Market Insights

Please standby Please standby. [music] Hello I'm Greg Bonnell and welcome to MoneyTalk Live, brought to you by TD Direct Investing. coming up on today show, the S&P 500 clawed its way back into both territory earlier this week but with recession worries continuing to linger, is it time to take a closer look at other asset classes? Jing Roy Portfolio Manager at TD Asset Management gives us some insight. And should those asset classes maybe include some commodities, Jennifer Nowski, Portfolio Manager at TD Asset Management give us some insight. All coming up on the show. But first let's get you an update on the markets. A bit of a down day on both they and Wall Street. We will start with the TSX Composite Index. Right now you are down 146 points, about three quarters of a percent. Energy has been a drag on the index throughout the week. We are seeing another weekday for crude prices, not quite the pullback that we had yesterday. American benchmark crude lost more than 4% but still in the doldrums. So you have to know his energy, also exhibiting some weakness today. Again not to the same extent as yesterday's trade but still some weakness. 21, 20 option always down to the tune of 1.2%. Seeing some of the gold names getting a modest bit today, including B2Gold. There is a bit of green on the screen despite the headline number. 469 a share you have B2Gold down about 1.7%. Now south of the border, a lot of things from investors to waive here. We who we did hear from Jerome Powell after two days of testimony in Washington and he basically laid out the need to continue the fight against inflation. He was asked a question about what that would mean and he's responded that another two hikes would be a fairly accurate guess. Fairly hawkish shock from the US Federal Reserve chair. The S&P 500 now down 27 points today, a little more than half percent. It managed to find a bit of momentum to the upside yesterday but it is giving back today. Including the tech space. A bit of a bid after a lot of the selling pressure in recent days. Down again today, the NASDAQ, 133 point deficit, about 1/4 of a percent of the downside. Tesla is another name of the street that has not been in its favour in recent days. You have the electrical vehicle maker at 258, we will call at 259 and the share roughly. Down a little more than 2%. And that's your market update. There are plenty of concerns of a potential recession on the horizon despite those fears markets have held up fairly well. Before this week, the S&P 500 even found its way into a bull market territory in recent weeks. So how should investors be IN different asset classes in this environment? I put that question to Jing Roy Portfolio Manager at TD Asset Management. >> We have to squint really hard to see where the fears manifest as a class. We are seeing recession fear being reflected in the softer bond yields. And in oil prices. But it's not really reflected in equity prices or credit spread. So let's take all these asset classes and dive a little deeper to each one of them. When we talk about the yield curve structure, the yield curve is deeply and extremely inverted for real rates. In US Canada and Europe, what it means is that in the future, people are expecting lower growth and lower inflation. So that's very bearish on the outlook. So secondly, let's take a look at the oil price which is down 12% year to date. Despite the very active effort for OPEC to manage the supply, it follows the industrial production slump that we are seeing in US. And in China. Now moving on to equities, it's not being reflected in the S&P 500 index. In the US for example, and there are a couple of reasons for that. Number one, it's important to remember that the equity index is very different from underlying economy. So for example, technology accounts for about one third of the index that contributes only to about 8% of the GDP. So there is a disconnect there. And secondly, it's very important to understand that,, earnings growth expectation right now on the street is a V shaped recovery that people are expecting. So if you look at the S&P 500 equal weighted index to take out the overwhelming dominance of the top seven tech names, street is expecting about 10% earning growth in each of the next two years. And that's compared to a recessionary scenario of a -10% average. So, earnings are not really pricing a recession. And lastly, I think the risk appetite is really returning. So because the economy has stayed so resilient and the Fed is reaching the end of the hiking cycle, as a result of that, the left tailrace has been taken out so what you're seeing is that the equities premium which is the extra compensation equity investors would demand to hold equity above free asset has declined to 15 year low. And if you look at the fixed index incident a 30 year low. If you look at implied volatility, before major economic data releases, they have collapsed. So all these plays into a kind of bold narrative for equity prices. And when you look at the credit spread, even though bond investors typically are less bearish than equity investors, but the recessionary fear is not there either. Because if you look at high-yield indices that the floor rating high-yield credit spread is about half of what we would typically see during recession and recovery rate is 1/3 higher than what you typically see in a recession. So overall, you know, asset prices are pricing in a no lending situation. > No landing situation. That was a fascinating breakdown across asset classes. What about across geographies with storm clouds on the horizon? What seems to appear? >> In the US as we detailed in the previous section, there is no landing. The tremendous amount of fiscal stimulus really propped up the corporate profits in consumer spending. So that's about 18% of the GDP IMF estimates. So we are still working through that. Across the pond, in euro zone, it's even more dramatic. Technically the euro zone is in a technical recession. The equity price there has actually helped perform rather outperformed US year to date. And because you know, the equity company over there is more index to the US the growth export growth and also the fact that their chief beneficiaries are the major energy transition fiscal spending, I think when we come back home, the mood is a little more solid in Canada because cyclical sectors actually make up over half of our index here. So, what we see is that equity return actually factoring in a kind of pessimistic view of the economic growth in Canada here. And the situation is even more dire in China. The sentiment is undoubtedly very, very perished in there. Because in the short term, the growth coming out of the rebound coming from an COVID lockdown is teetering out. In the longer term people focused on the deleveraging and balance sheet risk that can cause a long-term stagnation without proper policy support. And what outlier in the developing market is really Japan. Over there, the central-bank policy is externally supported because it's prerogative is really to support the economy. To be relaunched to a sustainable 2% inflation target. As a result, the monetary policy is very, very easy and you are seeing expansion in service BMI and also a recovery in manufacturing. >> When you said "no landing" is at a place where you just don't have a recession? Should we be expecting a pullback of some sort? What is it look like? The shape, the size? >> There are lots of Alphabet available to describe the shape of a recession. If I had to pick when it will be a U shaped one. It means a recession will take longer to play out. Because it will be a credit lead cycle. During this cycle as recession typically, we will have to take time because the rate has the interest rates have to stay higher for longer for this narrative to play out. It really comes to the point that how long companies and households can withstand the high interest rates without coming back to consumption. So the first domino to fall is really the corporate sector because they have a higher interest rate sensitivity. 1/3 of the corporate debt is on a floating rate. So how it will play out is that corporate, profit, are impacted by the slowing growth and higher financing costs which compel them to cut demand for goods and services as well as labour. And for those who have been flying too close to the sun, they will have to resort to distressed asset sales. To ensure a balance sheet and some will not make it and declare bankruptcy. This corporate malaise will spread to the household sector to unemployment which will ultimately impact the consumer consumption and this feeds right back into corporate profitability and it creates a kind of downward spiral and reinforcing a narrative for the economy. So that's how the anatomy of this recession will play out. It will be a long game. With a lot of time to play out. We are already seeing some sign of it weakening. In the corporate sector for example, we are seeing bankruptcies rising along private firms because they mostly rely on regional banks for credit in the credit condition there has been fairly tight. And we are also seeing that consumer spending has started to weaken, especially among the lower income consumer groups. And the delinquencies for car loans and credit card has started to take up among these income brackets. >> Once you get into a situation like that, a recessionary situation, it makes a lot of sense the corporations to lay people often people going home saying "I'm not buying that… " What does it mean for fixed income and equities? >> Let's take fixed income first. If the rate has to be kept for higher longer, then the long-term US bonds treasuries will outperform IG credit which would in turn outperform high-yield credit. So let's break it down one by one. Because in that scenario, in a recession, a U-shaped recessionary scenario, a growth would slow down. So if you think that the real growth and inflation expectation will decline by, let's say, 25 basis points, conservatively speaking, for each, that's 50 basis points of decline in nominal yields. That can translate to about 10% for those bonds. And that is on top of the 3 1/2% of yield you are collecting just from coupons. So you put that together, you are getting like meetings kind of return which is quite attractive. And moving on to IG credit, what's interesting is that at the front end of the curve, because the curve is deeply an extremely inverted, you are getting a very attractive care especially for high quality credit, as a result of that, that specific slice of the IG credit market is very attractive. However for high-yield, the credit will widen. More so than for IG credit. And the kind of outcome will be nonlinear. So we are cautious towards high-yield credit at the moment. The key here is to construct a fixed income portfolio that is defensively positioned. Stay with defensive qualities and stay with quality. At the same time, you have to maximize the carry. So moving on. >> The equity side. I guess stocks, the equity the S&P 500 entering a bull market and some people are scratching their heads. >> For equities it's a little… It's not one kind of recipe to fit all. So what I would start is with number one, it's very hard to rely on macro specifically interest rates, to compel the valuation multiple any higher. Especially given the fact that the average payment is at such low level. So the room of valuation multiple expansion is… Unless the Fed starts to cut rate which we are not expecting for quite some time. As a result of that, this is a very good environment for stock pickers who can identify companies with underappreciated earnings growth and free cash flow growth. As a result of that, you will look for managers with good stockpicking abilities. On the second point I want to make is that, you know, the factor rotation within the equity market will become more frequent and harder to trade. Factory rotation typically corresponds to changes in conditions. And we are expecting more frequent changes and find financial conditions just because the Fed is data dependent. And that results in a delay for the Fed to calibrate the Fed funds rate to the prevailing economic growth and inflation dynamics. As a result of that, you can have temporary loosening of financial conditions when economic data is weak, but tightening financial conditions when economic data is strong. As a result of that, you are seeing oscillating financial conditions but we know that the end result is tightening financial condition. The path is uncertain. So we have to really Zoom out and the key is to focus on the long-term trajectory and stay with quality companies that has profitable business models, strong cash flow generation capabilities at the same time, has a very strong balance sheet to whether the higher cost of capital at the same time have a very friendly shareholder family dividend policy. On the third, the last point I want to make is, you know, because there is widening policy divergence across the globe in terms of monetary policy and fiscal policy. So to increase the diversification and the equity portfolio, it will now make sense to look abroad outside of the US to see regions, whether they are regions that are more supportive fiscally and monetarily to support the economic growth. >> That was Jing Roy, Portfolio Manager at TD Asset Management. Now let's get you updated on the top stories in the world of business and take a look at how the markets are trading. It appears Canadians are ramping up their international travel, but the numbers still haven't returned to pre-pandemic levels. A new report from stats can says overseas travel was up almost 24% in April, compared to the same period last year, with industry players such as Air Canada have said they are seeing strong demand as we head into the somewhere travel season and guess what: it's now Summer. Also taking a look at Virgin Galactic shares under some pressure today. Raising $300 million in an offer of common shares. This space tourism outfit says it's looking to raise another 400 million to expand and improve its fleet of spacecraft. Virgin Galactic is planning its first commercial flight for later this month. You see the shares right now down to the tune of 19%. We also want to take a look at shares of used-car retailer "Carmax" in the spotlight today. The company delivered its earnings beat for its most recent quarter. Carmax says cost-cutting help the bottom line despite higher borrowing, costs sapping consumer confidence. Let's check in on the markets with Bay Street with the TSX Composite Index. We do have a down day right now. Energy is been a weak spot for the past couple of sessions with American benchmark crude prices under pressure this week down 134 points. Almost 3/4 of a percent. South of the border, as well. Well despite some concern about supply, commodity prices have been a mixed bag with many metals oil and gas prices flat or down year to date. Jennifer Nowski is a Portfolio Manager at TD Asset Management and I asked her what's been driving commodity prices so far. >> Centred more on the demand side of the equation. With investors evaluating the trajectory and pace of the recovery in China, as well as the slowing economic growth in the US and Europe. Now looking at the supply side, yes in some markets there is supply growth this year and projects coming online. However, this is being partially offset by shortfalls amongst existing production as well as continued producer discipline in many spaces. Now, commodities can be cyclical and volatile. It's uncertain how long anyone cycle will last. However when you see crosscurrents in the industry, it can be a very interesting time to be discussing and looking at commodities. >> That's what were doing today. Your supply and demand in there. Let's talk with the demand side, particularly the China part of the puzzle. At the beginning of the year, COVID restrictions and China's economy, the global economy, they do want to consumer commodities. That really hasn't played out the same way. When do we expect China to actually see some recovery? >> China is very important to the commodities market. They can be anywhere from about 50% of demand for some metals and also about 16% of global oil demand. But more importantly, they've been a significant contributor to oil demand growth for many, many years now. Now, you saw the metals prices in particular respond earlier this year when China late last year announced it was moving away from their zero COVID policies of the metal prices started to anticipate some of this recovery. Fast forward to today in China, it is recovering but the pace is somewhat disappointing. Particularly to what may be people of expected in the metals market. If we look on the metal side, you know, there are continued weaknesses in the property sector in China as it works through debt issues. All the oil side, although domestic travel has rebounded recovered in China, international travel remains well below pre-COVID levels and that's partly because bottom… Getting visas in a limited number of flights in the country. So in light of this weakness in recovery, the Chinese government is starting to take measures to stimulate the economy including some rate cuts recently. These are directionally positive for the commodity market. But I would caution that in the past, China has had very large stimulus measures that really boosted fixed asset measurement but at this point it doesn't seem like that's the route they're going to take. >> Even when it comes to their central-bank policies, 10 basis points of time, we are used to bigger things on the side of the world. Let's talk about of commodity prices remain weak. What are we thinking about some of the energy and mining companies? How did they fare? >> So, over the past five or 10 years, commodity prices and weakened in many of the producers had to reevaluate their strategies and became really focused on cutting costs, cutting CapX and strengthening the balance sheet. They got a boost would mark commodity prices were stronger. When looking at 2023, the large cap companies are looking at all .5. Very strong heading into wherever commodity prices may go from here. The other thing to bear in mind is that some prices are still fairly good for oil producers. So for example, with oil, for a large Oil producer that can produce free cash flow yield. >> In an environment like that where you're still seeing free cash flow, there are times in the commodity prices are little farmer, if were worried about supply, why were they investing in that in the past? What are the dynamics in that market? >> So resource companies have really shifted their mindset. A decade ago it was all about growth, massive investments, now they are very focused on being very disciplined with their investments and generating returns for shareholders. So during the past boom in 2012 or 2014, we saw CapX was very elevated and companies were chasing growth. Then they had to reevaluate all this and CapX got cut significantly. However it came off the growth it reached but it's been very modest. However, it's still nowhere near the levels we saw a decade ago. Why is this? Partly may be learning from past mistakes. But it really comes back to gain that focus on financial discipline. So for say, the US players which tend to be a shorter cycle, they have realized that they run more efficiently at a low growth rates of 0 to 5% production growth. Some of the oil majors outlined multiyear programs where they aim for a certain number and a specific range. On the other side you the added complication of some projects being very large. It takes a long time and you can't change these things quickly. When you have periods where you still have commodity price volatility, it makes them hesitant to kind of agree to kind of greenlight those projects. The macro implication of all this is supply growth would likely be limited and that's supportive of the price. > Let's talk about the path forward for these companies. Taking a look at some balanced seats that are stronger because of all the factors you outlined even though there may be a down term and all this is cyclical, you have some cash. But what they do with that money? There's a whole lot of things you can do. What might that be? >> I expect the financial discipline to remain and to ensue a balanced approach with all three options. First being maintaining a strong balance sheet. I believe there's a desire to do that. Second, they will continue to return cash by dividends and buybacks and it just went through Q3 rather Q1 earnings about a month ago and for the energy companies that was a key focus of investors was how much cash was coming back. In the third, M&A. It's not the big transformational M&A the top the last cycle. This sort of M&A by large is more contained. I would say, if you look at some of the gold miners of the US VPs or some deals they are… Those were largely to sure a production and find inventory for the long term. On the large diversified minors, there were also some deals and that's usually to get exposure to some metals that they think of a stronger profile. For example HP bought an Australian copper player of minerals this year. >> That was Jennifer Nowski, Portfolio Manager at TD Asset Management. Now let's get to our educational segment of the day. If you've ever had an interest in holding foreign listed shares than this next segment is for you. Canadian depository receipts are an easy way to get assets to those shares, and you can do it right on the WebBroker platform. Nugwa Haruna Senior Client Education Instructor with TD Direct Investing takes us to the process. >> These allow investors purchases the local currency. There are some really popular ones in the US. The Ali Baba stock, these are actually ADRs, American American depository receipts. On the Canadian side, we have CDR's or Canadian depository receipts. These actually let investors have access to US Securities in Canadian dollars. So talking to WebBroker, let's show you how we can find these. Once in Weber, were going to go to research. Under investments were going to go to stocks. I'm going to pull up a US security in this instance. When I do that, you're going to notice two things. First you'll see there is in a stock within the US in US dollars and 1 Listed in Canadian. Let's click on the US dollar security. This security trades of the US exchange in US dollars, 182 was the last price. I want us to take note of the volume. Almost 25 million Securities traded. Let's go over to the CDR. Once I pull up the stock, I'm going to go to the Canadian listed version of this security. One thing you will notice is the price. Much less than the US version. That's because CDR is giving you an opportunity to buy partial units of that security. So one of the advantages of the CDR then, is you are able to enter a position which met with much less than you would need if you're buying a whole share. So our investors will look into diversifying, this could be a consideration. Something is all the talk about when it comes to CDR is another advantage and that's for investors, you don't have to worry about the potential currency difference between the original security annual security. That's because CDR's are hedged. Now I do want to mention, the one risk when it comes to CDR's. If you recall, when you look to the US version, it was almost 25 million units traded to date. On the other hand, when I look at the volume, for the CDR, it's just under 30,000. So significant difference. Investors want to be aware of this potential risk when it comes to the volume being traded. They may not have enough for them to sell or buy to a position. So all in all, when it comes to investors in deciding to utilize CDR's, they want to compare the risks, versus the benefits before taking a decision on if they want to utilize it. When it comes to investing strategies. >> That was Nugwa Haruna, Senior Client Education Instructor with TD Direct Investing. Well a new report from TD Economics shows women with young children have been joining the workforce in droves since the pandemic. 2020, an estimated 111,000 women have joined. There are some very interesting reasons why this is happening. Earlier, Senior Economist, Francis Fong spoke with Kim Parlee about that surgeon participation. >> It's roughly a doubling. Some reasons for that. One is the reason for work and more broadly workplace flexibility since the pandemic. But over the longer term we have seen sort of this uptick in work for women with young children over time. Efforts by individual provinces to kind of improve access to affordable childcare. Areas like Québec, BC and Alberta have all made efforts over the past… Québec it is been quite some time but more recently in Alberta and BC. Those are really significant impact. >> It's one of those things because demand begets demand. More people wanted and of course they have to keep up with the demand at the same time. The thing that's really interesting, and I know we've chatted about this. We took a look at some of the industries. This is not equally distributed amongst all different kinds of companies across Canada. Where do you see the biggest pickup? >> Just like we were talking about, the impact of women in the workplace or sponsor ability, does it really been the dominant factors of the past few years. Obviously industries that offer office work, things of that nature, those have really benefited and have been able to attract a previously untapped labour pool. Areas like finance and insurance, professional and technical services, public demonstration, those of gain significant employment share among mothers. Where is if you look at other industries like retail, food accommodation, those are really struggled to kind of, attract or even retain the kinds of labour that they had before the pandemic. >> It's going to be interesting to see what happens as things "normalize". A lot of companies, people coming back into office, not five days a week with three… It still providing the flexibility. The other thing you talked about was the affordable childcare. It is there at the same time helping with that. Maybe give us a little more detail in terms of what you're seeing in terms of where may be Québec pave the way, if you will, on that side of things. How much is going to be needed and where are we in terms of providing that supply? >> You asked a really tough question. A lot to unpack there. So basically, with the kind of rise of hybrid work as opposed to… We are seeing a lot of industries move away from fully promoted to hybrid. That still offers a lot of flexibility for families. But, at the end of the day, more in person basically, it's going to put more onus on childcare to be able to sort of pick up the slack for families and particularly mothers. Thankfully, we are now in a situation where all the provinces and territories of now signed these territorial agreements with the federal government to offer $10 a day childcare. But the real challenge we are facing now is at the number of potential folks will demand childcare could potentially exceed what provinces are committed to. It's the kind of, if we take a look at all the different provinces, other commitments are created, childcare spaces in the wake of these agreements, we estimate that we could be falling short anywhere from 240 to 315,000 spaces nationwide just because there is so much unmet demand for families that are looking to potentially get back into the labour force. It's fascinating. You brought up in your report the concept of child care deserts. There's a whole bunch the pop up around it. But sometimes vast parts of cities or provinces don't have the childcare to. Distribute matters as well. >> Absolutely. It's a key point. We are seeing all these commitments from provinces saying they will create X number of spots. With the distribution of those spots actually matters. Certain research other will indicate that if you go to all more rural area or Indigenous communities, basically anywhere outside of major metropolitan centre's which are already, folks there are already struggling to access childcare. If you go outside of those areas, it's even more difficult. You coined the term already "childcare desert" it's basically areas where there are at least three children for everyone licensed childcare spot. So when we see these commitments from the governments, we have to take into consideration where those things are distributed. It's also not just the space that matters. To create a childcare spot is not just about having a building and a space for a child to be there. He needs to be staffed. So in addition to the potentially hundreds of thousands of spots that you might need to create in addition to its arty been committed, that just means we need to be hiring more training and retaining more early childhood educators and childcare workers to actually staff these spaces. >> And as you noted, so much matters in the details. The ratio goes down, the ratio of children to someone's care comes much lower in the beginning then later on. I've only got 45 seconds and I don't want to skip over this. I want to highlight first off this is good news. The fact that we are actually seeing more participation of mothers in the workforce. That's awesome. At the same time, you highlight something with the equity pay gap. There is an unexplained factor right now. If you could and 15 seconds, what you mean? You talk about of motherhood. >> If you look at the pay gap between men and women, you see that narrowing over time but an increasing portion of that is unexplained. We can ask by the factors related to occupational choice, job tenure, things of that nature. What researchers are largely pointing to is what's called a motherhood penalty. That's one factor behind this unexplained pay gap basically folks being penalized for becoming mothers. So what we do know however is that the shorter the destruction that mothers face in the workforce, the smaller penalty. Accessible childcare, work responsibly this is a pay equity. You can reduce that pay further. >> That was Francis Fong, Senior Economist at TD in conversation with Kim Parlee. And now an update on the markets. Were having a look at td's advanced dashboard. This the platform designed for active traders available through TD Direct Investing. This is of course the heat map. It's reading to the TSX 60 biggest companies looking at price and volume. There is a down down the headlines as you can see, from the screen. There is pressure to the downside. It's been a tough go in the energy space lately but I want to start with the materials. Some of the bigger action is there. Yet the likes of FM which is First Quantum Minerals down about 2.7%. And beside it, but to the lower side, you have a name like tech resources also down about 3%. There are concerns with the global economy, with central banks continuing to hike. We have the Bank of England this week, surprising 50 basis points. Even though the Fed paused or skipped or whatever you want to call it, the last time around, tough talk from Jerome Powell this week. But the need for higher interest rates to tame inflation. So it is having an effect on investors psyche in a little bit of worries creeping into the market about what can happen with the global economy. Kinross earlier, was showing a little bit more strength in its own positive territory for the material space but just barely so. It's been a pretty rough week also for the price of American benchmark crude. Yesterday it retreated about 4%. Not down quite as much as today but you can see definitely a lacklustre showing for a lot of those energy names on the corner of your screen. You have this seat VE, Chenault was down 1%. Even Cameco. Take some of the oil and gas space down to the tune of about 2.4%. You do want to find some green on the screen, GRI. Tiny box of green about 2 1/2%. That is Thompson. You can find more information by visiting td.com/advanced dashboard. Stay tuned on Monday, Benji Gallander coeditor of the contra the head investment letter will be our guest taking your questions about markets and investing. A reminder you get a head start by emailing moneytalklive@td.com that's all for our show today thank you for watching take care and see you next week. [music]