Market Insights-October 21, 2022

[music] Hello I'm Greg Bonnell and welcome to MoneyTalk Live, brought to you by TD Direct Investing. coming up on today show: will hear from Christian Medeiros about the four factors that might signal a possible bottom for the markets. Hafiz Noordin will give us his view on whether central bank rate hikes are actually making any progress in the fight against inflation. An John Mchughan will discuss whether the ESG investing trend can handle a recession and the growing energy security risk. Plus, in today's WebBroker education segment, Nugwa Haruna will take us through what structured notes are and how you can find info on them using the WebBroker platform. But first, before that let's get you an update on the markets. Some green on based in Wall Street. A bit of fluctuating ride but right now the TSX Composite Index is up to the tune of about 153 points. A little shy of a full percent. You are seeing a bit of firmness in the price of crude. But some chubby activity. Let's check in on Shopify which was putting points on the table earlier. A bit of a pullback for the name today. Down a buck 69. A little more than 4% on the name right now. I believe it has its next report coming up pretty soon. About mid next week. Coming up on Kinross to check on. The price of gold, the mining sector reacting with four bucks and $0.82 a share. We will call that up 2.8%. … Giving some time to work their way through the economy. That seems to be some of the murmuring going on today. we are seeing the short end of the curve with stocks. We are actually seeing some pullback in the US dollar today. Modestly supportive of equities. 3709, 43 points, a little more than a full percent. Let's check in on the NASDAQ. See other tech stocks are faring today. After the disappointment of yesterday,and Twitter, there seems to be more headlines…[video lag] When it comes to that Bank of Canada announcement, we will go live it 12 Eastern time here with James Orlando to break down the discussion and the decision from our central bank. You don't want to miss that show either. A bit of an understatement to say that it's been a tough year for stocks. But we've also seen some big moves to the upside in between the declines. So, amid these so-called bear market rallies, what signs might tell us if we are near market bottom? Christian Medeiros, Portfolio Manager at TD Asset Management has a checklist that he's keeping an eye on. Number one on that list is inflation. He joined me earlier to discuss. >> This time around obviously inflation is quite high. How you will control the Fed is dead set on bringing inflation down. With high and rising rates, that's going to be a major headwinds market. So that inflation problem solve, it will be hard to turn markets around. How we see inflation in how we measure it, we took an analogy that we find very helpful from the feds John Williams. Inflation is like an onion. On the outer layer you have commodities and things that were used to see rising prices over the past year. Lumber is expensive, gasoline was a huge challenge… A lot of things of common and we see that in our checklist. The second layer: goods inflation. We are all used to supply chain disruptions, the high cost of durable goods, we also see that improving. Looking at many of our indicators, the supply chains have improved globally and goods prices starting to fall. The inside layer is housing. We can see in the US, rents have been so strong over the past year. They have continued to rise. However we do see faster moving rental indices that margin rates are falling and we do expect rates to mediate next year. We get to the core and this is the problem with the overall inflation we are seeing. Core services inflation is still very strong. Across consumer spending data, cars data, there they are spending similar amounts and before higher rates. Employment is strong and wages are strong. The Fed is very focused on getting that wage inflation under control and that is still going to require higher rates that we have at present. So as a result, our overall checklist metric has seen inflation fall from a peak but not get at levels that we can be comfortable with giving the strength of the consumer wages. >> Still pretty high from Canada today. 6.9%. The United Kingdom, 10.1%. Okay inflation is number one of the checklist. The not the next one is growth. What you see here? >> Growth is one of the most important metrics in any checklist. It's what drives markets over the long run. We are looking at with growth is fascinating indicators. Surveys of purchasing managers in looking at consumer activity. On the growth side, we hope to see is the growth metric would turn down quite substantially and then become flat. Once we see that reflecting, we've seen so far… Around neutral. Recessionary scenario, you would expect inflation to come under control, you would need these growth indicators to fall much lower than the neutral level. So let's say the 40 or 30 range. There is still more to go on growth and we expect this to weaken over the course of the next few months into the midpoint of 2023 and then hope to see it inflection and growth metrics. >> All right. Inflation, growth our number one and two on the checklist. The next is risk sentiment. What we see here? >> Really interesting. We see across a whole host of surveys of managers and individual investors. Sentiment as bad as it's been and that's not surprising given what we seen over the markets in the past year. We look at volatility, another good measure of investor fear, we also see the elevated levels. However, when we look at our checklist and we are looking for, we really expect to see a blowoff in volatility. Very high levels of volatility. We haven't seen that so far this year. Volatility has been elevated but actually relatively tame as markets are slowly ground down over the course of the year. So we are really looking for much higher risk aversion… With a crash of market drawdown then we see currently. That would be more consistent with the bottom of an equity market drawdown. >> Three out of four. The final one of the checklist: we try to figure out past the worst of all this: earnings and valuations getting that we are getting into the thick of earning Seasonale. >> Fund metals within the equity markets will help us determine if investor expectations are properly pricing in the market drop off. So the bulk of the equity market drawdown this year has been given by valuations from the mid-20s to the mid teens. To play big drawdown for US companies. We think that a lot of this is habit. But the second aspect is earnings. Earnings revisions. This is what analysts are expecting for earnings across the companies. What we see now is they have not really coming very much. Only until recently have we started to see earnings revisions start to take down. Right now, as we look at it, we see digits decline in our names and we don't think that sufficient to price in a recession. In a normal deeper recession, we see up to 20% decline in earnings. So there is more to go unfortunately as well for earnings revision for us to be comfortable on our checklist that we fit the market bottom. >> All right so investors definitely, this is the question they keep asking when they see these rallies. I know you were calling Michael Craig at the chair and saying until we start to see a big change, he calls it bear market rallies. Inflation growth, risk sentiment in earnings and valuations, once we can check off these four boxes, then we just patiently wait? There is definitely criteria to time a market where we see we are past the worst. But then where do we go? >> It's very challenging to call the market bottom. We don't know if this checklist will give us the exact day or price point but it will give us comfort to start making evaluations for risk assets. So you mention those criteria. We expect inflation to need to come under control, especially that core services inflation for the Fed to be able to lighten up, perhaps pause, perhaps pivot on growth. We need to see growth start to trough and inflect on sentiment, we need to see much higher levels of investor risk aversion and fear of equity markets and lastly, we do expect and hope that analyst revisions continue to… Declined to reflect their volume in the condition where we are seeing the growth metrics. So there is more to go. It's more of a directional thing. We don't need to call it the exact bottom but we do need to see a trough in inflection in these metrics. With past economic cycles and market drawdown. >> That was Christian Medeiros, Portfolio Manager at TD Asset Management. And now some news. Shares of snapper in the spotlight today, then up to the social media company warned revenue will fall flat in the current quarter as companies rein in their advertising budgets. SNAP down 30% at this hour. Corus Entertainment is reporting what he calls meaningfully lower financial results for most recent quarter. In a release, CEO Doug Murphy said in an uncertain economy in taking a toll on advertising revenue, sales were down to 6% in the most recent quarter and Corus booked a non-cash goodwill impairment charge of three and $50 million. The stock has lost roughly half of its value since issuing a warning last month about the tough advertising environment. Lumber producer Interfor says it's reducing production levels in the face of softer demand. The move is resulting in some 200 million board feet of production comingdown red-hot inflation. But as we get into final… The move will result in some 200 million board feet of production coming off line on a temporary basis. About 70% of its output. … And now in the markets, in the US, the S&P 500 seems to be at least some headlines out there were people are saying maybe the Fed, at some point, and of course some point can mean anything, can pause, take a look around and try to figure if the effect has been happening so far with all these jumbo sized rate hikes. Of course that commentary will be swirled with everything else in the thick of earnings season. Really powering into it. Investors have a lot of things to way. The S&P 500, up one of the quarter percent. Many central banks have been delivering jumbo sized rate hikes in an attempt to tamp down red-hot inflation. But as we get into final months of 2022, are there any signs of progress? I was joined earlier by Hafiz Noordin, Portfolio Manager for Global Fixed Income at TD Asset Management to discuss. >> When we look at current levels and of inflation, that's one of the main performance metrics for central banks. It does feel like there is still a lot of work to do. We had US EPA last week. For September, show that headlines may be starting to stabilize the core inflation ticked up again to 6. 6%. That's a new high for this cycle. When we drill down into the numbers, it's the service as part of the economy that is driving it down in terms of inflation momentum. Less so so the good stories. So all that stuff about supply chains, all the bottlenecks in shipping costs… That story is starting to wane. It's really more the services story. Within that it's more about housing. So rent and owner rent, both at no rate of about 70% now in the US. So really, on that basis, it seems like there's a lot of work to do but I think it's important to take a step back and think about "do we assess central banks on current levels of inflation?" Arguably know. Monetary policy does work with about two or three of 1/4 like. So when we look at the fornicators or to really monitor, there is definitely evidence out there that the tightening that they've done so far is starting to have an effect in terms of cooling demand, bringing down inflation, going into next year. But where it ends up is still a fair amount of uncertainty. > Are central banks starting the week by releasing your business Outlook survey and the consumer sending the survey as well. If you pushed out far enough on both surveys, there seems to be some favour that the central bank and get under control. Right now, there seems to be a bit of concern out there. Even among consumers and businesses that we could be heading for some tough times and perhaps the inflation fights will take a little while longer. >> So you are right to point that out. Long-term inflation excitations still look kind of anchored so that's the good news that came out of that survey. But one to two year inflation expectations is still quite high. I think the general take away from the bank of Canada report is that there is a lot of uncertainty at a consumer level over the next year and even the growth picture. So for consumers and workers, that means they are really looking towards wage growth to help them to buffer that shock. They are to many higher wages. That's the risk that we really have to look out for. If that wage price spiral. You know, if we see higher wages given out to workers, then businesses will likely pass that on to higher prices for services and goods. And then again, that is a second order effect in higher inflation. If that continues in a spiral, that's really where they can lose control. So, I think the key message for investors is that even if growth starts to come down meaningfully, you know, we still should expect the Bank of Canada and most central banks to stay hawkish to prevent that scenario from ever happening. Because that's the one where we can really lose control of the economy. >> The last time we heard from our central bank was was it Friday? Maybe the beginning of the meeting's restart of two questions from the media. Lots of talk talk. That was the gathering of these people who were charging this course. > Exactly. A lot of things to talk about but I think front and centre is the growth outlooks. So twice a year at these meetings, the IMF releases a world economic Outlook. Pretty downbeat picture for next year in terms of declining growth excitations. Kind of tune after three present global growth but inflation is still stickier and 45% next year. I wouldn't say that is fundamentally changing a lot of the markets expectations. The private sector growth and inflation rates are really high there. This idea that a number of households across the globe dealing with higher borrowing costs, dealing with higher consumption costs and feeling the pain and the pressures on governments now to try and think of "how do they buffer the shocks"? We saw the UK do it the wrong way but that doesn't mean that that approach to having some sort of fiscal stimulus is gone. I think that's crucial to watching who's next to deal with those measures. >> You mentioned shelter costs. Did you say headlines about home prices coming down pretty dramatically in the face of higher borrowing costs question If you are a homeowner maybe you have mortgage and you're not getting a break there. If you are renter this is where you are not getting a break either. >> That's right. The US is actually the one to watch for that market. It's just over 7%. [video lagging] over 20 year high. So we are definitely arty seeing a lot of reduction. Alternate data that shows the rate of change of rents is starting to come down so rents are still going up. But the pace of appreciation of rents is a bit lower now compared to what it was in the first half of the year. So, perhaps a bit of a glimmer of hope there. That it's working its way into the inflation data and that the tightening measures that have been done so far will be sufficient. >> Right now trying to affect change on the road. TD's chief economist recently, she was on the second show she was sort of saying curious maybe. As a way to put it that the central banks seem to be focused on this inflation comes out… We are focused on as investors, the central banks focused on it but all these things are back related. >> That is a big challenge for monetary policymakers. You know, it's like driving a car and only looking in the rearview mirror. That's really the tough part of that job. I think at the end of the day, one of the things that really came out from the IMF meetings and from as they got feedback from investors was that uncertainties are increasing. Therefore there is reason to perhaps slow down in terms of the pace of rate hikes. With that said, that pivot everybody is… Everybody is waiting for that. But having a talked about just now in terms of what we saw from the bank, the business Outlook survey in Canada, that risk of the wage price spiral, that is still front and centre for central banks and we know that they've been saying that they would rather trade-off lower growth or even a recession then let inflation really run away. I think that's what we have to expect going forward. >> That was Hafiz Noordin, Portfolio Manager for Global Fixed Income a TD Asset Management. Now let's get to education segment of the day. Structured notes are one tool investors can use to try to manage volatile markets and WebBroker can help you find info on these products. Joining us for more is Nugwa Haruna, Senior Client Education Instructor at TD Direct Investing. Always a pleasure to have you with this Nugwa. So what are we talking with you? Structured notes… What are they and how they work? >> Greg it's always a pleasure being here so structured notes are investment products that are typically issued by financial institutions and could provide investors with some kind of market linked growth potential as well as some safety features of bonds. So they are Securities it may be actually tied to an underlying asset. So the performance of that structured note may be linked to one specific stock or it could be linked to a basket of equities that the latter could be linked to a specific index. So if investors want to look at structured notes within WebBroker, they are able to do this by clicking on the tab that says "trading" and going under "new issues". So once investors would see the different kinds of structured notes, one thing I will mention his we talked about how structured notes of some safety features that bonds offer as well. So they could be structured notes that will be principal protected. At the same time, investors may encounter structured notes that may have their principal at risk. So once again, these kinds of structured notes may actually provide a higher potential return but it also means that the investor needs to be aware that he could lose some or all of their principal if the underlying asset does not perform as expected. So if investors want to do a little more research, they can click on the specific structured note. In this case were going to click on the last one. They can dig a little deeper. So investors can actually pull up… Expected to mature just like a bond. As well as what the potential payment could be. So this structured note for instance, could potentially pay up to 9. 5% for a year for the lifetime of the structured notes but then that would also depend on the performance of the structured notes. So once again, investors can pull up the information to get a little more info at the structured notes. >> That's great. Great introduction to structured notes for those who are not familiar with this space if they are intrigued, and now they are asking how they would actually buy a structured note and WebBroker? How would they do that? > Investors looking to buy structured notes, you notice I click on "new issues" that's because one of the risks of structured notes as the secondary market. If some of the issues don't provide a secondary market, which means if an investor wants to get out holding a structured note, you might have to essentially break your agreement and you might be penalized. But if investors do you want to go ahead and purchase a structured note, they can do so on WebBroker. So we will continue here, an expression of interest…[Video lagging] Choose a specific account here… And say "I am interested in buying $10,000 worth at face value". Almost like a bond remember. So when I go "next", one of the most important things I'll point out here is even though it's an expression of interest, it is a firm commitment to buy. So if this offer is accepted by the issuer, this investor needs to be aware that the amount that they did put in here needs to be available in the account on the settlement date and in this case, it's November 3. So, if an investor decides that the structured notes on right now are not of things they're looking for, investors are able to update their profile. So by clicking "update profile", an investor can put their email address in the system and then consigned to receive information like new income products available in that way they can stay up to date if they find a project or product that works for them. > Fascinating stuff is always Nugwa. Thanks so much of that. >> Thanks for having me. >> Nugwa Haruna, Senior Client Education Instructor and TD Direct Investing. Make sure to check WebBroker for master classes and upcoming webinars including five ways to find value in a down market. Investing with environmental social and government concerns has been a growing trend. But fears of slowing economic growth and risk to energy security, will that momentum continue? John Mchughan, Climate Analyst at TD Asset Management join me earlier to discuss. >> Sure. You are absolutely right. It's been a very challenging year for the markets overall. For ESG, this is the real first challenging market that we've seen since it's become a part of the mainstream investment language. So certainly with its challenges, folks are wondering how it's going to hold up over the course of the year. It's not just from an economic perspective right now. You are seeing simpler days nation of ESG. Some states really pushing back on the concept as well as energy security looming large in Europe. All of which is creating headwinds for the space but I would say encouragingly, so far, we are seeing some positive signs of resilience for ESG investing overall. First of all if we just looked at interest of the space, relative to "normal" funds are nonsustainable funds, ESG is actually continuing to see inflows throughout the course. It's slowing inflows and hasn't grown like it has in recent years which is to be expected but the nonsustainable funds, we have seen outflows starting to happen. Particularly in the third quarter. So I think that goes well as a sign of just interest in the space. But everybody is interested in performance too. So what we see so far, within the US, when we look at a broad-based ESG, US index, it's actually outperformed the S&P by 5% this year. It's only down 19%. This was as a Friday so everything is new today. But as of Friday, it was only down 19% versus the S&P which is down 24. Similar story in Canada so far. Not quite as much outperformance but it has remained relatively steady with the S&P TSX index. So so far, ESG has proved to be resilient in the face of this market downturn. We are not truly get though. So we will continue to watch this space and see how investors feel about ESG. >> The energy security component of all this, obviously critics of ESG have sort of grabbed onto that piece of it, it is interesting, we know that this there are parts of the world including Europe first and foremost most likely facing some pretty serious concerns. At the same time is ESG investing needing to be the enemy of energy security? As some people are framed? >> No I don't think so and I would say most people would agree in this space. Certainly there are concerns with ESG that really push the climate agenda hard and you think that would increase global locations anything that does so should be avoided. In our case, we do it from a couple of different lenses. There is the economic lines but also the human lens here. Folks can't heat their homes or can afford to eat their homes, it will cost him a fortune, there is a human element there that should be incorporated within ESG. We should be able to provide energy security the people need to be able to last through the winter this year. You know, for our perspective, it's certainly being a challenging few months in this regard. We are starting to see cold plants reopen which is the number one enemy of climate change. But again, politicians are doing what they need to do to keep their people heated and happy and in what could potentially be a cold European winter. From a Canadian perspective, unfortunately there is not a lot we can do to help out at this point. Europe is really in need of gas. Canada unfortunately doesn't have a good way to get our natural gas to Europe because we would have to ship it to Alberta down to the golf course and then buy a tanker over to Europe. So it's not the most effective or cost-efficient route to get there. I'm sure you are aware of the LNG terminal that is being built up and BC that will come online for a few years and even then, that is positioned to go to Asia, not Europe. So unfortunately there is not a lot we can do. I guess the question for governments, companies and folks in Europe and Canada to wrestle with right now is "should we build that infrastructure now to get that natural gas to Europe?" Not really. When it will come online and if that demand will still be there, or should we look to cleaner forms of energy and getting those to Europe? I think that's what you're starting to see. We just saw the German Chancellor meet with Trudeau in Newfoundland. To export clean hydrogen from Canada's East Coast to Europe. Which, you know, will likely come online around 2025 if everything goes well. So we are starting to see that, long-term forecast it will be hopefully more positioned towards renewable. > When I think about ESG and sort of building in that direction, sometimes I simplify what politicians need to do and with the corporate world is saying. Now of course, governments can change and perhaps every four years or before that if you have a minority government. What seems to be in the most stable space now? The corporate commitment ESG or the federal political commitment? >> That's a really good question. You know, I would say we are chart starting to seethe government with a very ambitious climate agenda. Following suit. We recently see potential On oil and gas emissions in Canada. So oil companies and energy companies are trying to keep up with that. But at the same time, I can tell you from our engagements with energy companies, which is obviously a focus of the E portion of ESG.there is a focus on D carbonized in their business. That is the trend and in order to remain competitive, they have to lower the carbon intensity of the energy are producing. They can do that in a number of ways but to be perfectly frank, I do believe that the commitment as they are and we are seeing earnest attempts from large-companies to lower their carbon footprint. > You did mention the fact that the E being the environmental component of ESG… Does it overshadow? Many times we have these conversations… >> Historically probably the E has been the one absorbing the most attention from ESG. Probably because climate change is tangible and people can really see and feel the effects of it right now. So it's a tough mind for everybody. It's not to diminish the role of ESG. I can entering a period of economic downturn, the G is particularly important. Companies are well governed, those are the ones that are position to do the best in an economic downturn. They should have the strongest risk-management practices in place and be able to withstand potential downturns like this. So while the E is important, it certainly not to take away from the importance of the S and G as well. We are seeing that allow right now. >> That was John Mchughan, Climate Analyst at TD Asset Management. Let's check in on the markets and see if we are holding onto our gains early in the session. Starting here at home on Bay Street with the TSX composition. Up a little shy of a full percent to the upside. Starting to get a earnings coming in on this side of the border. As well. Corus Entertainment among them. Warning investors at the advertising environment in uncertain economic times was not looking all that great. They came out today and it pretty much confirm that information. You have Corus it down another 8 1/2% today. The stock basically cut in half since the issue that warning. You can see in early September. >> Checking in on Hudbay minerals up almost to the tune of 5%. South of the border, let's check on the S&P 500. Investors turned away as sticky inflations, central bank, an impressive policy with perhaps the idea that at some point, the central banks may not pivot but at least have a pause to try to figure out what affects so far and all the moves they have made could have going forward. Of course, these are just rumblings in the market between fed people coming out and telling us was on their minds. So 3704. Yet the S&P 500 today up a full percent. The tech heavy NASDAQ right now faring pretty much the same. Up a bit more than 1% as well. SNAP though, having a pretty tough day. It came out after the closing markets yesterday and sounded a warning about a soft environment for advertising sales. That stock down 30% in this session alone. Seven bucks and $0.53 a share. Given this persistent inflation and higher interest rates Outlook from this year, TD Securities recently updated their estimates on the diversified financial coverage universe. That includes mortgage lenders and some of the smaller banks. With more on this latest report is Anthony Okolie. >> Thank you so much Greg. As you mentioned TD Securities has revised their 12 month target prices for the coverage universe for diversified financials and while credit trends as they point out to, are expected to soften into thousand three, they do see some healthy shareprice upside looking one year out for some of these financials based on the employment outlook. While the big six banks outlook for employment, as you can see in the chart, suggests that mortgages are likely to move higher, TD Securities notes that the estimated 125 basis point increase in the employment rate at the peak in 2003, verses 2022 drop is less severe. Then the increases. When we start to see the global financial crisis where we saw a huge 280 basis points increase. As well as the early 1990s where unemployment rate increased 480 basis points. So TD Securities estimates also reflects a softer outlook for housing activity and mortgage growth in 2023. They noted the report the TD economics has recently reduced its housing sales price forecast. I brought along a chart where housing markets are expected to decline. A negative number here so we expect 25% decline in 2022. For housing sales. They expect another 6% decline rather. In 2023, they expect the average price to fall by 11%. So as a result, TD Securities has factored this outlook into their company specific loan growth forecast. When we look at valuations, they could remain below historical averages given the credit risk concerns they highlighted in the report. Their target price of multiples, but for some of these diversified financials have generally moved slightly lower again, to reflect the uncertain credit outlook as well as the Capital Markets volatility that we've seen throughout this year. So while the consensus forecast for unemployment trends along the week and Canadian housing markets suggests a credit cycle is likely, TD Securities maintains that it is potentially fairly manageable, relative to past cycles. Greg? >> Interesting stuff. With any outlook there is of course a risk to certain parts of your thesis not working out. We want to take a look at best space, any risk for price target? >> The insufficient demand for things like term deposits in GICs… Which is the key funding source for many of these diversified financials. So we have seen some really competitive GIC rates among lenders. They want to attract as much positives as they can. So the inability for these diversified financials to attract those deposits, that could certainly impact their ability to originate new mortgages going forward. >> Very interesting stuff indeed. Thanks Anthony. >> My pleasure. >> MoneyTalk Live is Anthony Okolie. Stay tuned on Monday, Jim Kelleher director of research at Argus research will be our guest. A reminder that you can get a head start by emailing us your questions at MoneyTalkLive@td.com. That's all the time we have today. Thank you and we will see you next week. [music]