Bruce Cooper, Chief Investment Officer at TD Asset Management, weighs in on the post-Brexit bounce in North American equities, and the domino effects of the Brexit vote on politics, the European economy, the U.S. dollar, the loonie, Japan and gold.
I'm Kim Parlee.
Thank you so much for joining us tonight.
It's been almost a week, just about, from the historic vote in the UK, which saw a very slim majority of people vote in favor of leaving the European Union.
The results of that referendum saw the markets get swept up in a wave of uncertainty.
But now they have mostly bounced back, the equity markets.
Not all, but a number of them have.
So here to help us cut through some of that is one of our favorite guests.
He is Bruce Cooper, Chief Investment Officer at TD Asset Management.
Thanks so much for coming in.
It's "brex-ellent" to be here.
"Brex-ellent," "bre-main," "bre-gret," I've got a list here we can go into.
So I wanted to start with we spoke last week with Michael Craig.
And talking about what the expectations were.
Fast forward to today.
We've had the vote, the markets sold off.
I was looking at the Dow today.
We are basically back where we started.
So we've had a bit of volatility.
North American markets down and then up.
European markets are still down, I think, about 5%.
Of course, the pound has been pretty hard hit.
But I think the market's kind of digesting how serious this is.
And I think the other thing is the fact that it's going to unfold over a really long period of time.
It doesn't change the world today.
It doesn't change the world tomorrow.
It's a significant event.
And it is serious.
But it's going to unfold in kind of slow motion.
Was the concern about Brexit warranted as much as it was when it first happened?
I mean, that's one thing I want to look back on now.
Because people are now saying-- I mean, suddenly everybody is a UK policy expert.
And that's not the case.
So were things overblown to begin with?
Well, I think it is a significant event.
From a European political perspective, it's a very important event.
But you have to sit back and say, well, the UK is something like 2% of global GDP.
So this doesn't change the whole world.
And as we sit here in North America, it's not going to move the needle immediately on the Canadian economy or the US economy.
You know, we're still getting up in the morning.
We're going to work.
Jobs are being created.
So it's important, but not overwhelming.
Maybe that's one way to think about it.
You know, again, we are not-- or at least I am not someone who watches the UK politics closely, closely.
Suddenly we've become a lot more interested in it.
But I think that the communication that's been out there the past little while is like, this could take quite a while.
I mean, I saw a note, I think, from one analyst saying it could be 2019 by the time something actually happens and the UK actually leaves the EU.
And if they do, it may not be-- It's an interesting process as you sit here.
Because you're going to have a negotiation between the UK and Europe.
And so far, the only things we don't know are who's going to negotiate for the UK, who's going to negotiate for Europe, what they're going to talk about, and what the process is.
So other than that-- So other than that we're cool.
But obviously the prime minister has announced his resignation.
There's going to be a leadership contest probably in September it sounds like.
And so there's some front runners.
Interestingly, of the two front runners, one was associated with the remain side, Ms.
And one was associated with the leave side, Mr. Johnson.
So that will be interesting.
And my understanding is Europe is saying, well, we're not talking about this until you guys-- Sort yourselves out.
Sort yourselves out, and invoke article 50, and start the process.
And so it's a pretty opaque process.
It is going to take a long, long time.
I find it pretty hard to handicap right now what the outcome is going to look like exactly.
And it's interesting because in the absence of that, I mean, you make a very good point.
When I was being somewhat glib in saying the Dow is back to where it is, but the pound obviously, and what is hit closest.
But is there anything in the sense of also maybe we're just getting used to a bad event happening?
Like it can't happen, can't happen.
Oh, it happened.
We're fine with it.
Same with Grexit way back, you know?
Some people said is this a Lehman event?
And you know, Lehman really was an event.
The company went bankrupt, boom, overnight, and triggered a number of other-- Liquidity issues.
This is not an event like that.
This is a process.
It's a process that unfolds over a very long period of time.
Then has indirect consequences for both the economy and financial markets.
So to me, it's very different than the kind of financial crisis sort of events that unfolded seven years ago.
I want to talk about what, in the industry, I hear people call them second order effects.
In plain English, these are domino effects that you're expecting.
So what is going to happen in Britain is going to happen.
They're going to figure they figure out.
But what does this mean for central banks?
What does this mean for deflation, which I believe is something you were talking about before.
Central banks, our base case has been that we're in what we call lower for a longer interest rate environment.
And when we say longer, we kind of mean as far as the eye can see, interest rates are going to be at very low levels.
And that's been because growth has been relatively weak and inflation has been nonexistent.
I think this event will kind of exacerbate all of that.
At the margin, as I said earlier, I don't think for North America this is hugely important for the economy.
But at the margin, it is negative.
Because it'll hit confidence a little bit.
That could impact investment.
And so growth will slow a little bit.
And so at the margin, growth will be slower.
And central banks will want to keep interest rates even lower than they originally thought.
And so our best guess is the Federal Reserve, people have been debating will they raise, won't they raise?
I think this kind of tips them over into, no, they won't raise.
Will they cut?
Probably for the balance of '16.
I don't I don't see them cutting in '16.
And beyond that, we have to see how the economy actually unfolds.
Fair enough, yeah.
But I think for the rest of '16, they're just kind of sitting on hold.
In England, they could actually cut rates.
Here in Canada, my best guess is we're sort of on hold.
I think the probability of an increase here is zero.
I think so of what I've seen with this is kind of like a luke-- if the global economy is kind of lukewarm, we just poured a little more cold water into it.
I think that's the way to think of it.
So US dollar, loonie, gold, obviously be a safe haven right now.
So what do you see that happening with that?
I think the US dollar has played its role in the last few days here as a safe haven sort of asset, clearly against the pound and the euro.
And our bet would be that the US dollar remains reasonably strong because it's kind of the best house in a bad neighborhood right now.
The thing about the big currencies like the euro, the pound, the dollar, you know, it seems like the place to be.
Even though interest rates are very low in the United States, they kind of look high yield compared to the rest of the world.
US 10 year bond's yield 1 and 1/2%, which doesn't sound like any great shakes.
But German 10 year bonds yield zero.
So I think we're continuing to attract capital to the United States, which tends to support the dollar.
Also on the currency front, we have believed that gold, if we can view gold as a currency, we have believed that gold would do well in this environment.
And we continue to believe that.
And it has done well.
It has done well.
And we think it will continue to do well.
The phrase we like to use is it provides insurance against the risk of extreme outcomes.
Gold tends to do well when real interest rates are very, very low.
Because the opportunity cost of holding gold is low, you know?
So you could put your money in the bank account and get zero.
Or you can put your money in gold and get 0 in terms of income.
But it provides protection against bad things happening.
And there's still a lot of risks in the world.
The political process in Europe is opaque.
We don't know what's going to happen.
There's still things lurking out there like China, will the economy struggle or whatever.
So I think gold will continue to be well-bid and will play its role as insurance.
You and I were chatting you earlier as well.
And you mentioned emerging market debt.
So I'm just going to say this to you like I'm six years old so i understand.
So there's-- you have x dollars in US debt.
When US dollars go up, you've suddenly got almost x plus 1 in a sense.
You've got more debt that you have to handle.
So you're referring to the fact that in the emerging world, which is a big place, there's lots of countries.
But if we can generalize a little bit, in the emerging world there is a fair amount of debt that is denominated in US dollars.
So I just said that the US dollar is going up a little bit.
So that means the value of that debt is going up a little bit, which is putting a little more stress on the emerging world.
Combined with the fact that Europe's actually a pretty big export market, for China for example.
And the best guess would be the European economy does slow a little bit because of the uncertainty surrounding Brexit.
So you get a bit of a double whammy.
If you're in the emerging world, Europe as an export destination is a bit weaker.
The value of your debt is actually going up because it's tied in some ways to the US dollar.
So it's not a great combination of events.
I seem to remember the last time we were talking, I think it was a few months back, that you were taking a look at Japan.
It was a concern.
We talked about helicopter money.
Just things that could happen.
Well, whatever situation they were in, I think with that lukewarm analogy, you just dumped a whole lot of cold water on them.
So what do they do?
Japan is in a bit of a tight spot.
The economy is poor.
They are struggling with deflation.
Our best guess is they will be the first country in the world to implement what we call helicopter money, which is this kind of combination of fiscal and monetary policy.
The government has some big stimulative fiscal program, which could be building infrastructure, it could be giving tax cuts, could be-- Could be checks to people that are-- Checks straight to citizens so they go out and spend.
But then instead of borrowing money in financial markets, basically the central bank provides that financing at 0% coupon and no maturity.
So you're kind of kind of printing money and using that money to fund fiscal stimulus.
So this is, I like to call it policy exoticism.
Like we're just trying stuff.
We've tried lots of stuff in the last few years.
It hasn't really kick started the economy.
My guess is authorities will continue to try new stuff.
And we'll see where it goes.
Let's bring this all back down to them, for someone who's watching going, OK.
There's a lot of stuff going on.
What do I do?
I know you're not making these specific recommendations.
But for you, you have an asset allocation committee that looks at things.
Where are you guys right now?
So there's two things I think are really important right now.
The first is diversification.
The range of possible outcomes is pretty wide.
Which is a big deal.
Like just that one phrase is huge.
I mean a lot by it.
So we've got Brexit.
We've got helicopter money.
There's a lot of things that could happen.
So I think diversification is really important.
On the surface, it's not obvious you should own government bonds that yield 1 and 1/2%.
We still think they have a role in a portfolio because they provide diversification.
And in times like we've had in the last week, they play their role as providing stability to a portfolio.
We think having some cash makes sense because it gives you dry powder for volatile markets like this.
We think gold's going to play a role.
And for sure, dividend paying equities in this environment are exceptionally important.
Because they are giving you dividend yields above the rate of inflation, which I think is very powerful.
One thing I think with equities that'll be interesting is when we do see-- we saw the market in a broad sell-off when actually everything happened.
But then fast-forward, there's people going, OK, this company got sold off.
It has no operations or exposure to Europe in any way, shape, or form.
That's the other thing I should have mentioned.
We think investing in quality businesses is absolutely crucial here.
And you're right.
The dynamics for many companies hasn't changed compared to last Wednesday.
If they've got very strong businesses, they pay good dividends, they can grow their dividends over time.
In this low return world, we think that is a very strong proposition.
So diversification, focus on quality.
It's not a time to speculate.
It's a time to keep your feet on the ground and put together a very high quality portfolio.
Well, in your words, "brex-ellent" insights.
Nice to be here.
See, even your name fits into Brexit right now.
Bruce Cooper, Chief Investment Officer at TD Asset Management.