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[music] >> Hello, I'm Greg Bonnell. Welcome to MoneyTalk Live, brought to you by TD Direct Investing.
coming up on today's show, we are going to hear from TD Asset Management Alex Gorewicz on what this week's hotter than expected US inflation report could mean for the US Federal Reserve. TD Cowen Vince Valentini is going to give us a view on whether there are better days ahead for the Canadian telcos. And Morgan Stanley Investment Management's Jitania Kandhari is going to look at whether the 60-40 portfolio strategy is making a comeback.
Lesson today's WebBroker education segment, Hiren Amin is going to look at how to track market performance on WebBroker.
Before we get to all that and our guest of the day, let's get you an update on the markets.
We will start here at home with the TSX Composite Index. It's been choppy this week. Today we are putting another 94 once on the table, about half a percent to the upside.
We've had a lot of macro data, particularly out of the US, when it comes to price pressures. We'll get all of that with Anthony Okolie. We've also had a lot of corporate earnings in Canada this week as well.
Let's check in on some of the most actively traded names. To that reported.
We will start with Air Canada. I will tell you more about what we saw in the report later on in the show. At $17.95, the market is clearly unimpressed. The stock is down all 7%.
Meanwhile, TC Energy out with its report, getting a bit of a bid today.
At $53.23, they are up about 2 1/3%.
South of the border, you had an inflation report, were little together, where are we? 5034 on the S&P 500, gain a five points.
Modest but firmly with the 5000 mark, reached for the first time last week. The tech heavy NASDAQ was under a bit of modest pressure earlier today. Still not taking its way out completely. You're down about 16 points were 1/10 of a percent.
I want to check in on Meta Platforms.
A little bit of selling pressure. Nothing too dramatic but taking points off the table. At 474 bucks and change per share, the parent company of Facebook's animals 2%. And that's your market update.
We are all data watchers, trying to figure out what the Fed is going to do next.
Inflation earlier this week and then Consumer Reports and another inflation read today. Here's a breakdown of what it might mean going forward for the Fed, Anthony Okolie.
>> It's been a roller coaster ride. I think what we are seeing now is markets have been reacting to the original confidence that rate could be hops, we could see rate cuts in the first half of the year. Now that is being delayed until the second half of the year.
We started with the CPI data in December which was revised lower.
It boosted sentiment around rate cuts.
Of course we got the January CPI data and US consumer prices came in at 3.1% year-over-year versus we .4% in December.
Well ahead of forecasts.
We got some retail data that showed that spending by US retailers slumped more than expected, largely due to the cold weather in January. That kept shoppers at home.
Retail sales came in at -.8% in January.
That broke a two-month streak of gains and that gives some reassurance.
January wholesale inflation saw the biggest monthly increase since August, coming in at .2% last month, that resulted in an annual increase of nearly 1%. More importantly, the core PPI, that excludes food and energy, he jumped half a percent, bringing the yearly pace of wholesale inflation to 2%. Much hotter than expected. This is reviving fears that the inflation piece has not been tamed by the side.
>> That the percent number seems to be a bit of a barrier because only got that earlier inflation point in the week, the market that we might crack below three and show progress words to. It was about. On Tuesday, when and he get back from a long weekend, we will get report on Canadian inflation. Total headline inflation in Canada was 3.4%. We are looking for some progress in this country but breaking below three and trying to get into, it could be an interesting week for us and for the market to try to figure out, okay, what the central bikes have told us repeatedly, we are not in a rush to cut.
The data seems to support the idea that they don't need to be in a rush.
>> Exactly. I think the Fed is looking for more signs that inflation is moving towards the 2% target. One thing about the core PPI, that's likely to feed into a higher January read for the Fed's preferred measure of inflation which is due at the end of the month and that could potentially keep the Fed on hold for longer. As you mentioned, we got our inflation data as well.
Investors will be watching closely to see if inflation is moving towards a 2% target. Another key report to watch.
>> It could change the minds about where we are headed and how fast. Thanks for that.
>> My pleasure.
>> MoneyTalk's Anthony Okolie.
Right 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.
Shares of Air Canada in the spotlight today. The airline handed in a solid quarterly report but investors seem to be more interested in and concerned about the forecast.
Air Canada says it expects higher costs and lower-than-expected capacity this year. The stock right now is down a little more than 6 1/2%.
Let's check in on TC Energy Corp, raising its dividend payout to shareholders as it swings to a profit. The pipeline giant is reporting a fourth-quarter profit of more than $4 billion, compared to the same period last year when it posted a loss of $1.45 billion. That was when TC Energy took a one-time charge on its Coastal GasLink project. That stock is up a little shy of 2%. Also want to check in on Nike.
Since it's going to cut 1500 jobs, 2% of its global workforce as it is dealing with a slowdown in consumer spending. The move down from the company's part of a broader restructuring program announced in December, aimed at cutting some $2 billion in costs over the next three years. Right now you got Nike at $102 and change, down a little more than 3%.
Let's check in on the markets. We will start on Bay Street with the TSX Composite Index, last trading day of the week. It's been a bit of a choppy one heading into a long weekend for us and the Americans.
They have Presidents' Day on Monday.
Got some green on the screen. Up 73 points, about 1/3 of a percent. Not a bad feeling after a choppy week.
South of the border, off the heels of that read this morning, the S&P 500 is clawing its way back into positive territory. It's pretty modest, 2 1/4 points to the upside, but it's still green on the screen and strongly about the 5000 level.
Earlier this week, as Anthony was telling us, we got that US inflation report indicating that, of course, inflation has not been tamed south of the border. So what does it mean for interest rates and the bond market? Alex Gorewicz, VP and Dir. for active fixed income and portfolio management at TD asset join me earlier to discuss.
>> There is no one answer, and that's the sad part. It's actually quite broad based, the stickiness, which is a problem for the Fed.
I think if we look at the headline numbers, we had some expected, let's say drags, from goods or energy, although be it less than what was anticipated. And maybe that contributed a bit to the beat.
But really, it was just core services, even excluding shelter, which is continuing to moderate, albeit at a snail pace. But it's really core services, ex-shelter that's just proving to be quite sticky. Some components actually edged higher, not good.
>> I was going to say, we didn't expect that it would be a straight line all the way down from the 8 or 9 where we were way back when down to the 2% target, that there'd be some chop along the way. But is this more than just chop? I mean, are there signs in here that we should be saying, are we going to get to 2? And then the time we think we're going to get there.
>> I think it's hard to say at this time.
And the reason I say this is it was anticipated by, let's call it inflation experts, really people that are actually putting their money where their mouth is and trading inflation-linked products.
It was expected that this month and actually the next couple of months-- so February and March-- are expected to remain call it sticky in that they're not necessarily suggesting inflation across the board is starting to trend higher. But they're sort of stalling the disinflation progress.
So this, to some extent, was not unanticipated. It was maybe a little bit firmer than that, but nothing that at the moment suggests that the Fed was wrong to pivot.
It does reinforce, however, that the euphoria coming into this year with five or six rate cuts to be delivered by the end of the year, it was-- there was just too much euphoria and that that had to give back.
>> Let's talk about that euphoria, then, obviously, the fact that we did see Jerome Powell, last time we heard from him, push back against this. Listen, we are not in a rush to cut rates. And the market-- I think there's been a dance. We've been talking about this dance between what the Fed, what our central bank has to say, other central banks, and what the market wants to believe. Are we pulling expectations back in line again, yet again, saying, well, maybe he's serious.
Maybe he has reason to wait and be patient.
>> Yes, and this definitely reinforced that. But honestly, you didn't need the CPI number to basically validate Powell's stance or, we'll say, the collective Fed's stance that March is too soon because jobs numbers beat. GDP data both, realized for Q4 of last year, as well as advanced data for Q1 of this year-- they're all tracking a lot better than expected, which tells you that the Fed can at least be patient.
And this just reinforces that.
Again, it doesn't necessarily throw off track the disinflation progress. It just stalls it. So we'll see next month and the month after that if we have a genuine pop higher, or if what we've seen today in terms of the broadening of that stickiness in core services-- if that persists over the next couple of months. But in any case, I think the bond market's reaction, which is, OK, we're not pricing in six anymore. Now we're pricing in only four to the end of the year in terms of rate cuts from the Fed. I think that's a lot more appropriate.
>> What does it take for the Fed or, really, for the economic data-- I just think in the terms of-- there's been some interesting ideas put out there recently about the idea that, well, if you can have interest rates at this level, which we do consider to be restrictive, more restrictive than they need to be-- they're not at their neutral place. But the economy keeps performing. The labor market holds up. Inflation, obviously, just got a little stuck there above 3-- that the Fed not only doesn't have to be in a rush. Do we have an idea of where rates actually need to be to bring an economy into balance?
>> That's an excellent question. And I think if we judge based on the reaction that we've seen in interest rates, let's say year to date as this full suite of data-- not just the latest CPI print, but the full suite of economic data-- has been coming in better than expected. I think interest rates have responded accordingly, which is they've edged higher.
And today, we've had, actually, a pretty significant reaction to the CPI print, as one would expect. 10-year interest rates are higher by almost 10 basis points.
Two-year and five-year are up even more than that. So the reaction was somewhat to be expected.
But interest rates year to date have actually just been reacting by moving higher just to all of this positive data.
Where I have more concern for the broader market, both the broader bond market as well as capital market, is that risk assets, whether you look at corporate bonds-- and that's effectively what we say like looking at credit spreads-- or whether you're looking at equities, I think they really ran away with this notion that we'll get five or six rate cuts. And they probably have more adjustment to do after this CPI print than even interest rates.
So when I think about where rates are, I'd say they're pretty-- they're pretty fairly priced for only three, maybe four rate cuts that we'll get this year.
>> What does it mean for fixed income this year, then? It's still early in the year.
I mean, we're only in February. But we had expectations. We're six, seven weeks in, and we're starting to question those expectations. What does it mean for the bond market?
>> And we've done this analysis looking back at every rate cut cycle since the '60s or '70s.
So we went back a long time. And one thing that we found was that interest rates don't really fall until we're about, let's say, a quarter-- a calendar quarter, so three months-- away from that first rate cut.
What was clear-- and this is why I keep mentioning the broad suite of economic data-- what was clear from as early as the first week of January is that data was suggesting that the economy is doing better than expected, better than the Fed's forecasting, better than economists are forecasting. And what that meant was that March was too soon-- and we've been talking about that for many months now-- and that June was more likely.
So if history repeats itself, like it has in prior rate-cutting cycles, that means you will have interest rates come down.
And therefore fixed income as an asset class will generate positive returns. But you have to be within striking distance of that first rate cut. I think at this point, it's too far away. As we head into the second quarter, we'll probably see, as long as the data, again, is not suggesting inflation is reaccelerating. As long as the data cooperates, I think that's when you start to see those positive gains in the asset class.
>> So with what we know today and, obviously, with the caveat that it can change-- and the data that comes out in the coming weeks and months-- is June still reasonable, a reasonable expectation for the market that perhaps we see that first cut in June?
>> Yes. I think so. Interestingly, the bond market's reaction to today's CPI print was to effectively price out any expectation of rate cuts in March. But the May meeting still has a 40% to 45% probability.
>> Also, still live. It's still a live meeting.
>> Still live. It's still a live meeting.
Again, with the data coming in as is-- and it's not just the hard data that I-- some of the data points that I had mentioned.
Even looking at survey-based indicators, they're suggesting a little bit of a cyclical upturn, to the extent that that actually translates into economic activity, I think may-- still is too soon.
And maybe the Fed can give itself more optionality and start in June.
>> That was Alex Gorewicz, VP and Dir. of active fixed income portfolio management at TD Asset Management.
Now, for educational segment of the day.
If you're looking to keep track of the major indices out there, WebBroker has tools can help. Joining us to discuss is Hiren Amin, senior client education instructor with TD Direct Investing.
>> This is something investors want to keep an eye on especially if you are exposed to equity growth.
If you turn on any newsfeed, that's the person you're gonna see. It's a benchmark or think of it as a gauge or temperature check on how the markets are performing.
It's a relative measure comparing to everyday performance usually. When you look at that number, you're really focusing on the change on a number.
Is it up for the day, is it down for the day? And that's relative to the previous day's closing price. Now, how does Gooden index get factored in? What exactly goes into an index?
Think of it as a hypothetical portfolio of investment holdings that either represent a broad market, meaning it covers the entire span of a certain market, broadly covering a lot of those sectors, or it could be a sector or segment specific as well.
Let me give you an example, some popular indices that we know about in our domestic North American markets.
If we look at the US markets, Dow Jones, the name is probably, quite a bit, the S&P 500. One of the things, I will give you a history lesson. When you think about that Dow Jones, it's made up of 30 of the largest industrial companies in the United States. But they aren't static, they're not the same since the Dow started. It was created back in 1896 and if you take the timeline from then till now, those companies have changed over time because there are different inclusion criteria that are required to be part of an index.
We will use another session to discuss what those are broadly speaking, it could be things like volume, their profitability of a company, the market capitalization.
Now, one of the things about the Dow was when it was created, GE, General Electric, was one of the companies that was included, it got included and excluded, until 1907 when it got included back in it was the mainstay of the Dow for the neck 122 years until 2018 when it had to make room for Walgreen. You can see those dynamic shifts happening with different economic changes and trends in the market.
We are going to turn our attention to focus in more on the Canadian ones but broadly speaking, that's what the stock market indexes and creatively look forward to seeing where those levels are going to knew lows or highs.
>> You take a basket of stocks on any exchange there are many more stocks on those indices but at the same time the indices report them, I report them every day, the S&P 500, new record highs, all that kind of stuff. What if you want to find indices and track the performance on WebBroker?
>> Absolutely.
Let's seven to WebBroker over here.
We are going to go into the research section. Under the markets column, we can head over to the overview section. This will cover the broad major indexes that we are going to see. You can see the TSX Composite Index, the Dow Jones industrial average taker. We go to the second tab on this page here, called indices, this is where you're going to see a breakdown of that. You come down here and it's broken down according to different major indices and sector specific in the international market, Europe and Asia, etc. When you come in here, we want to look at first is, we will just ask Blaine some of our Canadian indices. We are going to go towards the bottom here and within here you will notice that we have the TSX 60 index, we have the TSX comp and we have the venture.
The TSX composite index is our most broad market index, a cover 250 of the largest companies on the Toronto Stock exchange, representing about 70% of the market valuation. If I click on this indicator, it opens up a chart. There is a section down here that says members. This is where you are going to be able to track who is included as part of that index. We set at 250 so it's quite an extensive list here.
It's going to kind of break down a lot of that information on a per stock basis.
If you scroll towards the bottom, make sure for those investors that want to see the full suite of those products and their securities, you go through different pages.
There is an easy way once you are on this page if you want to see some of the other ones.
You can simply go back to the drop down are here and then just scroll through some of the other one. If you want to see the NASDAQ, some of the US one. We can also see some sector specific ones.
If you wanted to find out, for example, our Canadian banks doing?
This will show up there. The major indexes and sectors are going to show up using this list.
The one last thing that I will also mention is it's always a good idea to benchmark, traders like benchmarking the performance against an index.
Let's say we go back to the TSX 60. We will find that up here.
Let's say you want to benchmark it. What you can simply do is go to the charts over here, you can track it and analyse it in different ways and you can even run a comparison.
If you want to say how did the TSX 60 compare against the TSX Venture? I can put that in and I'm gonna benchmark the performance over whichever time period that we want there.
That's how you look at some of those members and do some benchmarking as well.
>> Thanks for that.
>> My pleasure.
>> Hiren Amin, senior client education instructor with TD Direct Investing.
And make sure to check out the learning centre in WebBroker for more educational videos, live, interactive master classes and upcoming webinars.
We were just talking about comparing the performance of an asset class or stock to a broader index. The big Canadian telecom stocks have underperformed the broader markets over the past year or so.
Are there any signs of better days ahead in the latest earnings? Vince Valentini, managing director for equity research at TD Cowen, which is a division of TD Securities, join me earlier to discuss.
>> Let me give you my thoughts just about the industry from a big picture level to start with, and we can drill down into some of the detail over what's happened in the past 12 months, or more recently. In general, I've been covering this sector for 30 years, to put this in context. So there's obviously something here I like because I've stuck with it. I think it is a good industry.
First off, they sell what are pretty much non-discretionary services. Everybody needs their cell phone. Everybody needs their internet connection. These companies provide the plumbing to make those services happen. So it really is digital infrastructure that's never going away. I like that long life infrastructure characteristic of the industry.
Second is we have a pretty good regulatory system in Canada. There's always ebbs and flows, and you have criticisms at times, but for the most part, we have a self-contained Canadian industry with strict foreign ownership rules.
That provides a huge barrier to entry, that we're never going to face competition from the likes of T-Mobile or a Vodafone, somebody who would have much bigger scale and potentially disrupt the apple cart for our existing players.
So I think that gives a good foundation for investors, which brings you back to what these companies do. They're not high growth entities, but they generate stable, slightly growing cash flow, which they then deploy into share buybacks or dividends or sometimes pad their growth with acquisitions. So at a high level, I think the industry is well-positioned for the longer term.
And last but not least, it is not overly expensive, considering the type of infrastructure they have. If we look at virtually every other class of infrastructure assets, whether you want to look at pipelines or railways, green energy projects, a lot of times, those trade in the range of 10 to 15 times EBITDA. Telco's trading at 7 to 8.
And at one point, they were up at 9, so they've come down a little bit, but generally hover in the 7 to 8 times range.
So I think you're getting pretty decent long life cash flow at a reasonable valuation. So I like where we are. I'll pause there if you want to dig more into the last year.
>> I mean, that's the reason why we often think of these as the blue chips and the steady-eddies. You take a look at the last year and you look at the stock market performance of a BCE or a Telus or a Rogers, even against the TSX-- and the TSX isn't gangbusters in the past year either, but they're dramatically underperforming.
What are we seeing in these names? And was there anything in the results that start moving us forward in this story?
>> Let me deal with last year first.
Really, I hate to admit it as a fundamental analyst because we're paid to dig into the weeds of what the companies are doing and who's doing better managing their cost structure and all that good stuff. But at the end of the day, 70% of the battle with these stocks is bond yields. They are simply cash generators, and people look at the dividend yields and weigh that versus where bond yields are.
Almost like bond proxies in some extreme cases.
The biggest issue last year was clearly, after many, many years of ultra low interest rates, we finally saw rates rising and bond yields up quite significantly. So magically, after the peak in October, from October to the end of December, you saw the telcos rally, which was, again, largely bond yields coming back down. So if you're constructive on the outlook for bond yields, which our teams at TD Economics are, that they will be lower a year from now, then I think these stocks will have a much better year. Last couple of days, it's been a little rocky on that front with the CPI numbers, so there's always going to be a bit of volatility. But in general, I think that headwind will turn into a tailwind and help most of the stocks in the sector.
In addition to that, Greg, there were a couple of fundamental factors last year that scared people a bit more than normal.
We had some major transformational, I'd call it, M&A activity in the space with Rogers acquiring Shaw cable. And then the spinoff of Shaw's wireless business, Freedom Mobile, had to go to Québecor in order to get regulatory approval.
That created a lot of consternation in the investment community as to what's this new world going to look like. Are we going to have dramatically more competition than we're used to? Any sort of price wars, especially from that new player, Québecor, who had acquired Freedom Mobile and become, pretty much, a national wireless carrier for the first time?
So I think there was a lot of, I would call, noise in hindsight, that we could have price wars. Hasn't really turned out to be the case.
There is certainly competition in the market, but nothing I would call outsized.
But for a few months last year, there were concerns that things would get worse than they did.
And the last point, I'd say, is just regulatory, which somewhat linked to the Rogers-Shaw deal, as well, that would the government and the CRTC come out firing after that deal, saying we let the industry consolidate? Now we're going to hammer you with more stringent regulations, potentially forcing you to open up access to your networks at super cheap rates for resellers to come in, and various other sort of small regulatory files that were on the docket last year.
Again, a lot of concern from some analysts on Bay Street, which really didn't materialize.
We saw a couple of regulatory outcomes late last year, which were very favorable.
Showed that it's steady as she goes. The government, at a high level, likes the industry. No politician can admit that very easily, but the industry invests very well in high quality networks. They want to incentivize investment.
So they're probably not going to do anything devastating to really hurt them, is my view, and we saw more evidence of that last year. But to your point, bond yields rising, competitive concerns, and some elevated regulatory concerns, which have now, pretty much, fallen by the wayside, is why things didn't do very well last year and why I'm pretty constructive over the next 12 months.
>> You mentioned some big names there. For the audience, for the full disclosure on the companies that are covered by TD Cowen, you can see the link to the TD Securities website at the end of this program. So that takes us through what we've been through. We recently had a batch of earnings, and of course, not only is it important, the three months behind them, but what they're saying about the path in front of them. As you went through those earnings for these big companies, does anything stand out? Anything interesting investors need to be aware of?
>> Yes, Greg. So we did. Just to level set for everybody watching, in the past two weeks, we've had BCE, Telus, and Rogers all report their fourth quarter results.
This is a pretty important quarter because at this time of the year, they almost always give us their annual guidance for the following year. So we got 2024 guidance from all three of those companies.
I would say a couple of wrinkles and things to be concerned about, but for the most part, the results were quite encouraging. First point I'd probably say is the wireless market remains very strong. Canada has gone through a couple of years of record levels of subscriber additions, in part driven by immigration and foreign students, but also just people adopting more devices than they ever have in the past. So we had, 2023, total industry wireless subscriber additions up around 1.75 million, which was right in line with 2022, which was an all-time record year. That's about 5% growth in volume for the industry. So we saw evidence of that in the fourth quarter results.
We saw nothing in the guidance from any of the companies to suggest that that pace of growth is going to slow down dramatically.
Rogers has indicated 4% to 4.5% for 2024 is where they think it can settle in, which factors in some of what the government is doing to limit foreign student visas. But it's not going to crater the industry growth. It just slows it down a little from a very high level.
So the results were encouraging in terms of that underlying volume growth.
We also saw stable ARPU, which goes back to what I was talking about earlier.
>> Average Revenue Per User, right?
I just remembered some of my acronyms from when I used to have to cover these things first off when they broke.
>> Apologies. We have a lot of acronyms in the industry, and I throw them out pretty quickly sometimes. So yes, catch me on any of that.
Average Revenue Per User, which is a key metric of, what are the wireless carriers getting from each customer per month? If that metric starts to decline, then we get concerned that there is too much competition and volume growth is being offset with pricing, and you don't get the revenue and profit growth that you should be getting.
We saw ARPU relatively stable, which refutes some of that noise I was talking about in sort of the middle part of last year, that people thought we were going to have price wars and elevated competition after Québecor took over Freedom. So no evidence of that in the fourth quarter results either.
And now back to the ebb and flow I mentioned. Not everything was perfect.
Some carriers certainly seemed to be executing better than others at getting their share of that volume growth, managing their cost structure well, which all translates into the most important metric for most analysts, like myself, is EBITDA growth, which ultimately is a proxy for free cash flow. But free cash flow runs around every year with all kinds of lumpy items, so we tend to focus mostly on EBITDA as the main comparative metric.
On that front, we saw guidance from Rogers for 6% to 9% growth in 2024. Telus is at 5.5% to 7.5% and BCE is at 1.5% to 4.5%.
So clearly, Rogers seems to be doing a bit better. And to be clear, that is organic growth for all three of them. I've backed out the Shaw contribution for one extra quarter that they've acquired it for in 2024. So some better execution from some versus others was notable in the numbers.
And then last, but not least, is free cash flow and dividend quality, which is very important to investors in this space, especially for BCE and Telus, which are the two highest yielding names. And there we saw pretty good performance from Telus-- free cash flow guidance in line with what we thought, seemingly supportive of them continuing what they've been promising for some time, which is to do at least 7% per year dividend growth, whereas BCE slowed their dividend growth for the first time in 15 years. They had been doing 5%. They lowered it to 3%. And their free cash flow growth guidance for 2024 was quite a bit below what most people were expecting, and they're expecting a decline of between 3% and 11%.
So, again, Greg, not everything was perfect in the results. There are a couple of weak spots, depending on which company you look at. But at a high level, the market growth and market pricing dynamics were clearly still trending in the right direction.
>> That was Vince Valentini, managing director for equity research at TD Cowen, which is a division of TD Securities.
Now, let's get you updated on the markets.
We are having a look at TD's Advanced Dashboard, a PlatForm designed for active traders available through TD Direct Investing. This is the heat map function, it gives us a view of the market movers.
Let's look at the TSX 60, screened by Price and volume.
We got some great on the screen, a fair number of names. We look at the energy space, I don't want to call them the TransCanada trap. TC Energy up about 2%.
The financials are showing some modest upside.
It's been a choppy week for Shopify.
It was only earlier this week that they reported and their shares pulled back in and they made some gains. They are down about 1 1/2% today right now.
South of the border, less chicken on the S&P 100, narrow it down a little bit. As Hiren told us earlier, you have a lot of designations and ways of gauging the movements of a market.
There's not a lot happening today. And videos up about 1.8% but some weakness in the tax base.
As I look across the board, there's not a lot to write home about. We do have Nike, we told you earlier, cutting some jobs, saying they see a slowdown in consumer demand, that stock is down about 3%. You can get more information on TD Advanced Dashboard by visiting TD.com/Advanced Dashboard.
Coming out of the seismic dislocations of the pandemic, there were some who thought the investing landscape had been fundamentally altered.
But earlier this week we had a chance to talk to one of our recurring guests. As many of those changes are minding and familiar investing themes are taking centre stage, we talked about it with Jitania Kandhari, Deputy CIO of the Solutions and Multi-Asset Group at Morgan Stanley Investment Management.
>> Yeah, we are reverting to familiar patterns, whether it's 60/40, which was thrown out of the window, like this is not going to work. It's coming back. The higher for longer is moving towards higher for no longer, in my opinion. All the green transition has not really curbed oil demand so far.
So interesting themes and trends that were being spoken about are kind of mean reverting. Even populism, from an election standpoint, given a heavy election year, seems to be peaking, which was becoming the big rhetoric in the past, that global populism is exploding. I think that is also leveling off at the margins. So interesting reversion to mean patterns across some of these themes that were talked about.
>> So let's breaking some of those down because obviously this is a world that perhaps we can approach and understand because we've lived in this world before.
Let's start with the 60/40 portfolio because there were people-- I mean, that's the whole idea, is diversification. If equities are doing this, then bonds offset it, and vice versa.
And then you had this environment coming out of the pandemic where no, both were going down at the same time. Well, walk me through that, why we think now 60/40 actually will work again in the future or even work now.
>> Yeah. So 60/40, interestingly, in 2022 was down 17.5%, the worst return since-- 4th worst return in the 200-year history, but worst return since 1937. 17.5% down in 2022, 17% up in 2023, so an interesting volatile swing.
As you mentioned, the diversification benefit of bonds in that balanced portfolio, or the moderately balanced portfolio, was under question because the correlation between stocks and bonds became positive after 25 years of negative correlation in 2022, given all the macro conditions.
But what's really interesting, we've looked at this 200-year data, which shows that what really drives that correlation is inflation. And we looked at several macro indicators, and inflation was the one-- and I have a chart here, which has divided this entire period into different inflation deciles.
And whenever, if you can see, the inflation crosses 2 and 1/2%-- 2.4, to be precise-- that correlation between stock and bonds gets positive, reducing that diversification potential of bonds.
Now with inflation coming down, I think that correlation is not going to be as high as we saw in 2022, bringing back that diversification potential for bonds, especially if there is an economic slowdown or a market correction driven by inflation or any of these issues that are gripping the market at this point.
More importantly, there is also a mean reversion argument. So if you look at, again, this 200-year data, whenever stocks and bonds have been down in a year, the next two years have been positive for this combination. Again, an event study based on this data.
So diversification argument and the mean reversion potential, both these reasons make me believe that this is a good starting point for asset allocation at these levels.
>> So if we use 60/40 then as our frame, based on those ideas, what looks interesting inside a 60/40 portfolio in the world we're living in now?
>> Yeah, so within equities, of course, US equities, we've talked about the concentration, the magnificent seven. I think really looking outside in an equal cap weighted US index is presenting an interesting opportunity.
I do like different segments of the US market. Of course, there will be some technology stocks that do well, but industrials and the energy complex, select financials. There are opportunities emerging in the ex-mega seven space, which are not expensive and look promising, even from a thematic perspective.
I do like international markets to diversify from that home bias. Pockets of Europe should benefit with the euro where it is, and also small cap Europe looks very interesting, given floating rate is a big part of those companies. And if rates come down, then they have a nice kicker going forward, and they are very cheap.
Emerging markets ex-China, there are several opportunities in India and Latin America, some of the Southeast Asian markets that are benefiting from the China plus one and a new growth cycle. So the 60 needs to be very actively managed, given the opportunities in select parts of the world.
On the fixed income side, I do think that over 4 and 1/2% yield on the 10 year is a very good duration trade, and we can talk about the reasons why. We do like the investment grade as well because if, in the event that there is a slowdown or the recession, then the higher quality fixed income pockets look good.
And emerging market debt also looks very interesting because the central banks have been way ahead in the tightening cycle, have been preemptive. So again, taking a diversified view within that 40 fixed income portfolio also makes sense at this stage of the market and economic cycle.
>> I imagine part of that view, or probably a large part of that view, too, is your idea, as you were saying, inflation. We were talking about inflation higher for longer. Rates not higher for longer. No longer going to stay high. At some point, we're going to get some cuts.
That must feed all back into what we're talking about.
>> Yes. So I think the rate story is going to be nicely volatile, given-- >> Nicely volatile. That's an interesting way of putting it.
>> --giving us opportunities kind of really positioning for the long term. So the way I'm thinking about rates is really from a historical perspective. I've looked at-- again, I like to back a lot of our research and data with historical evidence.
The three times when debt to GDP spiked in the US were during the wars, the 1860 Civil War, the two World Wars, and more recently during COVID and post COVID.
You've seen debt spikes. Today, US public debt is 120% of GDP, so it is at an all-time high.
And it's interesting that in all these periods when debts spiked, the real rates, as proxied by 10 year minus the CPI, have remained negative. And there is an economic reason for that because if you have such high debt, to grow out of that debt or to service that debt, you need real rates lower than your GDP so that you can service that debt with lower interest rates relative to your economic output, and you can boost that economic output to support that debt.
And I think that this time cannot be different because we need to be in that same situation.
Otherwise, something will break. So if I assume that inflation settles at 2 and 1/2%, 2 and 1/2% to 3%, for example-- I don't know if it will really go to the 2% target.
But assuming 2 and 1/2% to 3%, a 4 and 1/2%, 5% 10 year is neutral-ish, with rates at 2%, with GDP at 2%, is in line with GDP. So I think that's what I think is fair value of where those rates should be. Else, with this high debt, something can break in the system.
So keeping that economic template in mind is a good way to position in the fixed income trade. And as I said, there's going to be volatility because day to day, what's the market pricing in? Is it March?
Is it June? How much in March? How much in June? How much beyond?
So I think that will create that volatility, but keeping that template in mind that the 2% real rate with a 2% GDP is the worst-- at worst, that should be the real rate situation, and kind of positioning for that in the portfolios would be a good way to build the fixed income portfolio.
>> That was Jitania Kandhari, Deputy CIO of the Solutions and Multi-Asset Group at Morgan Stanley Investment Management.
As always, make sure you do your own research before making any investment decisions.
We are heading into a long weekend. We will be back on Tuesday though with Robert Both, macro strategist Ted TD Securities.
He will give us his reaction to the latest Canadian inflation report.
He also wants to answer questions on the economy.
A reminder that you can get a head start on those questions.
Just email moneytalklive@td.com. That's all the time we have the show today.
On behalf of everyone in front of the camera and behind the scenes who brings the show to you, thanks for watching and we'll see you after the long weekend.
[music]
coming up on today's show, we are going to hear from TD Asset Management Alex Gorewicz on what this week's hotter than expected US inflation report could mean for the US Federal Reserve. TD Cowen Vince Valentini is going to give us a view on whether there are better days ahead for the Canadian telcos. And Morgan Stanley Investment Management's Jitania Kandhari is going to look at whether the 60-40 portfolio strategy is making a comeback.
Lesson today's WebBroker education segment, Hiren Amin is going to look at how to track market performance on WebBroker.
Before we get to all that and our guest of the day, let's get you an update on the markets.
We will start here at home with the TSX Composite Index. It's been choppy this week. Today we are putting another 94 once on the table, about half a percent to the upside.
We've had a lot of macro data, particularly out of the US, when it comes to price pressures. We'll get all of that with Anthony Okolie. We've also had a lot of corporate earnings in Canada this week as well.
Let's check in on some of the most actively traded names. To that reported.
We will start with Air Canada. I will tell you more about what we saw in the report later on in the show. At $17.95, the market is clearly unimpressed. The stock is down all 7%.
Meanwhile, TC Energy out with its report, getting a bit of a bid today.
At $53.23, they are up about 2 1/3%.
South of the border, you had an inflation report, were little together, where are we? 5034 on the S&P 500, gain a five points.
Modest but firmly with the 5000 mark, reached for the first time last week. The tech heavy NASDAQ was under a bit of modest pressure earlier today. Still not taking its way out completely. You're down about 16 points were 1/10 of a percent.
I want to check in on Meta Platforms.
A little bit of selling pressure. Nothing too dramatic but taking points off the table. At 474 bucks and change per share, the parent company of Facebook's animals 2%. And that's your market update.
We are all data watchers, trying to figure out what the Fed is going to do next.
Inflation earlier this week and then Consumer Reports and another inflation read today. Here's a breakdown of what it might mean going forward for the Fed, Anthony Okolie.
>> It's been a roller coaster ride. I think what we are seeing now is markets have been reacting to the original confidence that rate could be hops, we could see rate cuts in the first half of the year. Now that is being delayed until the second half of the year.
We started with the CPI data in December which was revised lower.
It boosted sentiment around rate cuts.
Of course we got the January CPI data and US consumer prices came in at 3.1% year-over-year versus we .4% in December.
Well ahead of forecasts.
We got some retail data that showed that spending by US retailers slumped more than expected, largely due to the cold weather in January. That kept shoppers at home.
Retail sales came in at -.8% in January.
That broke a two-month streak of gains and that gives some reassurance.
January wholesale inflation saw the biggest monthly increase since August, coming in at .2% last month, that resulted in an annual increase of nearly 1%. More importantly, the core PPI, that excludes food and energy, he jumped half a percent, bringing the yearly pace of wholesale inflation to 2%. Much hotter than expected. This is reviving fears that the inflation piece has not been tamed by the side.
>> That the percent number seems to be a bit of a barrier because only got that earlier inflation point in the week, the market that we might crack below three and show progress words to. It was about. On Tuesday, when and he get back from a long weekend, we will get report on Canadian inflation. Total headline inflation in Canada was 3.4%. We are looking for some progress in this country but breaking below three and trying to get into, it could be an interesting week for us and for the market to try to figure out, okay, what the central bikes have told us repeatedly, we are not in a rush to cut.
The data seems to support the idea that they don't need to be in a rush.
>> Exactly. I think the Fed is looking for more signs that inflation is moving towards the 2% target. One thing about the core PPI, that's likely to feed into a higher January read for the Fed's preferred measure of inflation which is due at the end of the month and that could potentially keep the Fed on hold for longer. As you mentioned, we got our inflation data as well.
Investors will be watching closely to see if inflation is moving towards a 2% target. Another key report to watch.
>> It could change the minds about where we are headed and how fast. Thanks for that.
>> My pleasure.
>> MoneyTalk's Anthony Okolie.
Right 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.
Shares of Air Canada in the spotlight today. The airline handed in a solid quarterly report but investors seem to be more interested in and concerned about the forecast.
Air Canada says it expects higher costs and lower-than-expected capacity this year. The stock right now is down a little more than 6 1/2%.
Let's check in on TC Energy Corp, raising its dividend payout to shareholders as it swings to a profit. The pipeline giant is reporting a fourth-quarter profit of more than $4 billion, compared to the same period last year when it posted a loss of $1.45 billion. That was when TC Energy took a one-time charge on its Coastal GasLink project. That stock is up a little shy of 2%. Also want to check in on Nike.
Since it's going to cut 1500 jobs, 2% of its global workforce as it is dealing with a slowdown in consumer spending. The move down from the company's part of a broader restructuring program announced in December, aimed at cutting some $2 billion in costs over the next three years. Right now you got Nike at $102 and change, down a little more than 3%.
Let's check in on the markets. We will start on Bay Street with the TSX Composite Index, last trading day of the week. It's been a bit of a choppy one heading into a long weekend for us and the Americans.
They have Presidents' Day on Monday.
Got some green on the screen. Up 73 points, about 1/3 of a percent. Not a bad feeling after a choppy week.
South of the border, off the heels of that read this morning, the S&P 500 is clawing its way back into positive territory. It's pretty modest, 2 1/4 points to the upside, but it's still green on the screen and strongly about the 5000 level.
Earlier this week, as Anthony was telling us, we got that US inflation report indicating that, of course, inflation has not been tamed south of the border. So what does it mean for interest rates and the bond market? Alex Gorewicz, VP and Dir. for active fixed income and portfolio management at TD asset join me earlier to discuss.
>> There is no one answer, and that's the sad part. It's actually quite broad based, the stickiness, which is a problem for the Fed.
I think if we look at the headline numbers, we had some expected, let's say drags, from goods or energy, although be it less than what was anticipated. And maybe that contributed a bit to the beat.
But really, it was just core services, even excluding shelter, which is continuing to moderate, albeit at a snail pace. But it's really core services, ex-shelter that's just proving to be quite sticky. Some components actually edged higher, not good.
>> I was going to say, we didn't expect that it would be a straight line all the way down from the 8 or 9 where we were way back when down to the 2% target, that there'd be some chop along the way. But is this more than just chop? I mean, are there signs in here that we should be saying, are we going to get to 2? And then the time we think we're going to get there.
>> I think it's hard to say at this time.
And the reason I say this is it was anticipated by, let's call it inflation experts, really people that are actually putting their money where their mouth is and trading inflation-linked products.
It was expected that this month and actually the next couple of months-- so February and March-- are expected to remain call it sticky in that they're not necessarily suggesting inflation across the board is starting to trend higher. But they're sort of stalling the disinflation progress.
So this, to some extent, was not unanticipated. It was maybe a little bit firmer than that, but nothing that at the moment suggests that the Fed was wrong to pivot.
It does reinforce, however, that the euphoria coming into this year with five or six rate cuts to be delivered by the end of the year, it was-- there was just too much euphoria and that that had to give back.
>> Let's talk about that euphoria, then, obviously, the fact that we did see Jerome Powell, last time we heard from him, push back against this. Listen, we are not in a rush to cut rates. And the market-- I think there's been a dance. We've been talking about this dance between what the Fed, what our central bank has to say, other central banks, and what the market wants to believe. Are we pulling expectations back in line again, yet again, saying, well, maybe he's serious.
Maybe he has reason to wait and be patient.
>> Yes, and this definitely reinforced that. But honestly, you didn't need the CPI number to basically validate Powell's stance or, we'll say, the collective Fed's stance that March is too soon because jobs numbers beat. GDP data both, realized for Q4 of last year, as well as advanced data for Q1 of this year-- they're all tracking a lot better than expected, which tells you that the Fed can at least be patient.
And this just reinforces that.
Again, it doesn't necessarily throw off track the disinflation progress. It just stalls it. So we'll see next month and the month after that if we have a genuine pop higher, or if what we've seen today in terms of the broadening of that stickiness in core services-- if that persists over the next couple of months. But in any case, I think the bond market's reaction, which is, OK, we're not pricing in six anymore. Now we're pricing in only four to the end of the year in terms of rate cuts from the Fed. I think that's a lot more appropriate.
>> What does it take for the Fed or, really, for the economic data-- I just think in the terms of-- there's been some interesting ideas put out there recently about the idea that, well, if you can have interest rates at this level, which we do consider to be restrictive, more restrictive than they need to be-- they're not at their neutral place. But the economy keeps performing. The labor market holds up. Inflation, obviously, just got a little stuck there above 3-- that the Fed not only doesn't have to be in a rush. Do we have an idea of where rates actually need to be to bring an economy into balance?
>> That's an excellent question. And I think if we judge based on the reaction that we've seen in interest rates, let's say year to date as this full suite of data-- not just the latest CPI print, but the full suite of economic data-- has been coming in better than expected. I think interest rates have responded accordingly, which is they've edged higher.
And today, we've had, actually, a pretty significant reaction to the CPI print, as one would expect. 10-year interest rates are higher by almost 10 basis points.
Two-year and five-year are up even more than that. So the reaction was somewhat to be expected.
But interest rates year to date have actually just been reacting by moving higher just to all of this positive data.
Where I have more concern for the broader market, both the broader bond market as well as capital market, is that risk assets, whether you look at corporate bonds-- and that's effectively what we say like looking at credit spreads-- or whether you're looking at equities, I think they really ran away with this notion that we'll get five or six rate cuts. And they probably have more adjustment to do after this CPI print than even interest rates.
So when I think about where rates are, I'd say they're pretty-- they're pretty fairly priced for only three, maybe four rate cuts that we'll get this year.
>> What does it mean for fixed income this year, then? It's still early in the year.
I mean, we're only in February. But we had expectations. We're six, seven weeks in, and we're starting to question those expectations. What does it mean for the bond market?
>> And we've done this analysis looking back at every rate cut cycle since the '60s or '70s.
So we went back a long time. And one thing that we found was that interest rates don't really fall until we're about, let's say, a quarter-- a calendar quarter, so three months-- away from that first rate cut.
What was clear-- and this is why I keep mentioning the broad suite of economic data-- what was clear from as early as the first week of January is that data was suggesting that the economy is doing better than expected, better than the Fed's forecasting, better than economists are forecasting. And what that meant was that March was too soon-- and we've been talking about that for many months now-- and that June was more likely.
So if history repeats itself, like it has in prior rate-cutting cycles, that means you will have interest rates come down.
And therefore fixed income as an asset class will generate positive returns. But you have to be within striking distance of that first rate cut. I think at this point, it's too far away. As we head into the second quarter, we'll probably see, as long as the data, again, is not suggesting inflation is reaccelerating. As long as the data cooperates, I think that's when you start to see those positive gains in the asset class.
>> So with what we know today and, obviously, with the caveat that it can change-- and the data that comes out in the coming weeks and months-- is June still reasonable, a reasonable expectation for the market that perhaps we see that first cut in June?
>> Yes. I think so. Interestingly, the bond market's reaction to today's CPI print was to effectively price out any expectation of rate cuts in March. But the May meeting still has a 40% to 45% probability.
>> Also, still live. It's still a live meeting.
>> Still live. It's still a live meeting.
Again, with the data coming in as is-- and it's not just the hard data that I-- some of the data points that I had mentioned.
Even looking at survey-based indicators, they're suggesting a little bit of a cyclical upturn, to the extent that that actually translates into economic activity, I think may-- still is too soon.
And maybe the Fed can give itself more optionality and start in June.
>> That was Alex Gorewicz, VP and Dir. of active fixed income portfolio management at TD Asset Management.
Now, for educational segment of the day.
If you're looking to keep track of the major indices out there, WebBroker has tools can help. Joining us to discuss is Hiren Amin, senior client education instructor with TD Direct Investing.
>> This is something investors want to keep an eye on especially if you are exposed to equity growth.
If you turn on any newsfeed, that's the person you're gonna see. It's a benchmark or think of it as a gauge or temperature check on how the markets are performing.
It's a relative measure comparing to everyday performance usually. When you look at that number, you're really focusing on the change on a number.
Is it up for the day, is it down for the day? And that's relative to the previous day's closing price. Now, how does Gooden index get factored in? What exactly goes into an index?
Think of it as a hypothetical portfolio of investment holdings that either represent a broad market, meaning it covers the entire span of a certain market, broadly covering a lot of those sectors, or it could be a sector or segment specific as well.
Let me give you an example, some popular indices that we know about in our domestic North American markets.
If we look at the US markets, Dow Jones, the name is probably, quite a bit, the S&P 500. One of the things, I will give you a history lesson. When you think about that Dow Jones, it's made up of 30 of the largest industrial companies in the United States. But they aren't static, they're not the same since the Dow started. It was created back in 1896 and if you take the timeline from then till now, those companies have changed over time because there are different inclusion criteria that are required to be part of an index.
We will use another session to discuss what those are broadly speaking, it could be things like volume, their profitability of a company, the market capitalization.
Now, one of the things about the Dow was when it was created, GE, General Electric, was one of the companies that was included, it got included and excluded, until 1907 when it got included back in it was the mainstay of the Dow for the neck 122 years until 2018 when it had to make room for Walgreen. You can see those dynamic shifts happening with different economic changes and trends in the market.
We are going to turn our attention to focus in more on the Canadian ones but broadly speaking, that's what the stock market indexes and creatively look forward to seeing where those levels are going to knew lows or highs.
>> You take a basket of stocks on any exchange there are many more stocks on those indices but at the same time the indices report them, I report them every day, the S&P 500, new record highs, all that kind of stuff. What if you want to find indices and track the performance on WebBroker?
>> Absolutely.
Let's seven to WebBroker over here.
We are going to go into the research section. Under the markets column, we can head over to the overview section. This will cover the broad major indexes that we are going to see. You can see the TSX Composite Index, the Dow Jones industrial average taker. We go to the second tab on this page here, called indices, this is where you're going to see a breakdown of that. You come down here and it's broken down according to different major indices and sector specific in the international market, Europe and Asia, etc. When you come in here, we want to look at first is, we will just ask Blaine some of our Canadian indices. We are going to go towards the bottom here and within here you will notice that we have the TSX 60 index, we have the TSX comp and we have the venture.
The TSX composite index is our most broad market index, a cover 250 of the largest companies on the Toronto Stock exchange, representing about 70% of the market valuation. If I click on this indicator, it opens up a chart. There is a section down here that says members. This is where you are going to be able to track who is included as part of that index. We set at 250 so it's quite an extensive list here.
It's going to kind of break down a lot of that information on a per stock basis.
If you scroll towards the bottom, make sure for those investors that want to see the full suite of those products and their securities, you go through different pages.
There is an easy way once you are on this page if you want to see some of the other ones.
You can simply go back to the drop down are here and then just scroll through some of the other one. If you want to see the NASDAQ, some of the US one. We can also see some sector specific ones.
If you wanted to find out, for example, our Canadian banks doing?
This will show up there. The major indexes and sectors are going to show up using this list.
The one last thing that I will also mention is it's always a good idea to benchmark, traders like benchmarking the performance against an index.
Let's say we go back to the TSX 60. We will find that up here.
Let's say you want to benchmark it. What you can simply do is go to the charts over here, you can track it and analyse it in different ways and you can even run a comparison.
If you want to say how did the TSX 60 compare against the TSX Venture? I can put that in and I'm gonna benchmark the performance over whichever time period that we want there.
That's how you look at some of those members and do some benchmarking as well.
>> Thanks for that.
>> My pleasure.
>> Hiren Amin, senior client education instructor with TD Direct Investing.
And make sure to check out the learning centre in WebBroker for more educational videos, live, interactive master classes and upcoming webinars.
We were just talking about comparing the performance of an asset class or stock to a broader index. The big Canadian telecom stocks have underperformed the broader markets over the past year or so.
Are there any signs of better days ahead in the latest earnings? Vince Valentini, managing director for equity research at TD Cowen, which is a division of TD Securities, join me earlier to discuss.
>> Let me give you my thoughts just about the industry from a big picture level to start with, and we can drill down into some of the detail over what's happened in the past 12 months, or more recently. In general, I've been covering this sector for 30 years, to put this in context. So there's obviously something here I like because I've stuck with it. I think it is a good industry.
First off, they sell what are pretty much non-discretionary services. Everybody needs their cell phone. Everybody needs their internet connection. These companies provide the plumbing to make those services happen. So it really is digital infrastructure that's never going away. I like that long life infrastructure characteristic of the industry.
Second is we have a pretty good regulatory system in Canada. There's always ebbs and flows, and you have criticisms at times, but for the most part, we have a self-contained Canadian industry with strict foreign ownership rules.
That provides a huge barrier to entry, that we're never going to face competition from the likes of T-Mobile or a Vodafone, somebody who would have much bigger scale and potentially disrupt the apple cart for our existing players.
So I think that gives a good foundation for investors, which brings you back to what these companies do. They're not high growth entities, but they generate stable, slightly growing cash flow, which they then deploy into share buybacks or dividends or sometimes pad their growth with acquisitions. So at a high level, I think the industry is well-positioned for the longer term.
And last but not least, it is not overly expensive, considering the type of infrastructure they have. If we look at virtually every other class of infrastructure assets, whether you want to look at pipelines or railways, green energy projects, a lot of times, those trade in the range of 10 to 15 times EBITDA. Telco's trading at 7 to 8.
And at one point, they were up at 9, so they've come down a little bit, but generally hover in the 7 to 8 times range.
So I think you're getting pretty decent long life cash flow at a reasonable valuation. So I like where we are. I'll pause there if you want to dig more into the last year.
>> I mean, that's the reason why we often think of these as the blue chips and the steady-eddies. You take a look at the last year and you look at the stock market performance of a BCE or a Telus or a Rogers, even against the TSX-- and the TSX isn't gangbusters in the past year either, but they're dramatically underperforming.
What are we seeing in these names? And was there anything in the results that start moving us forward in this story?
>> Let me deal with last year first.
Really, I hate to admit it as a fundamental analyst because we're paid to dig into the weeds of what the companies are doing and who's doing better managing their cost structure and all that good stuff. But at the end of the day, 70% of the battle with these stocks is bond yields. They are simply cash generators, and people look at the dividend yields and weigh that versus where bond yields are.
Almost like bond proxies in some extreme cases.
The biggest issue last year was clearly, after many, many years of ultra low interest rates, we finally saw rates rising and bond yields up quite significantly. So magically, after the peak in October, from October to the end of December, you saw the telcos rally, which was, again, largely bond yields coming back down. So if you're constructive on the outlook for bond yields, which our teams at TD Economics are, that they will be lower a year from now, then I think these stocks will have a much better year. Last couple of days, it's been a little rocky on that front with the CPI numbers, so there's always going to be a bit of volatility. But in general, I think that headwind will turn into a tailwind and help most of the stocks in the sector.
In addition to that, Greg, there were a couple of fundamental factors last year that scared people a bit more than normal.
We had some major transformational, I'd call it, M&A activity in the space with Rogers acquiring Shaw cable. And then the spinoff of Shaw's wireless business, Freedom Mobile, had to go to Québecor in order to get regulatory approval.
That created a lot of consternation in the investment community as to what's this new world going to look like. Are we going to have dramatically more competition than we're used to? Any sort of price wars, especially from that new player, Québecor, who had acquired Freedom Mobile and become, pretty much, a national wireless carrier for the first time?
So I think there was a lot of, I would call, noise in hindsight, that we could have price wars. Hasn't really turned out to be the case.
There is certainly competition in the market, but nothing I would call outsized.
But for a few months last year, there were concerns that things would get worse than they did.
And the last point, I'd say, is just regulatory, which somewhat linked to the Rogers-Shaw deal, as well, that would the government and the CRTC come out firing after that deal, saying we let the industry consolidate? Now we're going to hammer you with more stringent regulations, potentially forcing you to open up access to your networks at super cheap rates for resellers to come in, and various other sort of small regulatory files that were on the docket last year.
Again, a lot of concern from some analysts on Bay Street, which really didn't materialize.
We saw a couple of regulatory outcomes late last year, which were very favorable.
Showed that it's steady as she goes. The government, at a high level, likes the industry. No politician can admit that very easily, but the industry invests very well in high quality networks. They want to incentivize investment.
So they're probably not going to do anything devastating to really hurt them, is my view, and we saw more evidence of that last year. But to your point, bond yields rising, competitive concerns, and some elevated regulatory concerns, which have now, pretty much, fallen by the wayside, is why things didn't do very well last year and why I'm pretty constructive over the next 12 months.
>> You mentioned some big names there. For the audience, for the full disclosure on the companies that are covered by TD Cowen, you can see the link to the TD Securities website at the end of this program. So that takes us through what we've been through. We recently had a batch of earnings, and of course, not only is it important, the three months behind them, but what they're saying about the path in front of them. As you went through those earnings for these big companies, does anything stand out? Anything interesting investors need to be aware of?
>> Yes, Greg. So we did. Just to level set for everybody watching, in the past two weeks, we've had BCE, Telus, and Rogers all report their fourth quarter results.
This is a pretty important quarter because at this time of the year, they almost always give us their annual guidance for the following year. So we got 2024 guidance from all three of those companies.
I would say a couple of wrinkles and things to be concerned about, but for the most part, the results were quite encouraging. First point I'd probably say is the wireless market remains very strong. Canada has gone through a couple of years of record levels of subscriber additions, in part driven by immigration and foreign students, but also just people adopting more devices than they ever have in the past. So we had, 2023, total industry wireless subscriber additions up around 1.75 million, which was right in line with 2022, which was an all-time record year. That's about 5% growth in volume for the industry. So we saw evidence of that in the fourth quarter results.
We saw nothing in the guidance from any of the companies to suggest that that pace of growth is going to slow down dramatically.
Rogers has indicated 4% to 4.5% for 2024 is where they think it can settle in, which factors in some of what the government is doing to limit foreign student visas. But it's not going to crater the industry growth. It just slows it down a little from a very high level.
So the results were encouraging in terms of that underlying volume growth.
We also saw stable ARPU, which goes back to what I was talking about earlier.
>> Average Revenue Per User, right?
I just remembered some of my acronyms from when I used to have to cover these things first off when they broke.
>> Apologies. We have a lot of acronyms in the industry, and I throw them out pretty quickly sometimes. So yes, catch me on any of that.
Average Revenue Per User, which is a key metric of, what are the wireless carriers getting from each customer per month? If that metric starts to decline, then we get concerned that there is too much competition and volume growth is being offset with pricing, and you don't get the revenue and profit growth that you should be getting.
We saw ARPU relatively stable, which refutes some of that noise I was talking about in sort of the middle part of last year, that people thought we were going to have price wars and elevated competition after Québecor took over Freedom. So no evidence of that in the fourth quarter results either.
And now back to the ebb and flow I mentioned. Not everything was perfect.
Some carriers certainly seemed to be executing better than others at getting their share of that volume growth, managing their cost structure well, which all translates into the most important metric for most analysts, like myself, is EBITDA growth, which ultimately is a proxy for free cash flow. But free cash flow runs around every year with all kinds of lumpy items, so we tend to focus mostly on EBITDA as the main comparative metric.
On that front, we saw guidance from Rogers for 6% to 9% growth in 2024. Telus is at 5.5% to 7.5% and BCE is at 1.5% to 4.5%.
So clearly, Rogers seems to be doing a bit better. And to be clear, that is organic growth for all three of them. I've backed out the Shaw contribution for one extra quarter that they've acquired it for in 2024. So some better execution from some versus others was notable in the numbers.
And then last, but not least, is free cash flow and dividend quality, which is very important to investors in this space, especially for BCE and Telus, which are the two highest yielding names. And there we saw pretty good performance from Telus-- free cash flow guidance in line with what we thought, seemingly supportive of them continuing what they've been promising for some time, which is to do at least 7% per year dividend growth, whereas BCE slowed their dividend growth for the first time in 15 years. They had been doing 5%. They lowered it to 3%. And their free cash flow growth guidance for 2024 was quite a bit below what most people were expecting, and they're expecting a decline of between 3% and 11%.
So, again, Greg, not everything was perfect in the results. There are a couple of weak spots, depending on which company you look at. But at a high level, the market growth and market pricing dynamics were clearly still trending in the right direction.
>> That was Vince Valentini, managing director for equity research at TD Cowen, which is a division of TD Securities.
Now, let's get you updated on the markets.
We are having a look at TD's Advanced Dashboard, a PlatForm designed for active traders available through TD Direct Investing. This is the heat map function, it gives us a view of the market movers.
Let's look at the TSX 60, screened by Price and volume.
We got some great on the screen, a fair number of names. We look at the energy space, I don't want to call them the TransCanada trap. TC Energy up about 2%.
The financials are showing some modest upside.
It's been a choppy week for Shopify.
It was only earlier this week that they reported and their shares pulled back in and they made some gains. They are down about 1 1/2% today right now.
South of the border, less chicken on the S&P 100, narrow it down a little bit. As Hiren told us earlier, you have a lot of designations and ways of gauging the movements of a market.
There's not a lot happening today. And videos up about 1.8% but some weakness in the tax base.
As I look across the board, there's not a lot to write home about. We do have Nike, we told you earlier, cutting some jobs, saying they see a slowdown in consumer demand, that stock is down about 3%. You can get more information on TD Advanced Dashboard by visiting TD.com/Advanced Dashboard.
Coming out of the seismic dislocations of the pandemic, there were some who thought the investing landscape had been fundamentally altered.
But earlier this week we had a chance to talk to one of our recurring guests. As many of those changes are minding and familiar investing themes are taking centre stage, we talked about it with Jitania Kandhari, Deputy CIO of the Solutions and Multi-Asset Group at Morgan Stanley Investment Management.
>> Yeah, we are reverting to familiar patterns, whether it's 60/40, which was thrown out of the window, like this is not going to work. It's coming back. The higher for longer is moving towards higher for no longer, in my opinion. All the green transition has not really curbed oil demand so far.
So interesting themes and trends that were being spoken about are kind of mean reverting. Even populism, from an election standpoint, given a heavy election year, seems to be peaking, which was becoming the big rhetoric in the past, that global populism is exploding. I think that is also leveling off at the margins. So interesting reversion to mean patterns across some of these themes that were talked about.
>> So let's breaking some of those down because obviously this is a world that perhaps we can approach and understand because we've lived in this world before.
Let's start with the 60/40 portfolio because there were people-- I mean, that's the whole idea, is diversification. If equities are doing this, then bonds offset it, and vice versa.
And then you had this environment coming out of the pandemic where no, both were going down at the same time. Well, walk me through that, why we think now 60/40 actually will work again in the future or even work now.
>> Yeah. So 60/40, interestingly, in 2022 was down 17.5%, the worst return since-- 4th worst return in the 200-year history, but worst return since 1937. 17.5% down in 2022, 17% up in 2023, so an interesting volatile swing.
As you mentioned, the diversification benefit of bonds in that balanced portfolio, or the moderately balanced portfolio, was under question because the correlation between stocks and bonds became positive after 25 years of negative correlation in 2022, given all the macro conditions.
But what's really interesting, we've looked at this 200-year data, which shows that what really drives that correlation is inflation. And we looked at several macro indicators, and inflation was the one-- and I have a chart here, which has divided this entire period into different inflation deciles.
And whenever, if you can see, the inflation crosses 2 and 1/2%-- 2.4, to be precise-- that correlation between stock and bonds gets positive, reducing that diversification potential of bonds.
Now with inflation coming down, I think that correlation is not going to be as high as we saw in 2022, bringing back that diversification potential for bonds, especially if there is an economic slowdown or a market correction driven by inflation or any of these issues that are gripping the market at this point.
More importantly, there is also a mean reversion argument. So if you look at, again, this 200-year data, whenever stocks and bonds have been down in a year, the next two years have been positive for this combination. Again, an event study based on this data.
So diversification argument and the mean reversion potential, both these reasons make me believe that this is a good starting point for asset allocation at these levels.
>> So if we use 60/40 then as our frame, based on those ideas, what looks interesting inside a 60/40 portfolio in the world we're living in now?
>> Yeah, so within equities, of course, US equities, we've talked about the concentration, the magnificent seven. I think really looking outside in an equal cap weighted US index is presenting an interesting opportunity.
I do like different segments of the US market. Of course, there will be some technology stocks that do well, but industrials and the energy complex, select financials. There are opportunities emerging in the ex-mega seven space, which are not expensive and look promising, even from a thematic perspective.
I do like international markets to diversify from that home bias. Pockets of Europe should benefit with the euro where it is, and also small cap Europe looks very interesting, given floating rate is a big part of those companies. And if rates come down, then they have a nice kicker going forward, and they are very cheap.
Emerging markets ex-China, there are several opportunities in India and Latin America, some of the Southeast Asian markets that are benefiting from the China plus one and a new growth cycle. So the 60 needs to be very actively managed, given the opportunities in select parts of the world.
On the fixed income side, I do think that over 4 and 1/2% yield on the 10 year is a very good duration trade, and we can talk about the reasons why. We do like the investment grade as well because if, in the event that there is a slowdown or the recession, then the higher quality fixed income pockets look good.
And emerging market debt also looks very interesting because the central banks have been way ahead in the tightening cycle, have been preemptive. So again, taking a diversified view within that 40 fixed income portfolio also makes sense at this stage of the market and economic cycle.
>> I imagine part of that view, or probably a large part of that view, too, is your idea, as you were saying, inflation. We were talking about inflation higher for longer. Rates not higher for longer. No longer going to stay high. At some point, we're going to get some cuts.
That must feed all back into what we're talking about.
>> Yes. So I think the rate story is going to be nicely volatile, given-- >> Nicely volatile. That's an interesting way of putting it.
>> --giving us opportunities kind of really positioning for the long term. So the way I'm thinking about rates is really from a historical perspective. I've looked at-- again, I like to back a lot of our research and data with historical evidence.
The three times when debt to GDP spiked in the US were during the wars, the 1860 Civil War, the two World Wars, and more recently during COVID and post COVID.
You've seen debt spikes. Today, US public debt is 120% of GDP, so it is at an all-time high.
And it's interesting that in all these periods when debts spiked, the real rates, as proxied by 10 year minus the CPI, have remained negative. And there is an economic reason for that because if you have such high debt, to grow out of that debt or to service that debt, you need real rates lower than your GDP so that you can service that debt with lower interest rates relative to your economic output, and you can boost that economic output to support that debt.
And I think that this time cannot be different because we need to be in that same situation.
Otherwise, something will break. So if I assume that inflation settles at 2 and 1/2%, 2 and 1/2% to 3%, for example-- I don't know if it will really go to the 2% target.
But assuming 2 and 1/2% to 3%, a 4 and 1/2%, 5% 10 year is neutral-ish, with rates at 2%, with GDP at 2%, is in line with GDP. So I think that's what I think is fair value of where those rates should be. Else, with this high debt, something can break in the system.
So keeping that economic template in mind is a good way to position in the fixed income trade. And as I said, there's going to be volatility because day to day, what's the market pricing in? Is it March?
Is it June? How much in March? How much in June? How much beyond?
So I think that will create that volatility, but keeping that template in mind that the 2% real rate with a 2% GDP is the worst-- at worst, that should be the real rate situation, and kind of positioning for that in the portfolios would be a good way to build the fixed income portfolio.
>> That was Jitania Kandhari, Deputy CIO of the Solutions and Multi-Asset Group at Morgan Stanley Investment Management.
As always, make sure you do your own research before making any investment decisions.
We are heading into a long weekend. We will be back on Tuesday though with Robert Both, macro strategist Ted TD Securities.
He will give us his reaction to the latest Canadian inflation report.
He also wants to answer questions on the economy.
A reminder that you can get a head start on those questions.
Just email moneytalklive@td.com. That's all the time we have the show today.
On behalf of everyone in front of the camera and behind the scenes who brings the show to you, thanks for watching and we'll see you after the long weekend.
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