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While the world eagerly awaits the arrival of COVID-19 vaccines, investors are searching for stocks that suffered through the pandemic and may be poised for a rebound. Kim Parlee speaks with Damian Fernandes, Portfolio Manager, TD Asset Management.
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- While the world eagerly awaits the arrival of vaccines against COVID-19, investors are asking what's going to be happening with certain equities. The ones that suffered through the pandemic, will they rebound? And the ones that did well, what's going to happen with them?
Joining me now is Damian Fernandes-- he is portfolio manager with TD Asset Management-- to help us understand some of his thinking around those questions. Damian, thanks so much for joining us. I'm just going to start with a big question, if I could.
Markets have done really well, equity markets that is. But are you bullish for equities going into 2021?
- Oh, that's a difficult question. Let's put it this way, Kim. We've had a tremendous rally off the lows. I think the market off the lows was something close to 60%, aided by a significant amount of monetary and fiscal stimulus and really, really positive news on the vaccine.
I think to expect that degree of out-performance next year would be an anomaly. It's never happened before. We're not going to see that level of rally.
What I think people should-- investors should be thinking about next year is moving from rally to rotation, your introductory comments about how the world's going to look next year, I think that holds true. A year from now, most of the vaccine would be-- the vaccines out there, that have actually pretty good efficacious data, would be widely distributed. I think world-- I think we will be, economic growth, ourselves, consumers, our behaviors will be very different from where it is today. And I think that presents opportunity.
So I'm not trying to skirt the question. Look, I'm not as bullish as we were before. I don't-- I think the magnitude of the rally has probably pulled forward some returns.
But it doesn't mean I'm not positive, because we are in a recovery. And rates remain really low. And those are all supportive of our equities.
- Well, then let's get into some names where you think-- that could maybe have a little more upside than the general markets once the vaccine does become available. One name you like is Amex. Tell me a bit about why.
- Sure. When you think about American Express, and American Express is a credit card company that does both. It does-- it provides the infrastructure to transact, but it also takes on credit risk. You have one of three platforms basically globally that facilitate credit-- Visa, Mastercard, Amex. American Express is the only one out of those three that takes on credit risk.
The customer base of American Express is generally, it skews higher-income cohorts. So credit risk, while is-- the credit risk isn't as risky as a traditional bank. Or I don't want to say a bank, but a traditional lender that takes on-- that has a different skew in terms of the cohort it lends to.
But a lot of American Express' customers, similar to you and I, have probably been quarantined at home, where our spending patterns have been reduced because of COVID. So coming into next year, you can actually see a significant increase in activity from American Express customers who have been quarantined at home as they move from consumption of services. So think about vacations.
Think about personal services, for example, the spa or restaurants. All of those personal consumption items that American Express' card members skew to have been reduced this year. But in a recovery scenario, where you have a vaccine, you can actually see tremendous pent-up demand for those services. And I think American Express benefits.
- Interesting thesis. What are-- you've got a couple of energy names here, too. And energy, of course, has been pummeled, seen a bit of a rebound with, I'd say, a bit of a-- in the past month or two. But what names do you like and why?
- Well, I like your characterization of energy being pummeled. It was pummeled year to date because we've had a collapse in demand. We've had a collapse in demand. And, of course, earlier in the year, we had that issue where-- with Saudi and Russia in terms of supply.
But generally, energy stocks have performed as you'd expect when you have a global recession and a complete stop in activity. Just from that thesis, where I talked about how next year would look different, and if we have a vaccine that then there's evidence that we will, it'll be widely distributed, you can see a restart in demand for energy, for oil. And so a lot of those companies which have had negative cash flows will actually see the reverse next year.
They've already cut their capex budgets. They're already thinking about-- so a lot of that-- the money they earn will flow right to the bottom line. When I think about energy names, they're like traditional names that we own in our portfolios, names like CNQ, Canadian Natural Resources in Canada, or ConocoPhillips, or Chevron in the US.
All of those companies pay very-- have very strong balance sheets in the midst of an industry that's really challenged versus their peers. They've been paying their dividend payments. They have sufficient liquidity. And in a recovery scenario, they will actually see demand for their products, i.e., energy, increase.
So you can actually see-- you have this nice setup, where you have companies that have been under a lot of pressure. And next year in a recovery scenario, you see demand for what they sell increase. And they should actually see increases in cash flow.
- I've only got a couple of minutes here, Damian. I'm going to try and squeeze in Amazon because Amazon has had such a phenomenal run. Why do you still like this one?
- Well, I want to differentiate. I talked about going from a rally to a recovery, from thinking about how the world looks like in a vaccine scenario. I think some demand, obviously, has been pulled forward. But I think some companies-- Amazon is front and center for that-- have seen a permanent shift in demand.
What our current lockdown scenario has done is that customers who never used Amazon before have now become acquainted with using Amazon, with online delivery. Particularly like cohorts that never thought about shopping online before are now comfortable with that experience. I don't think that stops next year.
So while, yes, you'll start seeing consumption move from products to services, you are still-- a lot of those people who signed up for an Amazon Prime membership are still going to hold on to that Prime membership because they see the value of that. So there are some companies who have benefited, who have done really well this year who people might say, oh, we should sell this next year because how do they keep delivering the same results that they just did? I think Amazon will do just fine because both of its business factors, e-commerce and delivering consumption items to people's doorsteps, coupled with its leadership position in the cloud, those things are here to stay.
So the revenues from those two businesses are unlikely to dissipate. In fact, they'll keep growing as you've pulled forward. And what you've done is you've taken-- you've pulled forward customers who weren't there before, who now will continue using your products.
- Damian, great roundup. Thanks so much for joining us.
- Sure. Thank you, Kim.
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- While the world eagerly awaits the arrival of vaccines against COVID-19, investors are asking what's going to be happening with certain equities. The ones that suffered through the pandemic, will they rebound? And the ones that did well, what's going to happen with them?
Joining me now is Damian Fernandes-- he is portfolio manager with TD Asset Management-- to help us understand some of his thinking around those questions. Damian, thanks so much for joining us. I'm just going to start with a big question, if I could.
Markets have done really well, equity markets that is. But are you bullish for equities going into 2021?
- Oh, that's a difficult question. Let's put it this way, Kim. We've had a tremendous rally off the lows. I think the market off the lows was something close to 60%, aided by a significant amount of monetary and fiscal stimulus and really, really positive news on the vaccine.
I think to expect that degree of out-performance next year would be an anomaly. It's never happened before. We're not going to see that level of rally.
What I think people should-- investors should be thinking about next year is moving from rally to rotation, your introductory comments about how the world's going to look next year, I think that holds true. A year from now, most of the vaccine would be-- the vaccines out there, that have actually pretty good efficacious data, would be widely distributed. I think world-- I think we will be, economic growth, ourselves, consumers, our behaviors will be very different from where it is today. And I think that presents opportunity.
So I'm not trying to skirt the question. Look, I'm not as bullish as we were before. I don't-- I think the magnitude of the rally has probably pulled forward some returns.
But it doesn't mean I'm not positive, because we are in a recovery. And rates remain really low. And those are all supportive of our equities.
- Well, then let's get into some names where you think-- that could maybe have a little more upside than the general markets once the vaccine does become available. One name you like is Amex. Tell me a bit about why.
- Sure. When you think about American Express, and American Express is a credit card company that does both. It does-- it provides the infrastructure to transact, but it also takes on credit risk. You have one of three platforms basically globally that facilitate credit-- Visa, Mastercard, Amex. American Express is the only one out of those three that takes on credit risk.
The customer base of American Express is generally, it skews higher-income cohorts. So credit risk, while is-- the credit risk isn't as risky as a traditional bank. Or I don't want to say a bank, but a traditional lender that takes on-- that has a different skew in terms of the cohort it lends to.
But a lot of American Express' customers, similar to you and I, have probably been quarantined at home, where our spending patterns have been reduced because of COVID. So coming into next year, you can actually see a significant increase in activity from American Express customers who have been quarantined at home as they move from consumption of services. So think about vacations.
Think about personal services, for example, the spa or restaurants. All of those personal consumption items that American Express' card members skew to have been reduced this year. But in a recovery scenario, where you have a vaccine, you can actually see tremendous pent-up demand for those services. And I think American Express benefits.
- Interesting thesis. What are-- you've got a couple of energy names here, too. And energy, of course, has been pummeled, seen a bit of a rebound with, I'd say, a bit of a-- in the past month or two. But what names do you like and why?
- Well, I like your characterization of energy being pummeled. It was pummeled year to date because we've had a collapse in demand. We've had a collapse in demand. And, of course, earlier in the year, we had that issue where-- with Saudi and Russia in terms of supply.
But generally, energy stocks have performed as you'd expect when you have a global recession and a complete stop in activity. Just from that thesis, where I talked about how next year would look different, and if we have a vaccine that then there's evidence that we will, it'll be widely distributed, you can see a restart in demand for energy, for oil. And so a lot of those companies which have had negative cash flows will actually see the reverse next year.
They've already cut their capex budgets. They're already thinking about-- so a lot of that-- the money they earn will flow right to the bottom line. When I think about energy names, they're like traditional names that we own in our portfolios, names like CNQ, Canadian Natural Resources in Canada, or ConocoPhillips, or Chevron in the US.
All of those companies pay very-- have very strong balance sheets in the midst of an industry that's really challenged versus their peers. They've been paying their dividend payments. They have sufficient liquidity. And in a recovery scenario, they will actually see demand for their products, i.e., energy, increase.
So you can actually see-- you have this nice setup, where you have companies that have been under a lot of pressure. And next year in a recovery scenario, you see demand for what they sell increase. And they should actually see increases in cash flow.
- I've only got a couple of minutes here, Damian. I'm going to try and squeeze in Amazon because Amazon has had such a phenomenal run. Why do you still like this one?
- Well, I want to differentiate. I talked about going from a rally to a recovery, from thinking about how the world looks like in a vaccine scenario. I think some demand, obviously, has been pulled forward. But I think some companies-- Amazon is front and center for that-- have seen a permanent shift in demand.
What our current lockdown scenario has done is that customers who never used Amazon before have now become acquainted with using Amazon, with online delivery. Particularly like cohorts that never thought about shopping online before are now comfortable with that experience. I don't think that stops next year.
So while, yes, you'll start seeing consumption move from products to services, you are still-- a lot of those people who signed up for an Amazon Prime membership are still going to hold on to that Prime membership because they see the value of that. So there are some companies who have benefited, who have done really well this year who people might say, oh, we should sell this next year because how do they keep delivering the same results that they just did? I think Amazon will do just fine because both of its business factors, e-commerce and delivering consumption items to people's doorsteps, coupled with its leadership position in the cloud, those things are here to stay.
So the revenues from those two businesses are unlikely to dissipate. In fact, they'll keep growing as you've pulled forward. And what you've done is you've taken-- you've pulled forward customers who weren't there before, who now will continue using your products.
- Damian, great roundup. Thanks so much for joining us.
- Sure. Thank you, Kim.
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