what we would like to earn as far as income in our retirement. It's giving us some idea here of a couple of different options.
So let's just go with a little less. 80% of our current income.
You'll notice to some helpful tips as you move along to give you an idea of what might be appropriate to choose. And, let's just go ahead and name our goal.
All right. Next up it's going to ask us to choose an investor profile. So you kind of have to know a little bit about yourself here as far as what your risk tolerances, what your timeframe is, and those are things that kind of understand which one of these portfolios might be most appropriate for you.
You can compare them, choose "compare" and put them side-by-side. And compare which one might make the most sense for you.
It has quite a bit of information as far as historical returns, levels and assets… Then you can go ahead and choose whichever profile is appropriate for you and go ahead and click "save and continue".
Next up we are going to say how much money we have that we are already using to save for this particular goal.
In this case, I'm gonna say that we have some money already so let's just say we have 30,000.
We are going to put in a contribution not that we are currently making into the account.
So let's just choose a biweekly contribution.
We will click "save and continue". And here we have the projection for what our plan is. So it shows us how much money were to have and how much we need to have a retirement. And how much we are projected to have. Obviously there's a bit of a gap here between the two so we kind of need to make some adjustments to get a little closer in line.
One thing I went to show you is I can actually click here to view assumptions and I will see that this particular goal is taking into account the average amount of CPP, per Canadian.
The minimum amount of O a.
s.
and you can add things like other income here for example if you have a pension plan and you know how much money you will receive per year from that plan you can put it here.
If you have rental properties, you can plan on working, any other types of income you can add them here.
You can also change your life expectancy here.
Or if you know what your amount for CPP would be you can, or OAS, you'll know here. The goal gets readjusted based on the fact that we will have that pension income and that we can go ahead and play with some of these numbers, maybe we say… Well, maybe I can take a little less income and take a couple of more years before I retire.
And click "recalculate".
We are a lot closer there!
So let's say a small amount more contribution and there we go, we are overall goal.
So it kind of gives us a way to understand how we can easily make adjustments to our current plan in order to meet that goal.
If we click "start with this plan" we will be able to go to our goal dashboard and keep an eye on this goal as time goes on.
We will see whether we are on target or not to actually meet our goal. We can go in as well and click "view details" and make any adjustments us time changes, as life changes, you can go in and make changes to any of these things that might've changed during the time frame.
Maybe you were a little bit more conservative, maybe you want to change some of the other inputs.
You can do that at any point in time. So this tool is a great tool in order for self-directed investors to use to kind of keep track of goals and make sure that you are on track to meeting them.
>> Our thanks to Caitlin Cormier, Client Education Instructor at TD Direct Investing. Make sure to check out the Learning Center and WebBroker for more educational videos, live interactive master classes and upcoming webinars.
Now before we get back to your questions about corporate bonds with Ben Chim a reminder of how you can get in touch of us. There are two ways you can get in touch of us. You can send us an email anytime@moneytalkliveatd.
com or click the question box right below the screen here on WebBroker.
Just writing 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 Ben Chim taking her questions were corporate bonds. (Greg reads the question) >> Yeah. You know, I would say first of all, when I think about credit ratings, the important thing is to do your own credit work right?
And you know, you know, be able to assess for yourself what the quality of a company is and what the credit quality of a bond is.
And I find credit ratings obviously to be a little bit backward looking.
And so that always, to me, creates more of an opportunity than something I really rely on.
Or we really rely on as a team to invest.
That being said, it is important to have a credit rating and the reason why is twofold. First is, there are a lot of nuances to an individual security that, you know, a lot of investors who have been living corporate analysis like I have are not really up to speed on.
For example, you know, it's good to know who is the actual lender a rather lender that you're borrowing to write?
What is your claim?
We have a claim against?
What cash flows are really kind of supported.
The interest payments that this bond is making. So that's really critical to understand. Then, just the documentation component of it right?
You know, there are a lot of nuances in terms of where do we rank in the search?
Are we secure?
Are we supported? Are we unsupported?
If the company goes bankrupt, we will get nothing?
It's really important understand what happens when things go wrong and there's a lot around that.
Credit rating analysts as well as analysts like in the market, will have a good experience with that and they'll be factored into the credit rating. So it's really important to have the credit rating to know that that kind of analysis is already been vetted and fully understood.
In the second thing of course is liquidity. Having more, having a credit rating, he allows other investors and other potential buyers to feel pretty confident that the security has been vetted as well. And fully analyse it and so there's going to be potentially quite a few more buyers if Sony has a credit rating versus something that doesn't.
>> Interesting stuff there on credit ratings. Another question for the audience, what high yield bond sectors are attractive? Which ones should be avoided?
>> Yeah this is a tough question because I would say that there aren't really any sectors in high-yield markets that are struggling quite dramatically. You know, it's been a fairly strong market overall with the companies as I mention that are struggling really the small specific characteristics in terms of leverage or in terms of size are creating problems. That being said, there are some sectors that we like more than others.
For example, we really like in terms of some parts of the sector, specifically the cruise lines, we also like the airlines… These are credits that do give you some yield still bugs are steadily improving in terms of their balance sheets in terms of their operating profile. There is very strong, if you take up occupancy levels, however you want to characterize it for especially cruise lines, but airlines as well : that allows them to continue to generate strong earnings and free cash flow and pay on their debt. We expect the cruise lines to ultimately get back to being investor grade.
They were there prior to COVID and of course COVID changed their dynamic quite dramatically.
But they are doing very well and Carnival just reported today very strong results.
And they will we think they will be able to generate free cash flow to keep that debt level shrinking and continue to see her re-revving of their credit quality higher. So we like that sector quite a bit. Another is the consumer-products and consumer sector in general. We like restaurants, as well as consumer staples and whatnot in high-yield market.
Those companies are doing well. Largely because you know, inflation is coming down so they are seeing less pressure on their wages. They are seeing less pressure on their cost and that is exceeding some of the, you know, weakness or some other deterioration that might be happening because of inflation on the revenue side.
And so margins are improving again, that is helping their cash flow in helping them to you know, cover their interest costs and their debt levels better. So that is a sector that is also, we really kind of like and we will still continue to add to our exposures there. Then finally, the leverage loan Marketing which I talked about. It's not a sector but it's a part of the market that we see as quite attractive and we have a fairly high allocation relative to explore in our high-yield bonds today. In terms of sectors that we are more wary of, that we are avoiding, the biggest one, the biggest shift for us in the last year or so has been the Tellico sector where we become, telecom media becomes significant and more cautious on it.
Most, even though it's quite a sector, most of these company's are quite a bit of debt on a balance sheet that they need to address. And they have had quite a decent amount of challenges just trying to refinance that in trying to return their debt so they can continue to pay off their rising and ever expensive capital expenditure costs. And so what we've been seeing in that sector more more is what's called credit earned, credit revivals. And I'm not sure how many people are familiar with that. With that it is something, one group of creditors and the secure vendors for example, are talking to the company to try to figure out ways to extract some value while reducing the overall debt of the company at the expense of other creditors.
So enriching themselves, hurting the others, and helping the company to have a lower debt going forward and reduce charges and survive. And that's a scenario where you need a lot of expertise in terms of you know, historical precedence with you also need of course a lot of legal expertise to release sort through that and navigate it properly.
So we have been pretty cautious about how these things are playing out from that perspective and we have been reducing our exposure to the Tellico sector overall.
And you know, in addition to that, you know, we are also fairly nervous and quite cautious on the media sector.
Particularly broadcasters, radio and television broadcasters where you know, advertising revenues are still unsteady decline. This year, might be a little bit better because it's an election cycle and typically during elections, there is more spending on advertising. Nonetheless, the trend continues to move further downward.
They are not giving you, some of them are not giving them a shield of the of the day.
We have serious concerns about what the values of these companies are at the end of the day when they, you know, over time, particularly are they going to be able to actually have enough asset value to cover their debts.
So that's another area that we can pretty much avoid.
>> Fascinating stuff.
For some of our viewers to do their homework on. We will get back your questions on corporate bonds with Ben Chimand a reminder on how you can get in touch with 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!
Let's talk with the Canadian consumer. TDs is spending data suggested Canadians loosen their purse strings to start the year. Defying the elevated borrowing costs and sticky inflation. Anthony Okolie joins us today with a new TD Economics report on what's driving the strong consumer growth and whether it's here to stay.
>> TD Economics spending data indicates the Canadian households kept their wallets open in the first two months of the year potentially driven by more warmer than expected weather as well as gains in household wealth thanks to solid rebound in both equity and bond markets in the fourth quarter of last year. Now, as a first chart shows the strong momentum of year-over-year growth in tools came in just a tick under 6% through January and February.
Now, when we break it out by services versus goods, some interesting trends here. We will start by looking at services. And the next chart shows there is a significant pickup in services spending in February. After a much weaker January. TD Economics says at the February rebound was really led by Canadians is spending in things like recreation and entertainment.
Even as travel related spending slowed, because of course we have seen higher prices for travel toward February versus January due to seasonal demand for travel to various destinations into the US, Mexico… Now when we break it up by goods, goods related card spending according to TD Economics dropped and that was largely driven by Canadians spending less on things like clothing and general merchandise categories like grocery stores, possibly due to some softer prices that we saw last month in the inflation data.
Stats Canada reported grocery prices increasing rather cooled from just over 3% year-over-year in January 2 slightly over 2% in February.
That marks the first time since 2021 that grocery inflation was below headline inflation.
Now, will be take a look at provinces, TD Economics notes that the combined regions of Atlantic provinces, Ontario, Manitoba and Québec topped the national spending benchmark during the review.
. Ontario spending pattern largely driven by her rebound in housing, that likely contributed to the strong growth overall.
Strong growth in overall numbers in Canada. Now, given the latest solid spending data combined with solid growth in auto sales, TD Economics is forecasting that real consumer spending growth will increase by 3% on an annualized basis in the first quarter of this year.
That will make a positive contribution to real GDP, TD Economics is forecasting around 1.3% in their latest quarterly economic forecast of this year.
>> Alright.
So we keep hearing about when it comes to the economy… You know, consumer economy, that we have very strong population growth. We know this. How we keep talking about per capita statistics. You put all that together, what are your thoughts there?
>> Now that you mention it, we want to look at per capita expenditure which is important because it sort of measure is the standard of living in any economy. And it measures the yearly use of goods by each person to kind of get a measure to determine personal economic well-being.
Now, while consumer spending growth is looking a little bit better in the first quarter as the data shows, getting boosted by auto sales, when we consider the population is expected to grow at more than 3% in the first quarter of this year, consumer spending is still projected to underperform at a per capita basis. Now, TD Economics says that this whole extended downward trend which has been ongoing since the Bank of Canada started hiking rates in 2022. That is akin to the weakness seen in the past recessions. It is likely why Canadians will feel a little consolation with all the talk of the economy potentially hitting a soft landing this year.
Greg?
>> I saw this morning to make sure I saw correctly, population growth last year in 2023 in this country, going at the highest rate since 1957.
So there is definitely a lot going on.
>> Yes and it is projected to grow more than 3% in the first quarter this year.
>> Interesting times thanks Anthony.
>> My pleasure.
>> MoneyTalk Live's Anthony Okolie. Now for an update on the markets.
Having a look at tedious advanced dashboard, the platform designed for active traders here with TD Direct Investing. Let's jump into the heat map function. Viewers of the market will risk, the price and volume, what is going on today. We have some modest green of the screen for the top line number and what is behind it? It would appear to be have some of the financials to the upside and nothing big in terms of moves here about a percent or more.
But indeed, these are heavyweights when it comes to the top line numbers, so definitely putting some points on. In the material space, including Kinross Gold, Barrick Gold, some of the gold names and also First Quantum. Making a sizable move today on the session up about 5%.
Now south of the border, I want to check in the S&P 100, if it's not the tech names that are putting the modestly in positive territory today. What is going on south of the border?
Tesla is taking up a lot of real estate on that screen. You have Tesla up almost 2%.
You also are some of the telecom names there.
Including a Verizon shares showing some strength there as well. And UPS, a bit of a bounce back from yesterday's selloff from some concerns about their projections this year for growth after a pretty tough 2023 for their gold shipping giants. For more information on TD advanced dashboard, you can visit td.com/advanced dashboard.
We are back now with Ben Chim from TD Asset Management talking about corporate bonds.
What is your view on REITs right now?
>> The office real estate sector itself is obviously very challenged.
There is, I think a lot more dislocation to go.
In that market. You still have a lot of employers who are, you know, trying to right size their office inventory. And you know, still trying to cut the space that they have, trying to find and cut meaningfully. That is of course pretty dire difficult consequences in terms of the operating income for a lot of these office properties.
I think class B and C property specifically are struggling much more than class A. Recent advances still. And at some point, we are going to have to see in that space is properties advocating, you know, being renovated or repurposed. And as those properties, if that starts to happen, and as employees do finally get to that point where they are finished cutting their space, we will, you know hit a trajectory where demand can finally meet supply again, that market starts to behave more rationally. Right now, I think there's a lot of challenges there. We generally have been avoiding and you would think it's going to be messy for just the foreseeable future. Where we are really more focused on in the REIT sector, we like the retail REITs as well as the industrial REITs. Retail REITs more so because of to tap it in the last while in the more challenged sectors in the market.
And so, they do trade with higher yield and a wider spread as a result of what we think they're actually in a pretty good spot today. In fact when I think about it, they are probably in a spot today where commercial real estate might be five or six years.
It's been, you know, tenure. I so of, you know, rationalizing retail real estate.
You know, both the US and Canadian markets were over retail for quite some time physically.
And they have had to readjust that, of course driving that over retailing was e-commerce was considered behaviour and that was a trend that happened for most of 2010 to 2020 and of course 2020 happened with the pandemic of the shutdowns and not just kind of accelerated the whole rationalization process.
Now we've got to the point where, you know, the restructurings in the repurposed thing in retail REITs has kinda played out. And there is really good demand for retail.
Activity is picked up.
You see that with spending as you guys are talked about.
As Anthony talked about. And so the demand is actually increasing.
And it's going quite well.
You know, occupancy levels are now some of the highest levels you see in the last 10 years. Over 90%.
And when you see these, you've actually seen higher rentals.
These companies are generating good feed absolutely and they've been able to prove their credibility as part of the market.
Industrial REITs, more straightforward story. They've been doing well for quite some time. Industrial REITs typically factories or fair or warehouses : e-commerce warehouses for example would be a typical client for industrial REITs. You know, they are there more economically insensitive so they have been some Epson flows particularly during the pandemic and concerns around the economy there.
But nonetheless they have come out of that and we are still seeing strong take up there as well. Not as much value but still a good sector to be in.
>> Interesting stuff as always.
Benjamin thank you so much for joining us today on the show we look forward to the next chat.
>> No problem. Thanks a lot for having me appreciated.
>> Our thanks to Ben Chim, VP director and head of high-yield fixed income to meet TD Asset Management as always do your own research. Before making any investment decisions. Stay tuned on Thursday for Andres Rincon, Managing Director and ETF sales and strategy with Securities will be our guest taking questions about exchange traded funds. That's all the time we have today thank you for joining and will see you tomorrow.
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