China’s economic growth decelerates to the slowest pace in nearly three decades. What are the investment implications of a slowdown? And with Brexit uncertainty continuing to hang over the U.K., what do investors need to know? Kim Parlee talks to Bruce Cooper, CEO and CIO at TD Asset Management.
- Hello and welcome to the show. It's great to have you with us. As you just heard, China's economic growth is slowing to the slowest pace it's been in nearly three decades, which has got traders and financial markets watching closely for signs of stabilization.
I had a chance to talk to Bruce Cooper who is Chief Executive Officer and Chief Investment Officer at TD Asset Management earlier about the implications of China's economic slowdown, and what else he is watching.
Bruce, let's start with some of the economic news that we got out of China. They've recorded I think it was a 6.2% growth in the second quarter of 2019. Any other country would jump up, applaud, and do backhand springs. They'd be so happy. China, not so much. Is that number concerning for you or not?
- Well, broadly we're seeing deceleration in global growth. So China's part of that. Europe's part of that. The US is part of that. But for sure, this is the slowest growth we've seen out of China in some time. And slower growth globally, it is a concern. We're still optimistic about stocks, as we've been all year. But one of the cautionary tales out there, for sure, is this slowing global growth.
On China specifically, I think that's the result of a couple things. One is, they actually put measures in place about, we'll call it 12 to 18 months ago, that have led to this slowdown. They were trying to clamp down on some of the excessive lending, credit creation that was going on in the economy. And so let's call it self-inflicted, or intentional.
And then also that the trade wars that we're seeing going on right now between China and the US, I think they are having an impact on the Chinese economy.
- I think that's something that I know Donald Trump would very much like to claim credit for, in terms of having that thing slow that down.
I mean, if you were going to kind of put a balance on materiality, versus on the self-inflicted measures you put in, versus the trade, which one do you think is?
- Well, the trade issue is a real issue for China, as it is for the whole globe. It is something we're focused on, monitoring, concerned about. I think it's probably the biggest risk out there today. We're seeing the volume of global trade has actually declined in the last 12 months, which is a pretty unusual event, particularly outside of recession. I'm not sure it's something the president should take credit for. I think it's actually quite concerning.
- In terms of China as well, part of it also is just, I would think, is size. I mean, when you just get to a certain size, you just can't keep growing at that rate anymore too.
BRUCE COOPER: Yeah.
- So they've put in controls you said to kind of, I think, control things a bit more. I'm not sure whether to slow things down. But how do you see things unfolding for China in the next month?
- Yeah. So if you think for a couple of decades China grew at 10% plus. And to your point, it's a lot harder to do that when you're the size China's economy is today, second largest economy in the world. And then it kind of slowed to 8%, and now to 6%.
Look, 6% is a super respectable growth rate. And some of the drivers underneath China remain very powerful. People continue to move from the countryside to the city. You're getting urbanization. It's still a crucial manufacturing center for the global economy.
But I think one of the challenges-- we talked a lot about this over the last five years-- is on top of all that good stuff going on, China was racking up quite a bit of debt. And that debt was sort of at the corporate level, state owned enterprises, at the local government level. And a lot of it taken on to fund infrastructure, and really just to make sure growth continued to be at the pace they wanted it to be at. So I think you're seeing some of that reined in. Probably that's the right thing, because debt can only grow so much before it becomes a meaningful risk.
And so I think the Chinese government's probably comfortable if growth was anywhere in the sort of 5% to 6% zone. And that can continue to be healthy, as long as it's built on the right foundation.
- Let me ask. One thing you mentioned is the fact that we're seeing trade impact all global trade right now. It's coming down. And the one thing that we know that happens-- I mean, if you speak to CEOs for a long time, you know that when there's a problem in one area, whether you mean to or not, you start thinking differently about where you're going to build your growth in the future, whether it's going to be in the States, or China, or somewhere else. We've experienced it in Canada. So how much do you think that-- are we going to be feeling the effects of this for a very long time, even if it gets solved?
- Yeah. I think so. I think big investment decisions, CEOs of large companies are going to have to really think about, do I put a plant in China? Do I put a plant in Vietnam?
Things like technology, there is a risk we kind of break into two global technology zones, one in sort of the West, and one centered around China, which then you get suboptimal scale, for example. And so I think this is going to lead decision makers to pause on the investment front, which itself can also slow global growth.
With globalization moving capital around the world has been just a crucial driver of the economic story for 20, 30, 40 years. Big picture question is, are we at an inflection point in that?
- And you also mentioned Vietnam. But we know President Trump has hardened his stance with Vietnam. And so all these centers that have benefited are going to not have that in the future, which I'm sure the political impact of that too is quite significant.
- Well, it's a tricky question, because, look, the difference in labor costs between, let's take Vietnam and the United States, is just so extreme that you can't bring a lot of these jobs back to the United States. Which, by the way, has an unemployment rate with a four handle. Actually the job situation in the US is terrific.
KIM PARLEE: Yeah.
- So you can't bring the jobs back. You probably don't want to bring the jobs back. And from an efficiency perspective, it wouldn't be the right thing for the global economy. And so we'll have to see how this plays out.
But we're at a tricky point. Our view has been trade is a risk, but it's manageable where we are right now. But there's a scenario where too many tariffs, too much uncertainty could tilt it over in the other direction.
- Yeah. Because to your point, I mean, the markets, I guess, are feeling as though it's manageable, because we've got markets hitting all time highs again. US markets.
- Yeah. That's right. We've been optimistic all year. And it probably surprised a lot of people how well markets have done. I think it probably even surprised us. Even though we were positive, I'm not sure we expected mid teens returns at the kind of midway point of the year.
Obviously a big part of that story has been accommodative central banks. If we went back 12 months, a lot of people thought rates were going up. It turns out they've come down. And that's very supportive for multiples, PE multiples, valuations of stocks.
And the other piece is, I think the US economy has slowed, but it's still OK. Like earnings growth will be positive. The consumer's in good shape. The labor market's strong. The technology sector is still booming. So there's lots of good elements to the story. But, of course, the fiscal stimulus that the Trump administration put in place kind of a year and a half ago, that's started to fade. Instead of growing at 3-plus percent, we're probably growing at somewhere around 2% instead.
KIM PARLEE: Yeah. Let me shift, if I can, towards the UK. Because this story just goes on, and on, and on, and on, and on. Three years since the UK voted to leave the EU. And we still don't know what's going to happen at this point.
We do know, of course, there's going to be a new prime minister at some point. Theresa May is stepping down. So when you look at this, I want to just get the bottom line first. How does this impact your investment outlook?
- So as I said earlier, we're positive on equities. So obviously, we understand it's a risk. But it's not enough of a risk to chase us to the sidelines.
Part of that is because we think this is quite a UK specific issue. The UK is around 2% of global GDP. So I would put this definitely in the negative category, just not negative enough from a global perspective to tilt us all the way to being cautious on markets.
Having said that, our least favorite region has been Europe slash international. Part of that is because I think the economy is quite weak. We expect earnings growth to be very slow. But then layered over the top of that, you have this political dynamic in the UK, amongst other countries, which I think is quite unsettling.
And so it hasn't been enough to make us negative on stocks globally. But it does make us cautious on Europe, for example.
- I was looking at a note that you put out and talked about recently. There's three scenarios with Brexit that could happen. Maybe just to tell us a bit about them. And you could leave with a deal. You could crash without a deal. And then you could, here we go again, second referendum and stay.
BRUCE COOPER: Yeah. Stay. Yeah.
- So take us through each one of those and what you see.
- Yeah. So obviously, you referred to the fact there was a vote three years ago. And the population voted to leave. But we need to remember, it was, in the big picture, pretty much 50/50.
KIM PARLEE: Yep.
- Kind of 50% plus 1 to leave, and 50% minus 1 to stay. I think that division is coming back to haunt them. Because as they try and think about the path to exit, of course, they don't have unanimity of views.
So if you think about one of those options is leave with a deal. This is where the divisions really haunt them. And Theresa May just could never kind of corral all the cats together. Parliament at one point voted on-- now I've forgotten how many. But it was like seven different options. And none of those seven options got anywhere near majority support.
So leave with a deal, sounds like a great plan. But you actually then need to get everybody together and say, here's where we are. It's not clear to me-- they've been working at that for three years. It's not clear to me they're going to get there.
So then, if you can't get to a deal, of course, you could leave without a deal. That's what some people call a hard Brexit, or crashing out. And Boris Johnson, who's one of the two candidates remaining to become leader of the Conservative Party, who would become prime minister, has said he would be open to a so-called hard Brexit, or leaving without a deal.
The challenge of that, that means if you're a business in the UK, and I'm, for example, exporting to Europe, what rules apply? What tariffs apply? And even beyond that is sort of logistics. Like I need to put my goods on a truck. And that truck's going to go, say, on the train and under the channel. It's going to pop up in France. What paperwork do I need to fill out?
I think a lot of people are expecting you're going to have massive backlogs of trucks and uncertainty. I know some companies have moved operations out of the UK and into continental Europe to sort of avoid that disruption. So I think there's just a lot of uncertainty about what the rules would be in that scenario. But Johnson-- I don't know if it's a negotiating tactic or not. But he has said he is willing to contemplate that. Of course, another challenge of that is still half the population, roughly, wants to stay.
So we are seeing these divisions in society throughout the world. We've seen some of this in the United States. Obviously we're seeing some of this in the UK. We're seeing a bit of a splintering of the traditional center of politics, which, to me, it creates the risk of kind of policy gyrations.
You get one government in place. They go in this direction. Five years later you go in a different direction. It could be quite unsettling for markets over the longer time.
- Yeah. And I think over the long term is interesting, because I think one thing that-- and I think, obviously, central banks getting back into stimulus again and cutting rates soothes the markets on a lot of things. But I feel as though investors become much more tolerant of some of the craziness that's been going on.
- Yeah. Well, it's one of those boiled frog kind of ideas. You put a frog in boiling water, he jumps out. But if put him in water, and then slowly turn up the temperature, he doesn't feel it. It feels a bit that way with politics now. Like we've been kind of-- Brexit's sort of background noise. We've been living with it for three years. Yeah. Yeah. Yeah. Yeah.
- Yeah. But look, these are very serious issues, in the end. I said we're positive about markets, because we think the central bank in combination, the fact that earnings are going to grow, the US economy is OK, tech boom, et cetera, et cetera, that'll trump the day-- make the day in the next kind of 12 to 18 months. But longer term, these political issues are very real. And we'll have to grapple with them.
- Last question for you. Just as we get ready for the election in 2020 in the US, we've got an election coming in Canada too. I don't know if that tends to be a huge market moving event from a Canadian economic standpoint. But are you expecting just a lot of loud headlines, as opposed to market activity.
BRUCE COOPER: Yeah. But I think, start with Canada. I think this could be an interesting election in Canada, from an economic perspective.
- Why's that?
- Because I think energy has been such a focal point. And the question of whether or not to build pipelines has been such a central political and economic event, and is very important for markets, for sure. So if you could get the Trans Mountain Pipeline built, I think that could be a bit of a catalyst for the energy sector, which still remains a very big part of the Canadian equity market.
- And for Canada too.
- And for Canada. So I think that particular issue could be interesting.
In the US, as we all know, you need a program to kind of remember who all the players are on the Democratic side. But it's an interesting field, for sure. And what we're seeing is obviously a much broader spread of ideas than we've historically seen.
So I say the range of possible outcomes is quite wide. Probably if we went back five years, we wouldn't have thought that some of the policies being put forward by Trump could come out of the Republican Party, the idea of trade wars and tariffs, et cetera. That wouldn't have been on the agenda.
And obviously on the Democratic side, they're putting forth some policies that would have been a surprise five years ago as well. Medicare for all, et cetera. So I think the range of possible outcomes is pretty wide on the political side. And I think the market will probably start to focus on that as we kind of get into the middle of next year, as opposed to today.
- Bruce, thanks very much.
- Great to be here.