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[theme music] >> Hello, I'm Greg Bonnell. Welcome to MoneyTalk Live, brought to you by TD Direct Investing.
coming up on today's show, Moneytalk's Susan Prince and Anthony Okolie will join us to discuss the big takeaways from Jerome Powell's highly anticipated speech at Jackson Hole. TD Asset Management's Jeff Evans will discuss whether lower rates might put the spotlight on some sectors like real estate and infrastructure. In today's WebBroker education segment, Meagan Henriques will take us through how dual listed stocks work.
Before we get to all that, let's get you an update on the markets. It's Friday, the last trading day of the week. Some green on the screen. Might have something to do with Jackson Hole and some other things going on. The TSX Composite Index is up 248 points, more than one full percent.
Some notable movers include the uranium place.
Concerns about global supply has these names all move higher. Including Denison Mines, at $2.33 per share, up almost 15%.
We have what expenses intermediate up about 2 1/2% per barrel, that's got some of our big oil and energy names including Baytex energy, at $4.86, up 2.5%. South of the border, it seems that Jerome Powell said just with the markets want to hear, the S&P 500 up 42 points or three quarters of a percent.
The tech heavy NASDAQ, I think it's outpacing the broader market, indeed it is. Up 1.3%. Nvidia, no real news around it other than its Nvidia and what it moves higher, it looks a lot of boats. Right now Nvidia is up to the tune… This is like a drum roll, please one… Up 3 1/2%. $128 and change per share.
And that's your market update.
We've been waiting for this one all week.
Jerome Powell at Jackson Hole, delivering that highly anticipated speech. The market seemed to please. Let's dig into what we heard. MoneyTalk's Anthony Okolie and Susan Prince join is that with more.
As I was saying, and I think we are all probably going to agree, I think the markets are pleased.
>> I think so. Heading into this, I think markets are expecting him to lay the groundwork for September rate cuts and it's unclear as to how much you will commit to the size of the rate cut but he did talk about inflation, for example.
Inflation, he said that the feds fight to cool inflation has largely succeeded. The progress to the 2% target has resumed after a pause earlier in the year. On the job market, the Fed is now focused on the risks of the weakening job market. We have seen unemployment move up from 3.7% in January to 4.3% in July. We saw that big revision as well.
The chairman also mentioned that job vacancies are down. The ratio of vacancies to employment is back to pre-pandemic levels.
And he also said that the conditions now are less than just before the pandemic in 2019 so clearly the Fed does not want to see the job market we can further. I think again that all kind of lays the groundwork for a potential cut in September.
>> That big headline, the time for policy to adjust is upon us.
All right, the market fully expected a quarter-point cut in the September meeting, I think it's a one in three odd that they could go 50 basis points. What stood out for you? I think you were saying it was humility.
>> There were a couple of things about it.
The market loves hearing what they expect to hear. They heard what they expected to hear. Everybody is happy. That's the first thing. The other part about it was, I heard someone characterize it as a valedictory address. It was humble, pointing out where they had made mistakes.
One of the things for the past couple of Jackson Hole meetings was his talk about inflation being transitory in 2021, 22, 23, and it was not, and he ate a little bit of humble pie about that which I thought was, own your mistakes and move on.
It gives some credibility there.
What will be interesting, I will have the market has such a short attention span.
It's like, okay, okay, we want to know what he says. What did he say about rate cuts? So now we are onto the next thing.
The next thing is, is it going to be 50, 75 or 100 points? There are now people basically saying they think it will be 100 points by the end of the year.
Not 100 Points in September.
Just to clarify.
>> You look to me and I was like… >> Yeah, so is it 25 in September and then somehow or another we get the other 75 basis points between October and the end of the year? That's what people are going to be jockeying back and forth on and why is that interesting and why do we care people are talking back and forth? Because people are making trading decisions based on that. They are making bets on that, whether we are talking about currency, which is the biggest market, far bigger than equities, and treasury levels have an impact on currency so whether you are talking about currency or fixing, or the economy or securities, people look at that and say, I'm going to make a calculated risk because I think this is going to happen. So why is it important that people are speculating back and forth? Because somebody is making a trade based on speculation.
Someone, somewhere, on some commodity, someone is making a trade.
>> What we heard from Jackson Hole is important for us as traitors. At the same time, when you saw the broadcast, it was a gorgeous backdrop. It's not a coincidence.
>> It isn't.
It's a great strategy.
If you're having a party and you want the guest of honour to come in, you want to cook something they want to eat. The same is true with the Federal Reserve, when they wanted to hold this event, they wanted Paul Volcker to come. At the end of summer and they find out he likes flyfishing. This is in the 80s.
They find out he likes flyfishing, let's have our conference where there is flyfishing and sure enough, he came and he delivered speech and he went flyfishing and the planned stocks so it's an invite only event, the symposium is an invite only event but people go and now the chairman of the Federal Reserve uses that time to give a speech that kind of lays the groundwork for the fall but it started as, how can we invited guys who might not want to come to come and talk to us?
>> I think it should be mandatory to go flyfishing.
Maybe the optics of being and the waiters out in the river… I think it's a good look.
>> Flyfishing, I only caught the person who was trying to show me how to fly fish, so.
>> Sore shoulder the one time I went with my dad, I got a bit of pain here. So that's what's happening south of the border and that's what informs the feds right decision in September. We have a rate decision in Canada before the Fed so we are watching all the data, we got retail sales.
>> We've got retail sales for June and that they are down, not in line with stats Canada's advanced estimates. This expands on the pullback we saw in me as well.
Adjusted for inflation, retail sales were still down .1% in June. Flash estimate, they still see some weakness in July. This is interesting because TD Economics has their internal data which shows that… Their pulmonary estimate for July was up for staff Canada. This kind of conflicts with TD's internal data which shows that July spending is weak and they say this kind of aligns with the soft job figures as well. They do expect August to rebound from the weakness that they saw in June.
One notable thing though is they said if the railroad strike continues, that could have an impact on some of the sectors within Canada, particularly autos and grocery retailers.
>> Central bank set up for rate cuts, questions to the fall about how many more into what magnitude, it's still August though. People are so quick to say goodbye to summer, it's still August. September is traditionally not a great month.
What do you think investors need to keep in mind here? Everything seemed to be pointing in one direction.
>> I look at it and we look at the data that's coming out from Stats Can or other sources and for me it's one of those… We are talking June, we are now at the end of August, and one of the things I like to think about when we look at these numbers is it's all around you. This is not something on high that somebody with a massive background or an economics background, they're the only ones who can define what's going on.
Look around and see how you feel about stuff.
Are you going out for dinner a little bit less? What is your holiday this summer, was a state Haitian where you did some of the things? We talked a little bit about the stats earlier this summer about young people being about 50% employment and your one son was employed and the other wasn't.
That's the economy. One of the things I like to look at is what is it looking like around me? You can pretty much get a good sense because you are going to be making those decisions for your investment, for your savings, for the things you are planning to have so are we seeing a software economy? Yeah, I think we are. So what we do with that information? And we may not need to wait until an economist tells us or Stats Can tells us.
>> Excellent conversation as always.
Thanks for joining us.
>> Our pleasure.
>> Susan Prince and Anthony Okolie of MoneyTalk.
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.
Canada's two biggest railways and its unionized workers being ordered into binding arbitration. The move from the federal government comes after Canadian National Railway and CPKC knocked out more than 9000 workers in a labour dispute which halted freight traffic on the country's rail line. Each side in the dispute has accused the other of failing to negotiate seriously. They have an order to binding arbitration. Still a lot of intrigue on this one so we will have to see how it all shakes out.
Let's get back to those uranium stocks, definitely in the spotlight today. We should be Denison off the top of the show making big gains, Cameco as well and a few other place. That goes back to Kazakhstan, the world's largest uranium producer actually cut its output target for next year, it is citing project delays and shortfalls of sulphuric acid, which is very important to the whole process of getting uranium. The country produces 1/5 of the global supply of nuclear fuel so you can see the effect it's having on the markets, Cameco up more than 5% and Denison was double digits last time we checked.
There is a departure in the executive ranks of Delta Airlines. Chief operations officer Mike Spanos leaving after just over a year on the job. Delta says Spanos is taking another job and had informed the airline he was considering other opportunities earlier this summer. The departure also comes just weeks after a globe spanning IT out is grounded thousands of Delta flight, costing the airline $500 million. Not that it didn't affect other airlines, but Delta seemed to take a particularly big hit. Quick check on the market, will start here at home with the TSX Composite Index, nice move to the upside at the end of the trading week, 232 points on the board, one full percent, and south of the border, in the wake of Jerome Powell at Jackson Hole, as our panel was saying, he said with the markets wanted to hear. 32 points to the upside of the S&P 500, a gain of more than half a percent.
It's been a busy week. Earlier this week, it seems like a million years ago, we had an inflation report out of Canada, called to 2.5% in July, the lowest level in more than three years. Is that open the door for another Canada rate cut in September?
Robert Both, senior macro strategist TD securities are in me earlier to discuss.
>> The details were a little bit softer than we had expected.
What I am referring to is that the Bank of Canada's preferred measures of core inflation, those printed at about 2.5, 5% on average. One of them sitting at 2.4, one of them sitting at 2.7 but that was 1/10 lower than where we and the market saw them and that means that those three-month rates of core inflation that the Bank of Canada likes to look at as a gauge of where inflation is trending, that looks a little bit softer than we had anticipated.
So overall, this is very positive news.
And if you look at what drove that improvement from last month, it is a lot of those cyclical components that you would expect to come under a little more pressure with higher rates of discretionary components like motor vehicles, hotels, airfares, large household appliances. Those are all the components that are dragging inflation lower on a year-over-year basis and that is likely to get the Bank of Canada a little bit more confidence that we are still on track to get that 2% target.
>> Something you and I talked about in terms of that headline inflation number, when you strip at the shelter costs, I think we are down to like 1.2% inflation if you strip out shelter and that was one of those things were the Bank of Canada has been asked repeatedly about, does that matter to them?
>> Rate. X shelter is running at 1.2. It was about 1.3 last month so not a huge change there, but shelter costs are seeing progress as well. If you look at the headline index, it improved more than the X shelter.
We are seeing that evidence of deceleration and things like rents. We are certainly seeing it in mortgage interest costs and that gap between shelter and everything else, as we grew smaller, it's going to be a lot easier to get all the way from 2.5 back down to 2.0.
>> So as we talk about those things, obviously the Bank of Canada taking a look at this report, they got an announcement two or three weeks from now, early September. What does it mean for them to Mark I feel after these two cuts we got the summer, there was a bit of hesitation in the market, will there 1 Day in September. Does this change the story?
>> So what I think the bank is going to be looking at in this report as they are going to be looking at kind of early signs of progress on shelter prices. They are going to be looking at that more modest performance across the bank's preferred measures of core inflation and I think those two stories are going to tell them that some of these concerns around inflation proving a little more persistent, things like shelter and core services help keeping inflation elevated into next year, some of those concerns might be fading away a little bit, so the market did not necessarily need to see that much evidence. We were already priced for a 25 Basis Point in September heading into this report, but I think this report will give the bank a little more conviction that that path is still intact.
And we do believe that this report is going to give the bank a green light to ease rates again in September.
>> If they do ease again in September, we will have had three cuts under our belt.
What does the rest of the year look like for the Bank of Canada can mark >> We think we are going to get 1 More Cut in September and then 1 More Cut in October, so that will be four in a row for 100 basis points of easing but we do still think there is going to be a pause this year so we are looking for that pause to come in December, our previous projection that had it in September but looking at the progress and today CPI report, the case for another rate cut is not necessarily as large of a slamdunk as the market might be in plain. You can look at things like wage growth still being a little elevated. There is certainly parts of the services baskets that are still seeing this pressures and inflation expectations have been somewhat mixed over the last few quarters as well so the Bank of Canada does seem to be putting a lot more weight on excess capacity versus what we are seeing in labour markets, that should make it easier to look through some of these more persistent underlying price pressures but overall, it is coming into the 2% target is coming into view. We are marking you ground today and we do think that is going to support rate cuts in September and October.
>> Anxiety might be too strong a word but the think there any lingering concerns about the BOC, thinking of conversations we had earlier this year leading into those two rate cuts, your thinking of the one in September, but they did not want to get this wrong. When inflation first showed up, central bank said it was transitory, they wanted to chase it and bring it back down. You think their anxieties are easing that they might be making the wrong call?
>> Their anxieties might be changing. When we saw those first two rate cuts, is not a foregone conclusion that the bank is going to continue easing all the way until we got to neutral. We have been through. It's the spring where you have seen those inflation pressures materialize quite sharply, core inflation saw a series of strong month over month advances from March all the way up to May and wage growth has remained strong so I think even as that first Bank of Canada cut materialize, there was a little uncertainty.
Is there really no risk that they are forced to hike again?
I think any discussion about inflation rate accelerating from here it is certainly taking on less importance in the bank's deliberations going forward and I think those discussions are more likely to shift into 2025 to whether or not we are actually going to be able to reach neutral and whether or not the bank is going to perhaps look at going through neutral if inflation does appear on track to undershoot the 2% target which is not our base case.
>> The longer term, you are talking about getting back to neutral rates where you are no longer trying to tamp down the economy to tame inflation, you're not trying to reinvigorate it as well to catch up to slow growth, where does the bank think neutral is, where do we think neutral is?
>> The bank thinks neutral is at 2.75%.
As you look into 2025 and 2026 right now markets are placing some risk that we end up going below neutral. If you look at where the end of the cutting cycle is priced, it's closer to about 2.5%. We think neutral is going to be three. The bank upgraded it from 2.5 to 2.75% in April last year. We do think they will upgrade it again in April of next year.
But neutral as unobservable so I guess we will know we are there once we are there.
>> That was Robert Both, Senior macro strategist with TD Securities.
Now, let's get our educational segment of the day.
Some Canadian companies also trade on American exchanges. Joining us on discuss how dual listed shares work is Meagan Henriques, Senior client education instructor with TD Direct Investing.
Always great to see. Let's talk about identifying which stocks are dual listed and the benefits.
>> Yeah, so like you mentioned, some companies are going to be on not just the Canadian exchange but on the American one as well so let's get to web broker so I can show you how you can identify this.
So once you are in web broker, let's go as if we were ready to place a trade. I'm going to go to the top right where it's buy/sell and from here, it's actually going to be a really good benefit based on the account that you are in. So for instance, if I look at the current view, which is the US margin account, if I wanted to change, I can click on the drop down and select another account. Accounts are divided by currency and this should help you avoid converting your currency unintentionally which can cause losses.
Let's say we keep it in the US margin account and we were to pick a company. So I'm going to put in TD as our example and from the drop down, you see that it's the exact same company but we will have a Canadian flag and an American flag. So let's click on the Canadian one and you will see that it's trading at about $80.66 and if I change it, so I'm going to go back to my symbol, take off the CA, get back my drop-down where I have both and now I'm going to click on the US one. See you can see that the pricing, the only difference is really that exchange rate difference.
So this way, if I did have American funds, instead of converting it, I can simply pick the company on the same conversions so the same currency rate.
So in this case, we are looking at TD US, it's the same Toronto Dominion Bank, but now in the US currency.
>> All right, so now we understand that.
Perhaps people have been doing this but now they are wondering if it's possible to transfer that dual listed stock between accounts on web broker?
>> On web broker you can transfer them to another council let me show you how. Let's get back into web that broker. Now we are going to be in the account section from the main menu. Under transfers and withdrawals, we are going to go to this third one, transfer securities within TD Direct Investing.
So here, you would simply need to follow the steps where you are selecting from which account to which account. You would type in the symbol, select your quantity, review it and then confirm. And actually it's on the same page of security transfers that if you wanted to, you could make your contributions into registered accounts like tax-free savings accounts and RRSPs, so you can do this same there where instead of making a cash contribution, you're doing it was securities instead.
>> Fascinating stuff. Great stuff as always. Thanks for that.
>> Thank you.
>> Meagan Henriques, Senior client education instructor with TD Direct Investing. For more educational resources, check at the learning centre on web broker or use this QR code. It navigates to TD Direct Investing's YouTube page. Once you're there, you will find more informative videos.
Big technology stocks have been in favour among investors but with interest rates trending lower, could we begin to see some more opportunity in other sectors like real estate and infrastructure?
Jeff Evans, VP, Dir. and lead of empirical research and PM support at TD Asset Management joined me earlier to discuss.
>> Absolutely. It has been a challenging couple of years for the sectors. We have had over the last two years some of the largest and fastest increases in interest rates around the world than we seen in probably 50 years. The reason why that's important for the sectors as these tend to be some of the highest leverage sectors and equity market. They also tend to be one of the higher dividend yield errors.
When you have interest rates go from 0 to 5%, you can get a risk-free GIC from a bank at 5%, the incentive to own a real estate stock or utility at three or four is much less compelling. From the perspective of the business, a lot of these companies are continuing to perform quite well over the last two or three years at the operating level but they are offering with a lot of leverage and as interest rates have come up, they have refinanced at higher rates and it's really made it harder for them to grow their bottom line just faced with the interest rate pressure. As we are starting to see interest rate cuts come in, we have had a couple from the Bank of Canada, starting to hopefully get one in the US in September, we will get updates from Jackson Hole later this week, we are now on the other side of that. All of that leverage goes upside down. As the GICs slide lower over time, it's a gradual process, but as investors have to replace that cash flow, they have to move out on the risk spectrum, into equities, and real estate and intra-structure tend to be the sectors to replace income when cash goes down. The tailwinds for financing or headwinds become tailwinds, it's much better operating environment.
>> Let's take those two sectors one at a time, let's talk about the outlook for real estate. This is a big bucket.
>> It comes down to the occupancy, what run can you charge and is the rent growing over time and then the financing on this building. The financing is improving. It comes back to occupancy and rent.
Across the major sectors, whether it's apartments, single family rental, industrial, data centres, cell phone towers, those of the big buckets in real estate, they are pretty much full.
Occupancy is tight. There might've been a bit of slippage here or there but broadly speaking operating very close to occupancy so what's important is because of the inflation we have seen in construction costs over the last couple of years, the increase in financing costs, nobody's building you buildings right now.
The math really doesn't work. Aside from a few special cases. There is a little bit still coming into the market, we are seeing a lot of deliveries and 24 and that will start to slow down and 25 and almost disappeared 26. We have an environment of strong occupancy day that should get tighter absent a recession. The operating fund metals become very strong and 26.
That's important for landlords because of occupancy is full, you can usually charge pretty good rents and push wrenching pieces through to tenants if there is, tenancy the space and then you can increase rates at fairly healthy rates. We are already seeing that today.
Across the apartment rates, particularly in Canada, we are seeing strong immigration, lots of demand for housing.
We have under built for 10 years.
There is still pretty healthy rent growth across the country. A little weaker in the US because they built a lot of supply in the Sun Belt so it's a little bit more regional but generally again healthy rent growth in apartments. Industrial, there are some dynamics going on there too but a very good path for industrial REITs to raise the rents over the next couple of years bringing them to market. This whole dynamic of being able to price particularly in retail where there has been no supply for 10 years, lots of opportunities to raise rents across the board. It really comes down to interest rates which have been masking a lot of the strong fundamentals but as we get into 26, the setup remains very favourable.
>> What about office? This is what I hear is the standout. Retail is returned strongly, industrial, warehouses, good for buying, but people, are they going back to the office to mark >> That is the one standout where there is clear occupancy decline. Historically, office was a great asset. 5 to 10 year leases, people generally hold onto them, occupancy was high in the mid-90s. It slipped down, depend on where you are at, low to mid 80s, so there has been a lot of occupancy loss but it's regional. When we look at Asia, a lot of the Asian office markets continue to be fairly healthy, particularly the newer buildings.
Culturally, people want to be in the office.
It has held up fairly well in those markets. Same thing and large parts of Europe. Spain is a great example. Very fast-growing economy, one of the best in Europe. Office vacancy has held up it currently well. You are seeing 92, 92% vacancy where is it was maybe 95 at the peak so lots of strong demand in certain submarkets. It's really the West Coast US which is tech, the tech sector has been that where things have struggled. You're saying occupancy sometimes will below 80% and landlords are really struggling to fill up the buildings.
We are seeing a few little green shoots here and there. The AI startups in San Francisco starting to take some space that's in helping to chip away at vacancy, get rid of some of the sublet space in the San Francisco market. You are also seeing within the apartment rates, last year there were tech layoffs. It was very difficult to rent an apartment.
We are seeing that come back. It's much stronger than it was a year ago. It tells us that at the margin something is starting to improve in the tech space.
Where we are really starting to see it is in the traditional office markets, like New York and Boston, you have your financial, insurance, real estate tenants.
There's a pickup and leasing activity in this market. We are even seeing some tenants take more space as these leases come up for renewal.
One big landlord in the states was talking about a tenant, a big consulting firm, took up 20% more than what they had before. Not everybody is doing that but their anecdotal signs that people are starting to figure out their space needs.
There may be three or four years of leases that need to roll over still before you completely comfortable that the COVID environment is sorted out but we are seeing some green shoots.
We are not quite at the bottom.
There is still a bit of occupancy slippage but this acceleration and leasing, it probably won't help this year but as you get into 25 and 26, you should start to see some of this leasing activity that's happening now show up in the occupancy statistics I think it's too soon for office but certainly more optimistic than it has been for the last couple of years.
>> Interesting breakdown of real estate.
How about we touch on the infrastructure side.
>> Lots of different subsectors within infrastructure.
I will start with transport, so the rails, trucking companies, those are a bit more economically sensitive. There were green shoots earlier this year. We started seeing I am picking up, the leading indicators were showing better signals and unfortunately that has rolled over in the last month or two.
It has created a little bit of uncertainty on whether the economy is recovering anonymous he said the payroll numbers being revised down does not help that dynamic.
We look at inventories, that's the other key thing. There was a lot of inventory destocking over the last couple of years.
Anecdotally is one example if you talk to the cold storage REITs that handle food and food processing, they are operating at some of the lowest inventory levels and occupancy that they have seen on record and its reflective of the challenges for the consumer. We are not eating out as much, people are not using restaurants as much, they are eating from home. It's change demand for some of these cold storage companies. We are just not seeing that restocking cycle re-accelerating as quickly as we thought.
It seems like it's coming. The inventory levels are relatively low, the ISM hopefully has bottomed out and should benefit from interest-rate cuts but we need to see a little bit more strength before those sectors come back.
On the pipeline side, what's interesting here is there is a lot of concern as to whether these needed to exist five years ago, we were off of oil and gas, everything renewable. I think we have seen with all of the geopolitical boys in the last few years is that there really is a need for oil and gas. It's going to be around for a long time. We cannot build renewables as fast governments want to steal.
Particularly for relatively clean and secure energy regarding Canada, it's hard to say energy is green, but the energy companies have spent a lot of effort to make their companies as Eeyou Istchee firmly as they can, trying to get as much carbon from the extraction process as possible and make the pipeline very efficient. What we are seeing on the intersection side is a very long term demand profile and other things like LNG, exporting to Asia and Europe to help with their energy and security needs, all of that is coming together to get a much more attractive profile.
Later, this AI datacentre theme in the past year, we cannot meet that with nuclear and renewables, it really comes down to natural gas.
That's another demand driver to support these pipelines. In general, I think it's a very healthy sector with a strong backdrop. The other component would be utilities.
Couple years ago, this was the backwater, the boarding area of the equity markets that did not do too much. Electricity demand was not growing, maybe half a percent per year for the last two decades.
We are now seeing at the low end seeing 1% per year growth which is a doubling of electric demand. I see estimates as high as 4% per year growth for literacy over the next decade. A lot of that is data centres, but a lot of it is bringing battery plans for EVs and back into the states, bringing chip plants back into the US and just manufacturing facilities, high-end stuff, airplanes and those sorts of things, this facilities use a lot of energy and we are now seeing much more constructive demand outlook for utilities.
It's gone from a relatively low growth, boring sector, to one that's really supporting now the Nvidia and Microsoft side. You cannot have that AI build out if you don't have the power so it's become a much more compelling sector. The earnings growth rates are still about the same, we have not seen companies upgrade guidance dramatically but it's the certainty and that guidance over a much longer period of time which makes it a much more compelling sector today than it was even a few years ago.
>> That was Jeff Evans, VP, Dir. and leader of empirical research and PM support at TD asset management.
Now, for an update 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, gives us a nice view of the market movers. Let's dig into the TSX 60. We had some strength on the top line composite index number today.
We are up pretty much a full percent. As we dig in, we can see the financial putting points on the table, whether it's Manulife up 2% or some of the big banks including Royal and TD and Scotia all up around the neighbourhood of about 1%. You can see in the energy bucket some of the oil and gas names are getting a bid on a higher price accrued but Cameco really standing out right now, up more than 5.5%.
As we told you earlier in the show, Kazakhstan, a major supplier to the world, saying it's cutting its production numbers. A little worried about some operational stuff and the materials it needs to mine uranium and produce it.
Interesting moves in that space. South of the border, Jackson Hole, Jerome Powell came out and spoke this morning. It appears what he had to say pleased the street. The big take away, if you take away one line from this, this is what I am taking away from his speech this morning, he said the time has come for policy to adjust. Clearly opening the door to a September rate cut. The question in the market now is, 25 basis points or more? We have more economic data coming out of the states in the next couple weeks before that decision so it will be an interesting time but the market like it.
The markets are higher south of the border. Nvidia is up more than 3%, Tesla's up more than 3%, Intel which has lagged in the CHIPS Act or on the whole AI boom up 2% and some of the financial showing a bit of strength on Wall Street.
Investors were dealt a brief but dramatic dose of volatility this summer when several major events on the horizon. Could the environment be right to consider a low volatility investment approach? Emin Baghramyan, VP, director and lead quantitative for flu management at TD Asset Management join me earlier to discuss.
>> Before we start discussing the reasons it's a good time to consider low volatility investing, let me give you a brief reminder of what low volatility investing is.
Low volatility is basically a strategy where we seek out these low risk companies that tend to be well-established with stable earnings and mostly represented in defensive sectors such as consumer Staples, utilities, healthcare and the goal of this strategy is to generate the highest possible risk-adjusted returns, so the main characteristic of the portfolio that consists of this type of stocks is to generate the most added value in an environment where market volatility is high and economic growth is scarce. That brings me to the first reason why investors should consider investing in low volatility strategies. If we look at the state of the global economy from China that is currently facing its housing slump to other emerging markets whose main trading partner is China and they are facing that weak Chinese demand, to Europe, to UK, even to North America where we had the United States and up doing much better than every other large economy, where we have also seen the first signs of economic weakness going into the end of 2024 into 2025, where there is debate, whether it's a soft landing or a hard landing.
What we can be sure of is that economic growth is weakening around the world and that is usually, as history tells us, in that environment, major equity benchmarks do not do well.
Weak growth tends to be accompanied by major corrections and benchmarks and even possible bear market so that's the first reason why investors should consider investing in low volatility strategies.
The second reason is that major equity benchmarks are, at the moment, extremely concentrated into very few selected themes which is mostly AI related. Here, I brought a slide with me to demonstrate.
This is basically showing let's first look at the purple line there, it is showing that only five stocks in the MSCI All Country World Index, 1/3 of the benchmark risk, and they tend to be large mega-cap stocks in the IT sector and so we look at the first area there, that the IT sector, the others are the communication services sector, consumer discretionary sector, those are dominated by Amazon and Tesla and Netflix and they are more IP type of stocks and if you look at that, 70% of the benchmark risk is coming from these selected stocks that are in a few very concentrated sectors. History also tells us that this concentration cannot last for long and eventually extreme levels of concentration and benchmarks which we saw in the 70s with energy stocks and we saw in the late 90s and the NASDAQ levels, with the financial stocks, it eventually becomes D concentrated. We don't have a crystal ball to say when exactly that will happen but that concentration on the benchmark tells us that investing in equities and trying to realize your equity risk premium is not very efficient right now to doing it with this Weighted benchmark so low volatility is a stronger alternative to whether these kind of storms.
>> You talk about low volatility investing, you say it's efficient over the longer term.
>> Yes, exactly.
Another reason the low volatility strategy is about longer term. It doesn't matter when you really get into it. You can of a better starting point or were starting point. I brought another point to show you. Over the last 50 years, if you are investing only in the low volatility quintile segment of the stocks, the strategy over the full market cycle or the few long-term periods, you can see that actually outperforms the cap-weighted benchmark in this case, is showing for the United States and it can also be compared to the U.S. Treasury index of the two major asset classes have performed really well over the past 50 years and in the US where we had the strongest returns we can see that the low volatility strategy has done well over a long period of time.
>> When we start thinking about the strategy, what kind of stocks or sectors are we thinking about?
>> It depends on the investment universe, of course, in what the strategy is sitting. Given the investment universe, if you are investing in low volatility Canadian stocks or low volatility US stocks are global stocks, those have a little bit different characteristics. For example, some of the financial companies in the US, they tend to be on the riskier side, given what was on regional banks and larger banks, they tend to be more volatile so they are not that represented in US low volatility strategies. In Canada, where we have more representation, a lot more well-established and safer financials, insurance companies, banks, we have more representation of these type of countries in Canadian benchmark. However, the main common point is that these are the companies that are easier to find in consumer Staples, grocers and retailers and food producers and soft drink producers, they are also utility companies that tend to be with very stable earnings and tend to be very stable in providing this difference in quality healthcare companies, you find in all sectors, it doesn't mean that you will never find a defensive tech company or defensive energy company, but the biggest sectors tend to be telecoms, utilities, consumer Staples and healthcare.
>> If an investor is doing their homework on low volatility investing, what risks did they need to be aware of?
>> One of the main risks that investors should think about when they start investing in low volatility strategy, it's not really a short-term strategy.
There will be periods where, for example right in the aftermath of the COVID pandemic, or right at the beginning after the 2008 2009 financial crisis or when you have that kind of environment, interest rates are/20, where you have a very strong market rally that recovers from extreme levels, obviously the defensive strategies will lack benchmarks.
If your thinking and relative performance terms, they might face a situation where they look at their equity holdings in low volatility compare that to benchmark and say they have been lagging but they have to remember that the strategies goal is asymmetry. So when you cut down your downside, you obviously need to pay for it somehow and the payment is on the very strong performing times but the mathematics of the compounding where you declined less than the benchmark and you kind of try to keep up as much as possible when the market rallies over a long term, it allows you to be very efficient and to generate the highest possible risk-adjusted return.
>> That was Emin Baghramyan, VP, Dir. and leader of quantitative portfolio management at TD Asset Management.
As always, make sure you do your own research before making any investment decisions.
stay tuned for Monday show. John Kiernan, managing director at TD Cowen will be our guest. He wants to take your questions about retail and consumer stocks.
A reminder that you can get a head start with those questions. Just email MoneyTalkLive@TD.com. On behalf of me, Anthony and Susan in front of the camera and everyone behind the scenes to bring to the show every day, thank you for watching and we will see you next week.
[theme music]
coming up on today's show, Moneytalk's Susan Prince and Anthony Okolie will join us to discuss the big takeaways from Jerome Powell's highly anticipated speech at Jackson Hole. TD Asset Management's Jeff Evans will discuss whether lower rates might put the spotlight on some sectors like real estate and infrastructure. In today's WebBroker education segment, Meagan Henriques will take us through how dual listed stocks work.
Before we get to all that, let's get you an update on the markets. It's Friday, the last trading day of the week. Some green on the screen. Might have something to do with Jackson Hole and some other things going on. The TSX Composite Index is up 248 points, more than one full percent.
Some notable movers include the uranium place.
Concerns about global supply has these names all move higher. Including Denison Mines, at $2.33 per share, up almost 15%.
We have what expenses intermediate up about 2 1/2% per barrel, that's got some of our big oil and energy names including Baytex energy, at $4.86, up 2.5%. South of the border, it seems that Jerome Powell said just with the markets want to hear, the S&P 500 up 42 points or three quarters of a percent.
The tech heavy NASDAQ, I think it's outpacing the broader market, indeed it is. Up 1.3%. Nvidia, no real news around it other than its Nvidia and what it moves higher, it looks a lot of boats. Right now Nvidia is up to the tune… This is like a drum roll, please one… Up 3 1/2%. $128 and change per share.
And that's your market update.
We've been waiting for this one all week.
Jerome Powell at Jackson Hole, delivering that highly anticipated speech. The market seemed to please. Let's dig into what we heard. MoneyTalk's Anthony Okolie and Susan Prince join is that with more.
As I was saying, and I think we are all probably going to agree, I think the markets are pleased.
>> I think so. Heading into this, I think markets are expecting him to lay the groundwork for September rate cuts and it's unclear as to how much you will commit to the size of the rate cut but he did talk about inflation, for example.
Inflation, he said that the feds fight to cool inflation has largely succeeded. The progress to the 2% target has resumed after a pause earlier in the year. On the job market, the Fed is now focused on the risks of the weakening job market. We have seen unemployment move up from 3.7% in January to 4.3% in July. We saw that big revision as well.
The chairman also mentioned that job vacancies are down. The ratio of vacancies to employment is back to pre-pandemic levels.
And he also said that the conditions now are less than just before the pandemic in 2019 so clearly the Fed does not want to see the job market we can further. I think again that all kind of lays the groundwork for a potential cut in September.
>> That big headline, the time for policy to adjust is upon us.
All right, the market fully expected a quarter-point cut in the September meeting, I think it's a one in three odd that they could go 50 basis points. What stood out for you? I think you were saying it was humility.
>> There were a couple of things about it.
The market loves hearing what they expect to hear. They heard what they expected to hear. Everybody is happy. That's the first thing. The other part about it was, I heard someone characterize it as a valedictory address. It was humble, pointing out where they had made mistakes.
One of the things for the past couple of Jackson Hole meetings was his talk about inflation being transitory in 2021, 22, 23, and it was not, and he ate a little bit of humble pie about that which I thought was, own your mistakes and move on.
It gives some credibility there.
What will be interesting, I will have the market has such a short attention span.
It's like, okay, okay, we want to know what he says. What did he say about rate cuts? So now we are onto the next thing.
The next thing is, is it going to be 50, 75 or 100 points? There are now people basically saying they think it will be 100 points by the end of the year.
Not 100 Points in September.
Just to clarify.
>> You look to me and I was like… >> Yeah, so is it 25 in September and then somehow or another we get the other 75 basis points between October and the end of the year? That's what people are going to be jockeying back and forth on and why is that interesting and why do we care people are talking back and forth? Because people are making trading decisions based on that. They are making bets on that, whether we are talking about currency, which is the biggest market, far bigger than equities, and treasury levels have an impact on currency so whether you are talking about currency or fixing, or the economy or securities, people look at that and say, I'm going to make a calculated risk because I think this is going to happen. So why is it important that people are speculating back and forth? Because somebody is making a trade based on speculation.
Someone, somewhere, on some commodity, someone is making a trade.
>> What we heard from Jackson Hole is important for us as traitors. At the same time, when you saw the broadcast, it was a gorgeous backdrop. It's not a coincidence.
>> It isn't.
It's a great strategy.
If you're having a party and you want the guest of honour to come in, you want to cook something they want to eat. The same is true with the Federal Reserve, when they wanted to hold this event, they wanted Paul Volcker to come. At the end of summer and they find out he likes flyfishing. This is in the 80s.
They find out he likes flyfishing, let's have our conference where there is flyfishing and sure enough, he came and he delivered speech and he went flyfishing and the planned stocks so it's an invite only event, the symposium is an invite only event but people go and now the chairman of the Federal Reserve uses that time to give a speech that kind of lays the groundwork for the fall but it started as, how can we invited guys who might not want to come to come and talk to us?
>> I think it should be mandatory to go flyfishing.
Maybe the optics of being and the waiters out in the river… I think it's a good look.
>> Flyfishing, I only caught the person who was trying to show me how to fly fish, so.
>> Sore shoulder the one time I went with my dad, I got a bit of pain here. So that's what's happening south of the border and that's what informs the feds right decision in September. We have a rate decision in Canada before the Fed so we are watching all the data, we got retail sales.
>> We've got retail sales for June and that they are down, not in line with stats Canada's advanced estimates. This expands on the pullback we saw in me as well.
Adjusted for inflation, retail sales were still down .1% in June. Flash estimate, they still see some weakness in July. This is interesting because TD Economics has their internal data which shows that… Their pulmonary estimate for July was up for staff Canada. This kind of conflicts with TD's internal data which shows that July spending is weak and they say this kind of aligns with the soft job figures as well. They do expect August to rebound from the weakness that they saw in June.
One notable thing though is they said if the railroad strike continues, that could have an impact on some of the sectors within Canada, particularly autos and grocery retailers.
>> Central bank set up for rate cuts, questions to the fall about how many more into what magnitude, it's still August though. People are so quick to say goodbye to summer, it's still August. September is traditionally not a great month.
What do you think investors need to keep in mind here? Everything seemed to be pointing in one direction.
>> I look at it and we look at the data that's coming out from Stats Can or other sources and for me it's one of those… We are talking June, we are now at the end of August, and one of the things I like to think about when we look at these numbers is it's all around you. This is not something on high that somebody with a massive background or an economics background, they're the only ones who can define what's going on.
Look around and see how you feel about stuff.
Are you going out for dinner a little bit less? What is your holiday this summer, was a state Haitian where you did some of the things? We talked a little bit about the stats earlier this summer about young people being about 50% employment and your one son was employed and the other wasn't.
That's the economy. One of the things I like to look at is what is it looking like around me? You can pretty much get a good sense because you are going to be making those decisions for your investment, for your savings, for the things you are planning to have so are we seeing a software economy? Yeah, I think we are. So what we do with that information? And we may not need to wait until an economist tells us or Stats Can tells us.
>> Excellent conversation as always.
Thanks for joining us.
>> Our pleasure.
>> Susan Prince and Anthony Okolie of MoneyTalk.
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.
Canada's two biggest railways and its unionized workers being ordered into binding arbitration. The move from the federal government comes after Canadian National Railway and CPKC knocked out more than 9000 workers in a labour dispute which halted freight traffic on the country's rail line. Each side in the dispute has accused the other of failing to negotiate seriously. They have an order to binding arbitration. Still a lot of intrigue on this one so we will have to see how it all shakes out.
Let's get back to those uranium stocks, definitely in the spotlight today. We should be Denison off the top of the show making big gains, Cameco as well and a few other place. That goes back to Kazakhstan, the world's largest uranium producer actually cut its output target for next year, it is citing project delays and shortfalls of sulphuric acid, which is very important to the whole process of getting uranium. The country produces 1/5 of the global supply of nuclear fuel so you can see the effect it's having on the markets, Cameco up more than 5% and Denison was double digits last time we checked.
There is a departure in the executive ranks of Delta Airlines. Chief operations officer Mike Spanos leaving after just over a year on the job. Delta says Spanos is taking another job and had informed the airline he was considering other opportunities earlier this summer. The departure also comes just weeks after a globe spanning IT out is grounded thousands of Delta flight, costing the airline $500 million. Not that it didn't affect other airlines, but Delta seemed to take a particularly big hit. Quick check on the market, will start here at home with the TSX Composite Index, nice move to the upside at the end of the trading week, 232 points on the board, one full percent, and south of the border, in the wake of Jerome Powell at Jackson Hole, as our panel was saying, he said with the markets wanted to hear. 32 points to the upside of the S&P 500, a gain of more than half a percent.
It's been a busy week. Earlier this week, it seems like a million years ago, we had an inflation report out of Canada, called to 2.5% in July, the lowest level in more than three years. Is that open the door for another Canada rate cut in September?
Robert Both, senior macro strategist TD securities are in me earlier to discuss.
>> The details were a little bit softer than we had expected.
What I am referring to is that the Bank of Canada's preferred measures of core inflation, those printed at about 2.5, 5% on average. One of them sitting at 2.4, one of them sitting at 2.7 but that was 1/10 lower than where we and the market saw them and that means that those three-month rates of core inflation that the Bank of Canada likes to look at as a gauge of where inflation is trending, that looks a little bit softer than we had anticipated.
So overall, this is very positive news.
And if you look at what drove that improvement from last month, it is a lot of those cyclical components that you would expect to come under a little more pressure with higher rates of discretionary components like motor vehicles, hotels, airfares, large household appliances. Those are all the components that are dragging inflation lower on a year-over-year basis and that is likely to get the Bank of Canada a little bit more confidence that we are still on track to get that 2% target.
>> Something you and I talked about in terms of that headline inflation number, when you strip at the shelter costs, I think we are down to like 1.2% inflation if you strip out shelter and that was one of those things were the Bank of Canada has been asked repeatedly about, does that matter to them?
>> Rate. X shelter is running at 1.2. It was about 1.3 last month so not a huge change there, but shelter costs are seeing progress as well. If you look at the headline index, it improved more than the X shelter.
We are seeing that evidence of deceleration and things like rents. We are certainly seeing it in mortgage interest costs and that gap between shelter and everything else, as we grew smaller, it's going to be a lot easier to get all the way from 2.5 back down to 2.0.
>> So as we talk about those things, obviously the Bank of Canada taking a look at this report, they got an announcement two or three weeks from now, early September. What does it mean for them to Mark I feel after these two cuts we got the summer, there was a bit of hesitation in the market, will there 1 Day in September. Does this change the story?
>> So what I think the bank is going to be looking at in this report as they are going to be looking at kind of early signs of progress on shelter prices. They are going to be looking at that more modest performance across the bank's preferred measures of core inflation and I think those two stories are going to tell them that some of these concerns around inflation proving a little more persistent, things like shelter and core services help keeping inflation elevated into next year, some of those concerns might be fading away a little bit, so the market did not necessarily need to see that much evidence. We were already priced for a 25 Basis Point in September heading into this report, but I think this report will give the bank a little more conviction that that path is still intact.
And we do believe that this report is going to give the bank a green light to ease rates again in September.
>> If they do ease again in September, we will have had three cuts under our belt.
What does the rest of the year look like for the Bank of Canada can mark >> We think we are going to get 1 More Cut in September and then 1 More Cut in October, so that will be four in a row for 100 basis points of easing but we do still think there is going to be a pause this year so we are looking for that pause to come in December, our previous projection that had it in September but looking at the progress and today CPI report, the case for another rate cut is not necessarily as large of a slamdunk as the market might be in plain. You can look at things like wage growth still being a little elevated. There is certainly parts of the services baskets that are still seeing this pressures and inflation expectations have been somewhat mixed over the last few quarters as well so the Bank of Canada does seem to be putting a lot more weight on excess capacity versus what we are seeing in labour markets, that should make it easier to look through some of these more persistent underlying price pressures but overall, it is coming into the 2% target is coming into view. We are marking you ground today and we do think that is going to support rate cuts in September and October.
>> Anxiety might be too strong a word but the think there any lingering concerns about the BOC, thinking of conversations we had earlier this year leading into those two rate cuts, your thinking of the one in September, but they did not want to get this wrong. When inflation first showed up, central bank said it was transitory, they wanted to chase it and bring it back down. You think their anxieties are easing that they might be making the wrong call?
>> Their anxieties might be changing. When we saw those first two rate cuts, is not a foregone conclusion that the bank is going to continue easing all the way until we got to neutral. We have been through. It's the spring where you have seen those inflation pressures materialize quite sharply, core inflation saw a series of strong month over month advances from March all the way up to May and wage growth has remained strong so I think even as that first Bank of Canada cut materialize, there was a little uncertainty.
Is there really no risk that they are forced to hike again?
I think any discussion about inflation rate accelerating from here it is certainly taking on less importance in the bank's deliberations going forward and I think those discussions are more likely to shift into 2025 to whether or not we are actually going to be able to reach neutral and whether or not the bank is going to perhaps look at going through neutral if inflation does appear on track to undershoot the 2% target which is not our base case.
>> The longer term, you are talking about getting back to neutral rates where you are no longer trying to tamp down the economy to tame inflation, you're not trying to reinvigorate it as well to catch up to slow growth, where does the bank think neutral is, where do we think neutral is?
>> The bank thinks neutral is at 2.75%.
As you look into 2025 and 2026 right now markets are placing some risk that we end up going below neutral. If you look at where the end of the cutting cycle is priced, it's closer to about 2.5%. We think neutral is going to be three. The bank upgraded it from 2.5 to 2.75% in April last year. We do think they will upgrade it again in April of next year.
But neutral as unobservable so I guess we will know we are there once we are there.
>> That was Robert Both, Senior macro strategist with TD Securities.
Now, let's get our educational segment of the day.
Some Canadian companies also trade on American exchanges. Joining us on discuss how dual listed shares work is Meagan Henriques, Senior client education instructor with TD Direct Investing.
Always great to see. Let's talk about identifying which stocks are dual listed and the benefits.
>> Yeah, so like you mentioned, some companies are going to be on not just the Canadian exchange but on the American one as well so let's get to web broker so I can show you how you can identify this.
So once you are in web broker, let's go as if we were ready to place a trade. I'm going to go to the top right where it's buy/sell and from here, it's actually going to be a really good benefit based on the account that you are in. So for instance, if I look at the current view, which is the US margin account, if I wanted to change, I can click on the drop down and select another account. Accounts are divided by currency and this should help you avoid converting your currency unintentionally which can cause losses.
Let's say we keep it in the US margin account and we were to pick a company. So I'm going to put in TD as our example and from the drop down, you see that it's the exact same company but we will have a Canadian flag and an American flag. So let's click on the Canadian one and you will see that it's trading at about $80.66 and if I change it, so I'm going to go back to my symbol, take off the CA, get back my drop-down where I have both and now I'm going to click on the US one. See you can see that the pricing, the only difference is really that exchange rate difference.
So this way, if I did have American funds, instead of converting it, I can simply pick the company on the same conversions so the same currency rate.
So in this case, we are looking at TD US, it's the same Toronto Dominion Bank, but now in the US currency.
>> All right, so now we understand that.
Perhaps people have been doing this but now they are wondering if it's possible to transfer that dual listed stock between accounts on web broker?
>> On web broker you can transfer them to another council let me show you how. Let's get back into web that broker. Now we are going to be in the account section from the main menu. Under transfers and withdrawals, we are going to go to this third one, transfer securities within TD Direct Investing.
So here, you would simply need to follow the steps where you are selecting from which account to which account. You would type in the symbol, select your quantity, review it and then confirm. And actually it's on the same page of security transfers that if you wanted to, you could make your contributions into registered accounts like tax-free savings accounts and RRSPs, so you can do this same there where instead of making a cash contribution, you're doing it was securities instead.
>> Fascinating stuff. Great stuff as always. Thanks for that.
>> Thank you.
>> Meagan Henriques, Senior client education instructor with TD Direct Investing. For more educational resources, check at the learning centre on web broker or use this QR code. It navigates to TD Direct Investing's YouTube page. Once you're there, you will find more informative videos.
Big technology stocks have been in favour among investors but with interest rates trending lower, could we begin to see some more opportunity in other sectors like real estate and infrastructure?
Jeff Evans, VP, Dir. and lead of empirical research and PM support at TD Asset Management joined me earlier to discuss.
>> Absolutely. It has been a challenging couple of years for the sectors. We have had over the last two years some of the largest and fastest increases in interest rates around the world than we seen in probably 50 years. The reason why that's important for the sectors as these tend to be some of the highest leverage sectors and equity market. They also tend to be one of the higher dividend yield errors.
When you have interest rates go from 0 to 5%, you can get a risk-free GIC from a bank at 5%, the incentive to own a real estate stock or utility at three or four is much less compelling. From the perspective of the business, a lot of these companies are continuing to perform quite well over the last two or three years at the operating level but they are offering with a lot of leverage and as interest rates have come up, they have refinanced at higher rates and it's really made it harder for them to grow their bottom line just faced with the interest rate pressure. As we are starting to see interest rate cuts come in, we have had a couple from the Bank of Canada, starting to hopefully get one in the US in September, we will get updates from Jackson Hole later this week, we are now on the other side of that. All of that leverage goes upside down. As the GICs slide lower over time, it's a gradual process, but as investors have to replace that cash flow, they have to move out on the risk spectrum, into equities, and real estate and intra-structure tend to be the sectors to replace income when cash goes down. The tailwinds for financing or headwinds become tailwinds, it's much better operating environment.
>> Let's take those two sectors one at a time, let's talk about the outlook for real estate. This is a big bucket.
>> It comes down to the occupancy, what run can you charge and is the rent growing over time and then the financing on this building. The financing is improving. It comes back to occupancy and rent.
Across the major sectors, whether it's apartments, single family rental, industrial, data centres, cell phone towers, those of the big buckets in real estate, they are pretty much full.
Occupancy is tight. There might've been a bit of slippage here or there but broadly speaking operating very close to occupancy so what's important is because of the inflation we have seen in construction costs over the last couple of years, the increase in financing costs, nobody's building you buildings right now.
The math really doesn't work. Aside from a few special cases. There is a little bit still coming into the market, we are seeing a lot of deliveries and 24 and that will start to slow down and 25 and almost disappeared 26. We have an environment of strong occupancy day that should get tighter absent a recession. The operating fund metals become very strong and 26.
That's important for landlords because of occupancy is full, you can usually charge pretty good rents and push wrenching pieces through to tenants if there is, tenancy the space and then you can increase rates at fairly healthy rates. We are already seeing that today.
Across the apartment rates, particularly in Canada, we are seeing strong immigration, lots of demand for housing.
We have under built for 10 years.
There is still pretty healthy rent growth across the country. A little weaker in the US because they built a lot of supply in the Sun Belt so it's a little bit more regional but generally again healthy rent growth in apartments. Industrial, there are some dynamics going on there too but a very good path for industrial REITs to raise the rents over the next couple of years bringing them to market. This whole dynamic of being able to price particularly in retail where there has been no supply for 10 years, lots of opportunities to raise rents across the board. It really comes down to interest rates which have been masking a lot of the strong fundamentals but as we get into 26, the setup remains very favourable.
>> What about office? This is what I hear is the standout. Retail is returned strongly, industrial, warehouses, good for buying, but people, are they going back to the office to mark >> That is the one standout where there is clear occupancy decline. Historically, office was a great asset. 5 to 10 year leases, people generally hold onto them, occupancy was high in the mid-90s. It slipped down, depend on where you are at, low to mid 80s, so there has been a lot of occupancy loss but it's regional. When we look at Asia, a lot of the Asian office markets continue to be fairly healthy, particularly the newer buildings.
Culturally, people want to be in the office.
It has held up fairly well in those markets. Same thing and large parts of Europe. Spain is a great example. Very fast-growing economy, one of the best in Europe. Office vacancy has held up it currently well. You are seeing 92, 92% vacancy where is it was maybe 95 at the peak so lots of strong demand in certain submarkets. It's really the West Coast US which is tech, the tech sector has been that where things have struggled. You're saying occupancy sometimes will below 80% and landlords are really struggling to fill up the buildings.
We are seeing a few little green shoots here and there. The AI startups in San Francisco starting to take some space that's in helping to chip away at vacancy, get rid of some of the sublet space in the San Francisco market. You are also seeing within the apartment rates, last year there were tech layoffs. It was very difficult to rent an apartment.
We are seeing that come back. It's much stronger than it was a year ago. It tells us that at the margin something is starting to improve in the tech space.
Where we are really starting to see it is in the traditional office markets, like New York and Boston, you have your financial, insurance, real estate tenants.
There's a pickup and leasing activity in this market. We are even seeing some tenants take more space as these leases come up for renewal.
One big landlord in the states was talking about a tenant, a big consulting firm, took up 20% more than what they had before. Not everybody is doing that but their anecdotal signs that people are starting to figure out their space needs.
There may be three or four years of leases that need to roll over still before you completely comfortable that the COVID environment is sorted out but we are seeing some green shoots.
We are not quite at the bottom.
There is still a bit of occupancy slippage but this acceleration and leasing, it probably won't help this year but as you get into 25 and 26, you should start to see some of this leasing activity that's happening now show up in the occupancy statistics I think it's too soon for office but certainly more optimistic than it has been for the last couple of years.
>> Interesting breakdown of real estate.
How about we touch on the infrastructure side.
>> Lots of different subsectors within infrastructure.
I will start with transport, so the rails, trucking companies, those are a bit more economically sensitive. There were green shoots earlier this year. We started seeing I am picking up, the leading indicators were showing better signals and unfortunately that has rolled over in the last month or two.
It has created a little bit of uncertainty on whether the economy is recovering anonymous he said the payroll numbers being revised down does not help that dynamic.
We look at inventories, that's the other key thing. There was a lot of inventory destocking over the last couple of years.
Anecdotally is one example if you talk to the cold storage REITs that handle food and food processing, they are operating at some of the lowest inventory levels and occupancy that they have seen on record and its reflective of the challenges for the consumer. We are not eating out as much, people are not using restaurants as much, they are eating from home. It's change demand for some of these cold storage companies. We are just not seeing that restocking cycle re-accelerating as quickly as we thought.
It seems like it's coming. The inventory levels are relatively low, the ISM hopefully has bottomed out and should benefit from interest-rate cuts but we need to see a little bit more strength before those sectors come back.
On the pipeline side, what's interesting here is there is a lot of concern as to whether these needed to exist five years ago, we were off of oil and gas, everything renewable. I think we have seen with all of the geopolitical boys in the last few years is that there really is a need for oil and gas. It's going to be around for a long time. We cannot build renewables as fast governments want to steal.
Particularly for relatively clean and secure energy regarding Canada, it's hard to say energy is green, but the energy companies have spent a lot of effort to make their companies as Eeyou Istchee firmly as they can, trying to get as much carbon from the extraction process as possible and make the pipeline very efficient. What we are seeing on the intersection side is a very long term demand profile and other things like LNG, exporting to Asia and Europe to help with their energy and security needs, all of that is coming together to get a much more attractive profile.
Later, this AI datacentre theme in the past year, we cannot meet that with nuclear and renewables, it really comes down to natural gas.
That's another demand driver to support these pipelines. In general, I think it's a very healthy sector with a strong backdrop. The other component would be utilities.
Couple years ago, this was the backwater, the boarding area of the equity markets that did not do too much. Electricity demand was not growing, maybe half a percent per year for the last two decades.
We are now seeing at the low end seeing 1% per year growth which is a doubling of electric demand. I see estimates as high as 4% per year growth for literacy over the next decade. A lot of that is data centres, but a lot of it is bringing battery plans for EVs and back into the states, bringing chip plants back into the US and just manufacturing facilities, high-end stuff, airplanes and those sorts of things, this facilities use a lot of energy and we are now seeing much more constructive demand outlook for utilities.
It's gone from a relatively low growth, boring sector, to one that's really supporting now the Nvidia and Microsoft side. You cannot have that AI build out if you don't have the power so it's become a much more compelling sector. The earnings growth rates are still about the same, we have not seen companies upgrade guidance dramatically but it's the certainty and that guidance over a much longer period of time which makes it a much more compelling sector today than it was even a few years ago.
>> That was Jeff Evans, VP, Dir. and leader of empirical research and PM support at TD asset management.
Now, for an update 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, gives us a nice view of the market movers. Let's dig into the TSX 60. We had some strength on the top line composite index number today.
We are up pretty much a full percent. As we dig in, we can see the financial putting points on the table, whether it's Manulife up 2% or some of the big banks including Royal and TD and Scotia all up around the neighbourhood of about 1%. You can see in the energy bucket some of the oil and gas names are getting a bid on a higher price accrued but Cameco really standing out right now, up more than 5.5%.
As we told you earlier in the show, Kazakhstan, a major supplier to the world, saying it's cutting its production numbers. A little worried about some operational stuff and the materials it needs to mine uranium and produce it.
Interesting moves in that space. South of the border, Jackson Hole, Jerome Powell came out and spoke this morning. It appears what he had to say pleased the street. The big take away, if you take away one line from this, this is what I am taking away from his speech this morning, he said the time has come for policy to adjust. Clearly opening the door to a September rate cut. The question in the market now is, 25 basis points or more? We have more economic data coming out of the states in the next couple weeks before that decision so it will be an interesting time but the market like it.
The markets are higher south of the border. Nvidia is up more than 3%, Tesla's up more than 3%, Intel which has lagged in the CHIPS Act or on the whole AI boom up 2% and some of the financial showing a bit of strength on Wall Street.
Investors were dealt a brief but dramatic dose of volatility this summer when several major events on the horizon. Could the environment be right to consider a low volatility investment approach? Emin Baghramyan, VP, director and lead quantitative for flu management at TD Asset Management join me earlier to discuss.
>> Before we start discussing the reasons it's a good time to consider low volatility investing, let me give you a brief reminder of what low volatility investing is.
Low volatility is basically a strategy where we seek out these low risk companies that tend to be well-established with stable earnings and mostly represented in defensive sectors such as consumer Staples, utilities, healthcare and the goal of this strategy is to generate the highest possible risk-adjusted returns, so the main characteristic of the portfolio that consists of this type of stocks is to generate the most added value in an environment where market volatility is high and economic growth is scarce. That brings me to the first reason why investors should consider investing in low volatility strategies. If we look at the state of the global economy from China that is currently facing its housing slump to other emerging markets whose main trading partner is China and they are facing that weak Chinese demand, to Europe, to UK, even to North America where we had the United States and up doing much better than every other large economy, where we have also seen the first signs of economic weakness going into the end of 2024 into 2025, where there is debate, whether it's a soft landing or a hard landing.
What we can be sure of is that economic growth is weakening around the world and that is usually, as history tells us, in that environment, major equity benchmarks do not do well.
Weak growth tends to be accompanied by major corrections and benchmarks and even possible bear market so that's the first reason why investors should consider investing in low volatility strategies.
The second reason is that major equity benchmarks are, at the moment, extremely concentrated into very few selected themes which is mostly AI related. Here, I brought a slide with me to demonstrate.
This is basically showing let's first look at the purple line there, it is showing that only five stocks in the MSCI All Country World Index, 1/3 of the benchmark risk, and they tend to be large mega-cap stocks in the IT sector and so we look at the first area there, that the IT sector, the others are the communication services sector, consumer discretionary sector, those are dominated by Amazon and Tesla and Netflix and they are more IP type of stocks and if you look at that, 70% of the benchmark risk is coming from these selected stocks that are in a few very concentrated sectors. History also tells us that this concentration cannot last for long and eventually extreme levels of concentration and benchmarks which we saw in the 70s with energy stocks and we saw in the late 90s and the NASDAQ levels, with the financial stocks, it eventually becomes D concentrated. We don't have a crystal ball to say when exactly that will happen but that concentration on the benchmark tells us that investing in equities and trying to realize your equity risk premium is not very efficient right now to doing it with this Weighted benchmark so low volatility is a stronger alternative to whether these kind of storms.
>> You talk about low volatility investing, you say it's efficient over the longer term.
>> Yes, exactly.
Another reason the low volatility strategy is about longer term. It doesn't matter when you really get into it. You can of a better starting point or were starting point. I brought another point to show you. Over the last 50 years, if you are investing only in the low volatility quintile segment of the stocks, the strategy over the full market cycle or the few long-term periods, you can see that actually outperforms the cap-weighted benchmark in this case, is showing for the United States and it can also be compared to the U.S. Treasury index of the two major asset classes have performed really well over the past 50 years and in the US where we had the strongest returns we can see that the low volatility strategy has done well over a long period of time.
>> When we start thinking about the strategy, what kind of stocks or sectors are we thinking about?
>> It depends on the investment universe, of course, in what the strategy is sitting. Given the investment universe, if you are investing in low volatility Canadian stocks or low volatility US stocks are global stocks, those have a little bit different characteristics. For example, some of the financial companies in the US, they tend to be on the riskier side, given what was on regional banks and larger banks, they tend to be more volatile so they are not that represented in US low volatility strategies. In Canada, where we have more representation, a lot more well-established and safer financials, insurance companies, banks, we have more representation of these type of countries in Canadian benchmark. However, the main common point is that these are the companies that are easier to find in consumer Staples, grocers and retailers and food producers and soft drink producers, they are also utility companies that tend to be with very stable earnings and tend to be very stable in providing this difference in quality healthcare companies, you find in all sectors, it doesn't mean that you will never find a defensive tech company or defensive energy company, but the biggest sectors tend to be telecoms, utilities, consumer Staples and healthcare.
>> If an investor is doing their homework on low volatility investing, what risks did they need to be aware of?
>> One of the main risks that investors should think about when they start investing in low volatility strategy, it's not really a short-term strategy.
There will be periods where, for example right in the aftermath of the COVID pandemic, or right at the beginning after the 2008 2009 financial crisis or when you have that kind of environment, interest rates are/20, where you have a very strong market rally that recovers from extreme levels, obviously the defensive strategies will lack benchmarks.
If your thinking and relative performance terms, they might face a situation where they look at their equity holdings in low volatility compare that to benchmark and say they have been lagging but they have to remember that the strategies goal is asymmetry. So when you cut down your downside, you obviously need to pay for it somehow and the payment is on the very strong performing times but the mathematics of the compounding where you declined less than the benchmark and you kind of try to keep up as much as possible when the market rallies over a long term, it allows you to be very efficient and to generate the highest possible risk-adjusted return.
>> That was Emin Baghramyan, VP, Dir. and leader of quantitative portfolio management at TD Asset Management.
As always, make sure you do your own research before making any investment decisions.
stay tuned for Monday show. John Kiernan, managing director at TD Cowen will be our guest. He wants to take your questions about retail and consumer stocks.
A reminder that you can get a head start with those questions. Just email MoneyTalkLive@TD.com. On behalf of me, Anthony and Susan in front of the camera and everyone behind the scenes to bring to the show every day, thank you for watching and we will see you next week.
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