Show Transcript
Global markets sell off again. This time from a collapse in oil prices as Saudi Arabia sets off an oil price war with Russia. Robert Vanderhooft, CIO, TD Asset Management and Michael O’Brien, Managing Director, TD Asset Management look at the implications for markets, the Canadian energy sector, and investors.
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[MUSIC PLAYING]
- I'm here with Rob Vanderhooft, he is the Chief Investment Officer at TD Asset Management, and Michael O'Brien, Portfolio Manager with TD Asset Management. Gentlemen, it's been quite a day in the markets. In terms if you look at the equity markets. You look at oil. You look at a number of sectors. You look at treasuries. I mean, it's been tough. It's been a very tough day.
A lot of this, it seems to me, was triggered by what happened with oil and oil prices. So Michael, I was wondering if we could start with that in terms of what happened with oil today? And what caused that to start things?
- Sure, so on Friday, we had a big breakdown with the OPEC-plus, which is the OPEC producers led by Saudi Arabia and a number of NanoPac producers. Primarily Russia is the key figure here. And for the first time since they came together in 2016, OPEC-plus failed to agree to a production cut back at the Friday meeting. We had a pretty rough day on Friday in oil.
What happened over the weekend kind of went from bad to worse in the sense that the Saudis-- or the Russians came out of this and declared, OK, we're not participating. Everybody can pump at will. And the Saudis on Saturday took them up on that offer and declared that they would basically turn the taps on. And so they've offered unprecedented discounts for the Saudi blends of crude, which are being taken by the market as kind of a declaration of war here. So oil prices have really taken it on the chin today.
KIM PARLEE: So a lot of this-- and just to back up one step further for people-- is that oil prices were already under pressure because of concerns about demand with COVID-19. So it was a trigger, I would say, that got this started.
- Absolutely. What we're dealing with essentially is a simultaneous demand and supply shock in the oil market. So I think you're absolutely right. The coronavirus has destroyed a lot of oil demand, which catalyzed this squabbling over how to slice up a shrinking pie, which is essentially what's happening in the oil market today.
But the reaction of the players at the table, particularly the Saudis, I think, caught a lot of people off guard, where I think they're trying to signal once and for all that they don't want to balance the market on their own backs. They want all of their partners to participate in balancing the oil market.
- From a historical perspective, we were chatting before we started that this is something that the Saudis have come out, and they've said they would do before. But have they followed through on the depth of what they said they were going to do?
- Yeah, I mean, they've indicated they could produce up to 12 million barrels a day is a supplied response. If you look at the history, Saudi Arabia's never produced really more than 10.5 million barrels a day. There's one month-- November of 2018-- they produced 11. But, again, very rare to see them over 10.5 million barrels a day. But, again, it's really that price cut. And really the demand-- decline that we've seen so far that has led to the impact we've seen.
KIM PARLEE: I want to broaden out the conversation to what happened to the markets today. But just to finish up with the oil, the one thing that I think people also try to understand is, how long does this last? I mean, you mentioned the Saudis just don't want to do it by themselves. But if supply goes up, how long does it take to work through the market? And what does that mean for oil prices?
- That's the critical question today that markets need to sort out. And they need to sort it out quite quickly. There are some hoping for a bit of a Hail Mary pass. There's still dialogue within the OPEC group. There is supposed to be a meeting on March 18 where they're going to discuss this. So I think some people are still holding out hope that maybe the severity of the drop in oil prices will bring folks back to their senses.
I would be a little more cautious in that. I think there are more elements at play than this. And what worries me is I think back to 2014, which is the last time the Saudis decided to open up the taps. And I think what surprised everybody, probably more so the Saudis than the rest of us, was just how long it took for this war of attrition to play out that went the better part of three years. So I'm certainly hopeful that it's not going to be that type of an outcome.
- Let me ask about the broader market reaction. Because you mentioned this happened on Friday, and the markets obviously been in a lot of pressure already because of COVID-19. Fast forward to today, and the S&P halted based on some of the trading. Why are we seeing such a broader market sell-off because of this?
- Yeah, really, oil is one part of the story. It's really the coronavirus and the implications for that with respect to economic growth. And so you've seen additional cases in the US and some concern that, in the US, testing hasn't kept up to what we've seen elsewhere in the world. And so they may be underreporting some of the cases.
And so the concern is what economic implications that has on global growth, and layer that on with the hit from oil prices. And that's really why you saw the response that you saw this morning. There, Michael talked about the hit that oil prices have taken. And you've also seen a hit in the financials area as well.
- Let me ask you, when you take a look at this-- I know the last time we spoke about 10 days ago, we talked about how, again, this is depth and breadth of how long this last is what the market is trying to price in right now. What are you seeing?
- Yeah, again, it's hard to make a real determination at this point. Again, every case is different. If you look in 2008, we had a real systemic issue and concern that we would lose the financial system. You look back at the crash of '87, very, very different circumstances. So, again, all circumstances are different. Our expectation is this has an impact on economic growth on expected returns.
But looking past this, we can certainly see the case for equities in the longer term. And if you look at where interest rates are, they'd gotten to very, very low levels. Unfortunately, that could persist for a period of time. And, again, it's hard to really call for an end to this. It's hard to call the bottom. But we're still reasonably optimistic.
- What about you? I know the Wealth Asset Allocation Committee gets together. And obviously on a regular basis takes a look at how you're looking at risk in different sectors and different areas right now. You've made some changes based on what's been happening.
- Yeah, we've made very modest changes in terms of our outlook. We've gone from a very slight overweight in equities and really in US emerging markets to a neutral position in equity. So we've taken that back a little bit. Again, really related to the coronavirus impact on economic growth, layering on the impact of oil prices as well.
Oil prices were also part of the reason we moved to an underweight in the Canadian dollar relative to where we were previously. And, again, more neutral on gold, more from a risk perspective, and a hedge against the financial system. And so very modest changes to our asset allocation at this point.
- Let me ask, I know, from a market standpoint. Of course, everybody watching this around the world. There's some very interested folks who are out West who are watching this even more closely when it comes to energy prices. Can I ask you what you see in terms of the energy sector in Canada? And, I mean, it's been hit hard already. What does this mean?
- Well, it's another setback for the Western Canadian producers, to be sure. Like you say, it's been a very slow sort of two steps forward, one step back process for a number of years, as they've struggled with market access.
Now, the surviving companies have done a nice job of improving their cost structures. They're much leaner, much better, much more efficient companies today than they were in 2014, 2015.
Unfortunately when you've got a backdrop like this, they're just going to have to bear down. And what it does, it removes any thought of what's the exciting growth project? And it's more about keeping the lights on, you know, living to fight another day. So a lot of the better companies are well-positioned to do that.
And in contrast to the US, we have such high decline rates from the US shale producers. One of the silver linings for the Canadian producers is they tend to have much lower decline rates. And what that means in practical terms is they have to spend a lot less money to keep their production flat.
And so I think the challenge for the Canadians is keep your costs as lean as you can. The challenge for the Americans is this need to keep investing in order to maintain your production growth. So it's two different problems that they're dealing with right now.
KIM PARLEE: Let me ask about our central banks. I mean, you mentioned the fact that rates could be lower and persist for lower. Could they go even lower? I mean, the last rate cut we had from the Fed, not terribly well received. But, I mean, should we be expecting to hear more from central banks--
- Yeah, I mean, that's certainly the market implications today is for further Fed cuts and for further central bank cuts. And so that's really priced into the expectations as early as next week. So, yeah, do expect that. In addition, quantitative easing-- some fiscal stimulus-- very likely possibilities.
- So I'm going to ask you the same question that I asked you the last time we spoke. It has been a tough few days-- few weeks for people who've been watching these markets roller coaster. So, I mean, what would you say to those who are trying to figure out what they should be doing?
- Yeah, and, again. Well, equity market returns have obviously been quite a bit negative relative to where we were 10 days ago. And this is the argument I made last time-- where balanced returns are, we're really not that far off relative to where we were 10 days ago. So we might be a further 1% negative. But, again, that's a been kind of a 1% to 2% negative for balanced portfolios, in general, relative to what was a very strong year last year.
15%, 16%, 17% returns weren't uncommon last year for balance returns. So, again, you'll keep that in context. And ensuring that you have fully diversified, fully balanced portfolios, makes sense to go through what are periods like this of severe market disruptions.
- Rob, Michael, thank you very much.
[MUSIC PLAYING]
- I'm here with Rob Vanderhooft, he is the Chief Investment Officer at TD Asset Management, and Michael O'Brien, Portfolio Manager with TD Asset Management. Gentlemen, it's been quite a day in the markets. In terms if you look at the equity markets. You look at oil. You look at a number of sectors. You look at treasuries. I mean, it's been tough. It's been a very tough day.
A lot of this, it seems to me, was triggered by what happened with oil and oil prices. So Michael, I was wondering if we could start with that in terms of what happened with oil today? And what caused that to start things?
- Sure, so on Friday, we had a big breakdown with the OPEC-plus, which is the OPEC producers led by Saudi Arabia and a number of NanoPac producers. Primarily Russia is the key figure here. And for the first time since they came together in 2016, OPEC-plus failed to agree to a production cut back at the Friday meeting. We had a pretty rough day on Friday in oil.
What happened over the weekend kind of went from bad to worse in the sense that the Saudis-- or the Russians came out of this and declared, OK, we're not participating. Everybody can pump at will. And the Saudis on Saturday took them up on that offer and declared that they would basically turn the taps on. And so they've offered unprecedented discounts for the Saudi blends of crude, which are being taken by the market as kind of a declaration of war here. So oil prices have really taken it on the chin today.
KIM PARLEE: So a lot of this-- and just to back up one step further for people-- is that oil prices were already under pressure because of concerns about demand with COVID-19. So it was a trigger, I would say, that got this started.
- Absolutely. What we're dealing with essentially is a simultaneous demand and supply shock in the oil market. So I think you're absolutely right. The coronavirus has destroyed a lot of oil demand, which catalyzed this squabbling over how to slice up a shrinking pie, which is essentially what's happening in the oil market today.
But the reaction of the players at the table, particularly the Saudis, I think, caught a lot of people off guard, where I think they're trying to signal once and for all that they don't want to balance the market on their own backs. They want all of their partners to participate in balancing the oil market.
- From a historical perspective, we were chatting before we started that this is something that the Saudis have come out, and they've said they would do before. But have they followed through on the depth of what they said they were going to do?
- Yeah, I mean, they've indicated they could produce up to 12 million barrels a day is a supplied response. If you look at the history, Saudi Arabia's never produced really more than 10.5 million barrels a day. There's one month-- November of 2018-- they produced 11. But, again, very rare to see them over 10.5 million barrels a day. But, again, it's really that price cut. And really the demand-- decline that we've seen so far that has led to the impact we've seen.
KIM PARLEE: I want to broaden out the conversation to what happened to the markets today. But just to finish up with the oil, the one thing that I think people also try to understand is, how long does this last? I mean, you mentioned the Saudis just don't want to do it by themselves. But if supply goes up, how long does it take to work through the market? And what does that mean for oil prices?
- That's the critical question today that markets need to sort out. And they need to sort it out quite quickly. There are some hoping for a bit of a Hail Mary pass. There's still dialogue within the OPEC group. There is supposed to be a meeting on March 18 where they're going to discuss this. So I think some people are still holding out hope that maybe the severity of the drop in oil prices will bring folks back to their senses.
I would be a little more cautious in that. I think there are more elements at play than this. And what worries me is I think back to 2014, which is the last time the Saudis decided to open up the taps. And I think what surprised everybody, probably more so the Saudis than the rest of us, was just how long it took for this war of attrition to play out that went the better part of three years. So I'm certainly hopeful that it's not going to be that type of an outcome.
- Let me ask about the broader market reaction. Because you mentioned this happened on Friday, and the markets obviously been in a lot of pressure already because of COVID-19. Fast forward to today, and the S&P halted based on some of the trading. Why are we seeing such a broader market sell-off because of this?
- Yeah, really, oil is one part of the story. It's really the coronavirus and the implications for that with respect to economic growth. And so you've seen additional cases in the US and some concern that, in the US, testing hasn't kept up to what we've seen elsewhere in the world. And so they may be underreporting some of the cases.
And so the concern is what economic implications that has on global growth, and layer that on with the hit from oil prices. And that's really why you saw the response that you saw this morning. There, Michael talked about the hit that oil prices have taken. And you've also seen a hit in the financials area as well.
- Let me ask you, when you take a look at this-- I know the last time we spoke about 10 days ago, we talked about how, again, this is depth and breadth of how long this last is what the market is trying to price in right now. What are you seeing?
- Yeah, again, it's hard to make a real determination at this point. Again, every case is different. If you look in 2008, we had a real systemic issue and concern that we would lose the financial system. You look back at the crash of '87, very, very different circumstances. So, again, all circumstances are different. Our expectation is this has an impact on economic growth on expected returns.
But looking past this, we can certainly see the case for equities in the longer term. And if you look at where interest rates are, they'd gotten to very, very low levels. Unfortunately, that could persist for a period of time. And, again, it's hard to really call for an end to this. It's hard to call the bottom. But we're still reasonably optimistic.
- What about you? I know the Wealth Asset Allocation Committee gets together. And obviously on a regular basis takes a look at how you're looking at risk in different sectors and different areas right now. You've made some changes based on what's been happening.
- Yeah, we've made very modest changes in terms of our outlook. We've gone from a very slight overweight in equities and really in US emerging markets to a neutral position in equity. So we've taken that back a little bit. Again, really related to the coronavirus impact on economic growth, layering on the impact of oil prices as well.
Oil prices were also part of the reason we moved to an underweight in the Canadian dollar relative to where we were previously. And, again, more neutral on gold, more from a risk perspective, and a hedge against the financial system. And so very modest changes to our asset allocation at this point.
- Let me ask, I know, from a market standpoint. Of course, everybody watching this around the world. There's some very interested folks who are out West who are watching this even more closely when it comes to energy prices. Can I ask you what you see in terms of the energy sector in Canada? And, I mean, it's been hit hard already. What does this mean?
- Well, it's another setback for the Western Canadian producers, to be sure. Like you say, it's been a very slow sort of two steps forward, one step back process for a number of years, as they've struggled with market access.
Now, the surviving companies have done a nice job of improving their cost structures. They're much leaner, much better, much more efficient companies today than they were in 2014, 2015.
Unfortunately when you've got a backdrop like this, they're just going to have to bear down. And what it does, it removes any thought of what's the exciting growth project? And it's more about keeping the lights on, you know, living to fight another day. So a lot of the better companies are well-positioned to do that.
And in contrast to the US, we have such high decline rates from the US shale producers. One of the silver linings for the Canadian producers is they tend to have much lower decline rates. And what that means in practical terms is they have to spend a lot less money to keep their production flat.
And so I think the challenge for the Canadians is keep your costs as lean as you can. The challenge for the Americans is this need to keep investing in order to maintain your production growth. So it's two different problems that they're dealing with right now.
KIM PARLEE: Let me ask about our central banks. I mean, you mentioned the fact that rates could be lower and persist for lower. Could they go even lower? I mean, the last rate cut we had from the Fed, not terribly well received. But, I mean, should we be expecting to hear more from central banks--
- Yeah, I mean, that's certainly the market implications today is for further Fed cuts and for further central bank cuts. And so that's really priced into the expectations as early as next week. So, yeah, do expect that. In addition, quantitative easing-- some fiscal stimulus-- very likely possibilities.
- So I'm going to ask you the same question that I asked you the last time we spoke. It has been a tough few days-- few weeks for people who've been watching these markets roller coaster. So, I mean, what would you say to those who are trying to figure out what they should be doing?
- Yeah, and, again. Well, equity market returns have obviously been quite a bit negative relative to where we were 10 days ago. And this is the argument I made last time-- where balanced returns are, we're really not that far off relative to where we were 10 days ago. So we might be a further 1% negative. But, again, that's a been kind of a 1% to 2% negative for balanced portfolios, in general, relative to what was a very strong year last year.
15%, 16%, 17% returns weren't uncommon last year for balance returns. So, again, you'll keep that in context. And ensuring that you have fully diversified, fully balanced portfolios, makes sense to go through what are periods like this of severe market disruptions.
- Rob, Michael, thank you very much.
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