As we transition from 2016 to 2017, all eyes will be on Washington, where the transfer of power from the Democrats to the Republicans will take place. What could this mean for global markets? Bruce Cooper, Chief Executive Officer & Chief Investment Officer, TD Asset Management, talks to Kim Parlee about how investors can prepare for the year ahead. For the full report click here.
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00:00:09.750 2016 was, for lack of a better word, incredible.
00:00:14.250 I mean, we went from a year where I think it was very rocky
00:00:17.880 and markets were not looking great-- I think you talked about that one
00:00:21.300 third of all global debt with negative yields--
00:00:23.490 to equity markets at record highs and people scratching their heads at all
00:00:27.942 the incredible things that were going on.
00:00:29.650 So tell me a bit about just what foundation was built in 2016
00:00:33.620 that we're going to be building off for 2017.
00:00:36.049 So if you think-- let's start with the economy.
00:00:38.280 We've been talking for years about we live in a persistent low growth world.
00:00:42.280 And I think that was definitely the situation through most of '16, which
00:00:47.010 is why, of course, rates were so low and central banks kept their foot firmly
00:00:52.800 on the accelerator.
00:00:54.300 We had quantitative easing in Europe.
00:00:57.330 Rates stayed low in the US right the way till the very end of the year.
00:01:02.460 And then we had all the political surprises, which created equity market volatility.
00:01:06.660 So low growth, low rates, equity market volatility-- that was kind of the story
00:01:10.320 as we went through most of the year.
00:01:12.480 But then, of course, as we finished, we finished with a flourish,
00:01:16.530 I think it would be fair to say.
00:01:18.120 And there were a couple of things to highlight there.
00:01:21.080 I think the economy exited '16 in better shape
00:01:24.480 than it had been through most of the year, meaning the US accelerated a little bit.
00:01:29.580 Europe accelerated a little bit.
00:01:31.530 China was fairly strong as we went through the fourth quarter.
00:01:36.570 And then, of course, we had the election in the United States.
00:01:40.350 And in the end, the market viewed very favorably
00:01:45.330 the kind of policies that Donald Trump talking about bringing into place.
00:01:50.410 They're viewing favorably, I guess, the potential policies.
00:01:53.250 That's right.
00:01:53.400 Because we still don't know, at this point, what they're doing.
00:01:55.570 Well, exactly, yeah.
00:01:56.490 But I know that I spoke to some folks in your group
00:01:59.451 before, I think when the markets were in the midst of their rally,
00:02:02.200 just showing, for example, even if corporate tax rates were reduced,
00:02:06.240 by how much that increased the valuations in the S&P 500.
00:02:11.927 One thing, though, that you talk about, I think, in one of the notes
00:02:14.760 that you've recently put out is that we're seeing this theme of rejection
00:02:19.020 of the status quo in 2016-- Brexit, the US.
00:02:24.660 How do you see that continuing in 2017?
00:02:27.450 Well, I think this does bring with it risks.
00:02:30.520 Interestingly, the market drove straight through, despite the fact
00:02:34.290 that we had Brexit and the election of Donald Trump, although I do highlight for people,
00:02:39.200 Brexit wasn't a nonevent from a market perspective.
00:02:42.060 Stocks in North America were resilient.
00:02:45.670 But of course, the British pound did get hit very, very hard and was at a multi-year low.
00:02:49.500 And so in the end, there was a market impact that just didn't tend to affect our clients.
00:02:54.390 But if you were--
00:02:55.500 A currency trader, or--
00:02:57.090 --a currency trader, or you lived in the UK and you wanted to travel outside the UK,
00:03:00.630 you would have been hit fairly hard, because the pound went to a very low level.
00:03:07.110 But looking ahead, I think this issue of political uncertainty persists.
00:03:14.380 And I think ground zero of it for this is Europe,
00:03:18.100 because Europe has been the area with the slowest economic growth.
00:03:22.530 It has very high unemployment.
00:03:25.440 You're seeing stresses around the issue of immigration, which is a common global theme.
00:03:30.750 And all of these are being given voice by populist parties in the different countries,
00:03:35.880 whether it's Europe or Germany or France.
00:03:41.160 A lot of these populist parties are actually doing quite well
00:03:44.010 in the polls around a similar set of issues.
00:03:46.590 And so I think we'll have to see how that unfolds.
00:03:50.080 But I do think it is a risk in Europe, and I think
00:03:53.040 different from what we saw in North America, where we did kind of look
00:03:57.060 through the election of Donald Trump.
00:03:59.350 I think the central issue for investors in Europe is whether the euro as a currency
00:04:04.050 will survive.
00:04:05.380 And I don't think that's a question that will be answered in 2017.
00:04:08.130 But over the next two, three, four years, I think
00:04:11.700 you could see volatility surrounding that question, because membership of the euro
00:04:17.459 has put some countries in a bit of a straitjacket, especially Italy,
00:04:20.940 in my view, where they just have not been able to thrive within the currency zone,
00:04:26.400 and the economy has really, really struggled.
00:04:28.734 What do you think would be-- and I'm going to jump around here a bit--
00:04:31.650 but what do you think would be the implications of the euro not surviving?
00:04:35.037 And I'm not asking you to predict it, although certainly we're
00:04:37.620 seeing-- if rejection of the status quo is a theme we've seen,
00:04:41.179 that would imply-- I think that's a direct--
00:04:43.470 But what happens if that gets rejected?
00:04:45.300 Well, I think from a market perspective, it has
00:04:48.540 to create very, very significant short term volatility.
00:04:52.440 But in this case, short term could be measured in months or quarters
00:04:56.610 as opposed to--
00:04:57.750 --hours and days and minutes, as we saw this year,
00:05:00.180 because you can imagine the uncertainty that would come from that.
00:05:04.680 What would replace it?
00:05:06.750 Would you have two currency zones, a north and a south?
00:05:10.690 Is it just one country, like Italy or Greece, exiting the eurozone,
00:05:13.810 and the rest stays in place?
00:05:15.490 So there would be a lot of uncertainty about what would come next.
00:05:19.060 And I think for any countries exiting-- take Italy as an example-- you would presumably
00:05:26.050 have their new currency devalued very significantly,
00:05:30.400 which would mean that if you had assets in that country, you would be hit very sharply.
00:05:36.620 So you don't want to be lending, I don't think, to Italy or Greece, for example,
00:05:40.654 because you might end up with bonds that are denominated in some different currency that
00:05:44.820 Pennies on the--
00:05:45.814 --worth quite a lot less.
00:05:46.855 Yeah, yeah, yeah.
00:05:47.620 So there's a lot of bridges across before we get there.
00:05:50.770 But I do think this is a risk that people need to be mindful of.
00:05:54.340 And it's one of the reasons that we've been relatively cautious on Europe
00:05:58.680 and we've had a preference for North America in our investing stance in the last couple
00:06:04.885 Well, then let's focus a bit on North America and just the States
00:06:07.960 and Canada in terms of your outlook for 2017.
00:06:12.580 With the election of President-elect Trump, you
00:06:17.140 highlight and talk about the potential fiscal policies that are coming,
00:06:20.210 the potential tax code changes and trade policies.
00:06:24.190 Let's start with fiscal.
00:06:25.750 Is that all priced in the market already, do you think?
00:06:28.060 I don't know if fiscal is priced in.
00:06:30.045 I know we're going to get to tax.
00:06:31.420 I think that's probably priced in a little more.
00:06:34.445 I think the reason I say fiscal is probably not priced in
00:06:36.820 is because there's less certainty about whether it will happen
00:06:39.520 and when it will happen.
00:06:41.470 It almost certainly won't happen in the first half of 2017,
00:06:44.900 because it will require a budget to be passed.
00:06:49.540 And as we all know, infrastructure takes a long time to get going.
00:06:54.760 I think President Obama once said, there's no such thing as a shovel-ready project.
00:06:58.750 And it could be that President Trump finds that out.
00:07:02.770 But it could still have an impact in, say, 2018, 2019.
00:07:07.150 So I think that's more of a longer term issue about a bit of acceleration
00:07:12.070 in the pace of US growth compared to what we would otherwise have seen.
00:07:16.930 But there's still enough uncertainty around it
00:07:19.090 that I would say it's probably not totally priced in.
00:07:21.910 So potentially could see some more upside there, would that be a fair thing?
00:07:25.030 I think that's fair, yeah.
00:07:26.113 Tax code-- is that priced in?
00:07:27.520 I think a bit more of this is priced in.
00:07:30.427 So when we talk about taxes, there are two separate, maybe three separate issues
00:07:33.760 we need to think about.
00:07:34.718 One is just the reduction in corporate taxes.
00:07:37.300 So the US has actually very high corporate taxes on a global basis today.
00:07:45.430 President-elect Trump has talked about lowering those very significantly.
00:07:48.730 The numbers we've run is if the effective tax rate was cut by, say, 5%, earnings per share
00:07:54.850 would go up somewhere between 5% and 7%.
00:07:58.390 I think some of this is priced in, because in some ways, it's the easiest to understand.
00:08:02.310 Well, I was going to say, the markets have rallied-- I don't know-- 7% to 8%.
00:08:05.320 So is that-- yeah.
00:08:06.150 Yeah, and it's not that mysterious.
00:08:08.230 If you have Company A and their tax rate goes down 5%,
00:08:11.314 you, me, and everybody else can figure out what the impact of that is.
00:08:14.230 So it's simple to understand.
00:08:15.820 It's simple to calculate the impact.
00:08:18.580 And both Mr. Trump and the Congress-- also controlled by the Republicans--
00:08:25.780 have seemed very committed to lowering taxes.
00:08:28.720 So high probability event, easy to understand, easy
00:08:31.300 to calculate the impact-- that's why I think it's more likely priced in.
00:08:36.585 It doesn't mean it's totally priced in.
00:08:38.210 But I think a fair bit of that is priced in.
00:08:40.400 So that's part of the tax.
00:08:42.220 Of course, we also have-- sticking on the corporate side,
00:08:46.030 a lot of US companies, particularly global companies,
00:08:48.580 have very significant amounts of cash trapped overseas we call it,
00:08:52.760 because if they bring it back to the United States, they would have to pay US tax on it.
00:08:57.620 And so there's been discussion about a sort of a tax holiday
00:09:01.450 if US companies bring that cash back.
00:09:04.330 That could be a catalyst, because if a company brings cash back,
00:09:08.080 they could pay dividends, do share buybacks, do acquisitions, things
00:09:13.660 that could create shareholder value.
00:09:16.490 I think that's probably a little less priced in.
00:09:19.330 And then the third piece of the equation is cutting personal taxes.
00:09:24.940 And the question about that is if we cut personal taxes,
00:09:27.640 will it unleash animal spirits and increase economic activity so that growth is higher?
00:09:34.360 I don't think that is meaningfully priced in, because there's lots of economic debate
00:09:39.340 about what the impact of that will be and how quickly it will unfold.
00:09:42.980 And so taxes is a big topic, I think some priced in, some less so.
00:09:47.710 What about trade?
00:09:49.660 You have that listed here in terms of another,
00:09:51.670 because that's-- I'd say we've got fiscal, potential positive, I think.
00:09:56.530 Tax code already in the markets as a positive.
00:10:00.580 Yeah, trade is the most meaningful potential negative, which we've talked about, really,
00:10:05.110 since the day of the election.
00:10:08.210 And if you think back over the last five 10, 20, 30 years, North American companies
00:10:16.430 generally, US companies specifically have benefited enormously
00:10:20.210 from globalization-- moving production to Asia or to Mexico.
00:10:27.380 You've had whole supply chains built around that, particularly
00:10:30.080 in things like the auto industry.
00:10:32.210 And they've moved production to where costs are lowest.
00:10:34.760 In some cases, they've tried to minimize taxes.
00:10:38.030 And we're seeing presidential tweets influence, even right now,
00:10:41.000 where things are happening.
00:10:42.710 Yeah, so I would say, on the trade side, it's a source of meaningful uncertainty
00:10:47.930 right now.
00:10:48.710 But the risk is that rules are put in place-- whether it's
00:10:52.010 tariffs or other rules-- that kind of roll the clock back on globalization,
00:10:58.970 ultimately raise costs.
00:11:01.550 Those cost increases are passed through to the consumer.
00:11:04.740 And that slows economic growth.
00:11:06.470 So on the one hand, I think fiscal and tax, they could accelerate growth.
00:11:12.050 There is the risk that trade could decelerate growth.
00:11:15.320 The market-- so I kind of picture this as a tug of war.
00:11:18.810 The market is clearly looking on the tax and infrastructure or fiscal side
00:11:23.450 and saying, that team is winning this tug of war.
00:11:26.980 But you've got to remember, there is a team on the other side that is pulling also.
00:11:30.760 And we could see some announcements and shocks and headlines
00:11:34.201 as we go through the first half of the year that
00:11:36.200 remind us there is a team on the other side of the rope,
00:11:38.550 and it could create market volatility.
00:11:40.640 Speaking of that team on the other side of the rope, one of the things
00:11:42.740 you highlight as well is just the unpredictability of everything that's
00:11:45.440 going to happen-- unintended consequences.
00:11:47.191 It was funny, because-- I can't remember where I was reading this,
00:11:49.940 but I remember seeing a tweet from a former Mexican president talking about the fact
00:11:54.440 that, well, if you do ask people not to build as much in Mexico, guess what?
00:11:59.420 You might have some more illegal immigration to the States.
00:12:01.910 There's just things we don't know.
00:12:04.380 Or you think about the infrastructure program,
00:12:06.297 one of the challenges of infrastructure is going
00:12:08.296 to be who's going to build all this stuff?
00:12:10.190 We want to build roads and bridges and ports at a time when unemployment is actually
00:12:15.210 So is there slack in the economy?
00:12:16.900 There may not be-- we're pretty close to operating at capacity as it is.
00:12:20.970 So that's where you'd actually like a little bit of immigration
00:12:23.780 to provide the workers that may not happen.
00:12:26.390 So for sure, there's unpredictability.
00:12:28.760 I don't think we've seen presidents-- I'll use the phrase
00:12:32.150 "pick on" individual companies before.
00:12:34.790 Ford, you shouldn't do this.
00:12:35.980 Or GM, you shouldn't do that.
00:12:37.600 Or Boeing or United Technologies-- so you never know when you wake up in the morning.
00:12:41.990 You could have a stock in your portfolio that is down 5% because of a tweet.
00:12:46.970 And so that's on the other side of the rope as well, I would say.
00:12:50.437 A bit unnerving, I'm sure everyone is watching.
00:12:53.000 I want to, I guess, paint a global picture.
00:12:55.250 And you highlight the fact that, also, if you take a look here in Canada-- what would
00:13:00.769 you say the dynamics that Canadians need to take a look at-- rising
00:13:03.560 household debt is part of it.
00:13:05.395 And commodity prices.
00:13:06.990 So I think in Canada we've seen quite slow economic growth, really,
00:13:11.720 for the last few years.
00:13:13.760 And I think as we look out to 2017, we would anticipate that slow growth pattern will
00:13:18.380 continue, in part because of what you cite there, which is high consumer debt.
00:13:27.120 As you're building the debt, of course, that contributes to the economic growth.
00:13:30.960 But if that actually flattens out or even starts to pull back a bit,
00:13:34.640 you're taking away from economic growth.
00:13:37.370 And our view would be the debt in Canada is now at a level where you don't really
00:13:43.280 want it to go higher.
00:13:44.990 In fact, for choice, you'd probably rather go lower a little bit.
00:13:48.230 So I think that's going to subtract from economic growth.
00:13:52.070 The commodities side-- of course, oil is the big one, in terms of economic activity.
00:13:59.270 We did see a rally in oil last year, but it did not rally to a level
00:14:03.140 that it would incentivize new investment in Alberta, in things like the oil sands,
00:14:08.240 where really you need probably somewhere between $70 and $80
00:14:13.550 to justify new oil sands projects.
00:14:17.600 And of course, we're in the $50s now.
00:14:19.760 We're nowhere near the $70 to $80 level.
00:14:23.750 And the concern for Canada would be that with the development of shale in the United
00:14:29.510 States, this new technology that allowed us to get oil out of places
00:14:33.980 we didn't think we could get it before, it's lower cost.
00:14:37.170 And it may be that as oil gets up into this kind of $50 to $60 area,
00:14:40.430 you get a lot of activity happening in, say, North Dakota or Pennsylvania or Texas.
00:14:46.820 And that caps the price, because you're getting new supply come on in the $60 area,
00:14:51.460 and we never quite get to the $80 area, which is economic for Alberta.
00:14:56.870 So I think these are long term headwinds, which
00:14:59.900 is one reason why we believe the Canadian dollar will stay low
00:15:03.200 for a fairly persistent period of time.
00:15:05.780 I think the Governor of the Bank of Canada, Mr. Poloz, has been fairly clear about this.
00:15:10.650 That's one tool we have to help rebalance our economy,
00:15:16.070 make other things we're doing cheaper from a global perspective
00:15:19.890 through the mechanism of the weak currency, so we
00:15:22.770 can export other stuff to either the United States or other parts of the world.
00:15:26.855 Which may get trickier, too, because at least the exporting to the United States,
00:15:30.230 just given the trade unpredictability that's developing in the next little while.
00:15:35.610 We touched on Europe.
00:15:36.730 I want to touch a bit on China, because we, I think,
00:15:39.697 have been quite so focused on North America lately we've
00:15:42.030 kind of forgotten about which country has been driving world growth
00:15:44.954 the past little while.
00:15:45.870 What do you see 2017 doing for China?
00:15:49.330 Well, maybe to start with where we are today, the Chinese government's
00:15:52.710 been targeting growth in the 6 and 1/2% area.
00:15:56.675 I'd been saying, if you went back a year or so ago,
00:15:58.800 I thought it was actually growing much slower than that.
00:16:01.870 But as we went through 2016, I would say the pace of growth in China
00:16:06.090 did accelerate quite a lot.
00:16:07.350 We probably are growing somewhere in the 6% area in China today,
00:16:11.550 driven by very aggressive infrastructure spending,
00:16:14.880 financed by the central government, and also by a very hot real estate market,
00:16:21.520 which is starting to result in new homes being built
00:16:25.890 or new apartment blocks being built in the big cities in China.
00:16:29.170 So I think the economy there is growing quite nicely.
00:16:34.380 But the way I think of it is imbalances persist in the Chinese market.
00:16:39.930 And they're reflected partly in the fact that debt is climbing very significantly there as
00:16:45.780 well, both at the household level, which is tied to the real estate boom.
00:16:50.760 We could kind of recognize this from Canada.
00:16:53.490 House prices go up.
00:16:54.600 Households take on more debt in order to afford it.
00:16:56.725 That is also happening in China.
00:16:59.880 And also debt at the government level, in order to finance this infrastructure boom--
00:17:03.964 a lot of that's actually happening at the local government level
00:17:06.630 as opposed to the central government level.
00:17:09.270 But in aggregate, debt in China has gone up quite a lot.
00:17:12.900 And so that imbalance is out there, and that can't go on forever.
00:17:16.069 And so my sort of medium term view is that growth will decelerate in China, probably
00:17:23.190 to the low to mid single digits.
00:17:26.010 Know let's call it 3% to 4%, as opposed to 6% today.
00:17:30.810 But they can keep it going for a while longer if they choose to.
00:17:34.350 What does the deceleration of economic growth in China, briefly,
00:17:38.910 mean for trade relationships with the United States?
00:17:41.760 I would just think-- does that make it even that much more antagonizing?
00:17:46.110 I think this is a really tough one to untangle, I think.
00:17:50.080 I'm not sure I would identify the current trickiness of the relationship between China
00:17:57.810 and the US as directly linked to the growth rate in China.
00:18:01.440 I don't think so.
00:18:02.010 I was just thinking if it might exacerbate it.
00:18:04.000 It could.
00:18:04.500 I suppose if growth slows in China, it means there's even
00:18:07.620 less demand for goods from the US to China.
00:18:11.790 But as you know, the big story in that relationship
00:18:14.640 has been the export of very low cost goods from China to the US.
00:18:18.360 And I think the interesting element of that story
00:18:20.401 is if you stopped or slowed that, that does have an impact on lower income consumers who
00:18:26.220 end up buying a lot of stuff that's produced in China at fairly attractive prices.
00:18:30.960 So in the United States, incomes have grown slowly.
00:18:33.909 But that has, at least to some extent, been offset by the fact-- at least
00:18:36.950 you can buy stuff cheaply.
00:18:38.910 If you upset that balance, you could end up with unintended consequences.
00:18:43.320 To say there's a lot going on in the world would be probably the largest understatement
00:18:48.530 You live in interesting times, and you're managing money at a very interesting time.
00:18:52.140 Let's bring this all back to what sectors look interesting,
00:18:56.489 what you're thinking in terms of where you're overweight and underweight.
00:18:59.530 But let's just start with equities.
00:19:02.850 US, I'm assuming, more attractive?
00:19:04.845 So from a geographic perspective, our favorite market has been US
00:19:07.830 and continues to be the US.
00:19:09.740 And we upgraded the US literally the day after the election
00:19:14.880 because of some of the things we've talked about in this conversation--
00:19:17.890 the potential for lower taxes to increase earnings, the potential for fiscal stimulus
00:19:22.770 to accelerate economic growth.
00:19:24.831 And we still think that has some room to run.
00:19:27.690 So the US remains our favorite market from a geographic perspective.
00:19:32.710 We're more cautious on Europe for some of the reasons I talked about-- some
00:19:36.780 of the political challenges.
00:19:40.080 Although, also, look.
00:19:42.270 It continues to grow very, very slowly, which means
00:19:45.210 that domestically-oriented companies in Europe
00:19:47.820 are just having a hard time growing their earnings.
00:19:51.180 Within the States, too, I know you highlight industrials, financials,
00:19:56.020 consumer discretionary, IT looking good.
00:19:58.349 But I've got to ask you about valuations, because yes, they've done well,
00:20:01.390 but they've had a very nice run in the past little while.
00:20:04.020 Yeah, look, whether it's those sectors or the market overall,
00:20:08.880 we need to understand the fact that the market has
00:20:11.577 run-- I said we upgraded the US equities the day after the election.
00:20:14.910 Well, between November and December and here early in January,
00:20:18.360 you've had a pretty big move.
00:20:19.680 And so it's not that we're anticipating enormous returns.
00:20:24.990 We still live in what we think of as a low return world.
00:20:29.130 We can talk about fixed income later.
00:20:30.900 But in equities, I think it's probably still right
00:20:34.200 to anticipate that kind of mid single digit sort of level.
00:20:39.240 If all goes well in the United States and policies
00:20:41.610 get implemented, as we've talked about, there could be some upside
00:20:44.359 to that over the next year or two.
00:20:46.320 But the US market trades at something like 18 or 19 times earnings, which
00:20:52.530 is a pretty high level.
00:20:53.700 And so some of this is already in the price.
00:20:56.504 And we wouldn't anticipate that we're going to get the kind of returns
00:20:59.420 that we saw coming out of the financial crisis.
00:21:01.680 Remember, in 2009, '10, '11, '12, '13, those were very, very good years in aggregate.
00:21:08.345 I guess 2011 was a bit of a struggle.
00:21:10.200 But that five-year period was actually phenomenal for equities.
00:21:14.460 We don't think we're in that same situation today.
00:21:17.610 And just a couple more quick ones.
00:21:19.125 Canadian equities, you guys are neutral?
00:21:21.370 We're neutral on Canadian equities.
00:21:24.142 With Canadian equities, you always have to think about the big buckets-- of course,
00:21:27.600 financials, a very important bucket.
00:21:30.270 Phenomenal year last year for financials-- earnings growth was solid.
00:21:36.001 And then you had multiple expansion.
00:21:37.500 And of course, you get the dividend along the way.
00:21:40.830 We tend to think that the financials in Canada
00:21:43.350 are just fabulous long term investments.
00:21:45.690 And they tend to be core holdings in many, if not most, of our portfolios.
00:21:51.340 So we continue to hold them but after the big move they had last year,
00:21:55.790 you wouldn't necessarily expect outsized returns this year.
00:21:59.760 And then, of course, you get energy and resources-- much more cyclical.
00:22:05.760 They did have decent returns last year.
00:22:09.600 I think oil could have a little bit of upside here.
00:22:13.410 But as I said earlier, I don't anticipate, necessarily,
00:22:16.280 oil going back to that $70 to $80 range.
00:22:19.170 So that doesn't necessarily get you outsized returns in the energy side either.
00:22:23.070 So when we look at the big sectors, it still leaves us
00:22:26.070 at sort of a neutral stance on Canadian equities.
00:22:28.620 And finally, last one, just on fixed income-- taking a look here,
00:22:33.160 it looks as though you're pretty much underweight on most
00:22:36.180 fixed income with the exception of cash.
00:22:39.810 We think there's some optionality in cash.
00:22:41.580 We talked about that unpredictable world we live in.
00:22:44.280 So we kind of view cash as dry powder that you
00:22:47.070 can deploy if you get a bump in the road.
00:22:49.334 And it wouldn't shock us if you do get a bump in the road.
00:22:51.750 So that's the logic behind the cash.
00:22:54.270 Government bonds-- our perspective on fixed income is a little like last year.
00:22:59.250 We anticipate low single digit returns, which, in the end,
00:23:02.370 is what we got last year, although it was a bit of a tale of two halves.
00:23:05.372 As you know, you actually got sort of mid single digit returns the first half
00:23:08.580 and negative returns in the second half, which got you low single digit
00:23:11.970 returns for the full year.
00:23:13.650 We think low single digits is about the right expectation for 2017 as well.
00:23:18.990 They still play a role in providing stability to a portfolio.
00:23:23.340 But that long sort of 30-year bull run that we had in bonds
00:23:29.790 where you got capital gains to go with the coupon returns we think is behind us.
00:23:33.869 And now, it's really down to those coupons, which
00:23:35.910 are at that sort of low single digit level.
00:23:38.642 Thank you, Bruce.
00:23:39.350 Always a pleasure.
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