Show Transcript
In Q2, investors learned about the risks of standing in the way of a raging bull—a bull market that is. But will the bull keep charging? Kim Parlee speaks with Rob Vanderhooft about his outlook on equities, fixed income, real estate, gold and currencies in these uncertain times.
Print Transcript
- Rob, it's good to see you. And if I could, I'd like to start with the big picture. You guys recently came out with a note, and you talk about the phrase "economic damage" from what has happened. And you say that the speed of the recovery from recession is going to be largely dictated by what's happening with COVID-19 treatments and the vaccine progress. So tell me what you're watching and what you're seeing on that front.
- You know, we're probably seeing a little bit better economic performance than we would have thought to this point in the absence of significant improvements in treatment or a vaccine. So the economic rebound has probably been, to a degree, better than we would have thought. And certainly the equity market rebound has been significantly better than we would have thought off of the bottom.
When you're looking at, in the US, for example, some pretty good performance in some of the first-wave states-- in New York, New Jersey, et cetera, more concerning, some of the other states that have been later but are seeing peaks-- California, Florida, Arizona, et cetera. But we're encouraged by the pace of economic growth at this point.
- Let me ask you, though-- I mean, I know you're watching this closely. You talk about the first-wave states, but what about if we start seeing more halting or reversing of openings in the states, and what's that going to tell you?
- Yeah that is certainly a concern in the first-wave states. We're less concerned where-- if everybody followed the path of New York and New Jersey, things would be great, certainly well under control. We are still seeing acceleration in some later-wave states and some reacceleration in a couple of states as well. But we're carefully watching that. But in more populous states, we are seeing a rollover in cases. Net hospitalizations are actually moving lower now, which also is a good sign, but the US is relatively-- in terms of COVID cases, it has about almost half the active cases now. So concerned, but we are seeing some positive signs of rollover.
- Let me bring up a chart right now. I think back to when we last talked in May, Rob, and markets were already in their second month of a move up. Fast forward to today. As you can see, we've got markets significantly higher, but the NASDAQ and fresh all-time highs. You're neutral in equities right now. Maybe you can tell me your thinking on why.
- Yeah, neutral-- we've seen economic growth pick up. We are seeing earnings revisions begin to turn more positive, so there are some positive signs. But valuations have moved well in advance of the turn in earnings. So valuations in all equity markets are really the higher end of their value.
And so we're a bit cautious. We're certainly not out of the woods with respect to COVID-19 and some of the concerns about a second wave, et cetera. So we've got a relatively modest risk position on right now, and we'll continue with that given those circumstances of valuation and lag in earnings.
- I know we're going to get into more detail on all the asset classes in just a minute, but I wanted to focus on a couple of changes that you recently made, specifically in the equity space. You recently upgraded international equities. Was a modest underweight. You've gone to neutral. Why that move?
- Yeah. In part, European economies were hit harder earlier by COVID-19 and are emerging. So if you look at a combination of valuations, a return to earnings, it does look relatively attractive to us at this point.
- You also made the move-- you upgraded Chinese equities from neutral to modest overweight. How come?
- If you look at that where China is in terms of economic growth, a big impact in the first part of the year with COVID-19 has really recovered to a great degree. If you look at industrial production, very, very-- really quite strong, returning almost to normal. And so we are seeing a positive impact on earnings.
Where we are less positive, perhaps, is on the retail sales side in China, where that continues to lag. And we're seeing that in most markets where industrial activity has picked up. Retail activity is slower to pick up.
- I want to back up if we could and talk about just your overall take on all the asset classes. If we take a look at equities overall-- obviously, that compiles Canadian, US, international, Chinese, and emerging market equities-- you are neutral, as you talked about. But I know you're monitoring PMIs. Maybe tell me a bit more about why and what you're seeing there.
- Yeah. PMIs are a barometer of industrial activity, Purchasing Managers Index. And so we are seeing those pick up, and it's a pretty good signal of economic growth. And we're also looking at, as we talked about earlier, retail sales. But PMIs are a pretty good barometer, and they're generally picking up to above 50, which is a positive number.
- All right. Let's take a look at the next asset class-- fixed income. You're currently modest underweight right now, and you're saying that you are comfortable with the modest underweight-- excuse me-- overweight on corporate bonds. Maybe take me through what you're seeing there.
- Yeah. If you look at interest rates, we're underweight fixed income overall. We don't see rates really moving lower from here. We would expect that as the pace of economic activity picks up, that rates will move higher-- so government bonds, less positive on corporate bonds where we are seeing reasonably good yields still. Spreads did widen. Yields did move out. They've come back somewhat, but they're still relatively attractive on a yield basis versus government bonds. So we're overweight on the corporate bonds still.
- Can I ask again a bit on the corporate bonds? Can you tell me a bit more about what specifically you're going to be watching just to make sure that that yield is maintained?
- Yeah, that's a good question. Very specific industries, et cetera. If you look at travel-related industries, if you look at the oil and gas area, more credit impact there, more earnings impact within those areas. The retail sales-- different retailers, very different outcomes through this, so very important to differentiate between credit quality through what we've seen here.
- Interesting. Because I know we've always talked about the importance of active management, and I think it becomes even clearer in this kind of scenario. Let's move to real assets and alternatives. Again, you've got an overweight in this space right now. But the interesting thing if we dial in on one-- you're saying you're seeing a pickup in transaction volume in the commercial mortgage market. Tell me a bit more about that.
- Yeah. That's beginning to pick up now. We went through a period, obviously, early this year where really, not a lot of activity was happening in that space. But we have seen more mortgage activity more recently.
And if you look at spreads in the mortgage area versus the government of Canada's, there's still an attractive yield spread. It's coming in a little bit, but it's kind of lagged what we've seen on the corporate side in terms of spread compression, so very attractive interest rates in mortgages right now. So we're really quite favorable on mortgages.
- And how are you feeling about commercial real estate? I mean, I can see here that relatively neutral at this point. But I think a lot of people who are sitting at home who are not in the offices-- it begs the question what you're seeing on that front.
- Yeah. If you look at it, very different in terms of impacts on the various sectors. The real estate market, industrial activity is actually reasonably good. If you look at the office market, class A space, fine. If you look at multi-unit residential, very-- really, quite positive. And where we've seen more impact in terms of valuations to a degree is on the retail side. So that's pulled back a little bit more than the balance of the market. But overall returns, while slightly negative, are still relatively-- in a relatively good position at this point.
- We move to the last class here, taking a look at gold and currencies, obviously, the relationship between. But we've seen gold move a leg up, so curious to get your thoughts on what you see there.
- The cost of holding gold is obviously very low with interest rates being very, very low. So as a hedge against other risks, it has a place in portfolios for a lot of people. We're certainly not gold bugs. But in terms of as a component of risk protection, it does have a place in a lot of portfolios. Therefore, we think gold could move a little bit higher.
- You've also got a look here at the Canadian dollar versus the US dollar, underweight on that. Is this a case more of the Canadian currency story or the US dollar story?
- Yeah, it is more a case of the Canadian currency story. Economic activity a little bit slower in Canada. If you look at the impact of oil and gas, there's a significant correlation between oil and gas and other commodities with the Canadian dollar. And really, you can't find a lot of commodities that are very positive. And while oil has rebounded, it's still far from where it needs to be to really drive economic growth in Canada and to drive the Canadian dollar.
- I saved, I think, one of the more interesting questions for me to the end. I want to talk a bit about the US dollar. I mean, the US dollar is the reserve currency. And obviously, the Fed is doing so much to help the markets. But again, it's that safety play.
When you fast forward, though, and think of the election that's coming in four months, I mean, how does that play into, I guess, the larger economy, the US dollar? Is it going to be tumultuous for a short period, or are there some longer-run things we should be paying attention to?
- Yeah, it probably is the longer-run things that we should pay attention to. If you look at polls at the moment, in past history, there's been no incumbent president that has had a seven-point deficit and has gone on to win the election. And we're now at-- Joe Biden is an 11-point lead over Trump. So again, you can't count Trump out, as we know, but the odds aren't stacking up in his favor.
In terms of impact of a Biden government, probably a rollback of taxes-- or sorry-- tax cuts, Medicare, social spending, et cetera. So there probably will be an additional fiscal burden onto the economy going forward in addition to the amount of fiscal burden that we are picking up as a result of COVID-19. So it does have a longer-term implications for the pace of economic growth going forward, which may be, therefore, a little bit lower than what we otherwise might have seen.
- And Rob, what does that longer-term political outlook mean for the US dollar? Does it shift in terms of, again, this idea of the reserve currency? Or is it really, until there's something else, it will maintain that position?
- Yeah, it will maintain that position as reserve currency going forward. That likely doesn't change. And that changes over a very, very long, long period of time or could change over a very long period of time, so not something that we would expect to happen immediately.
- Let me ask you-- I've only got about 15 seconds left, but for those who are listening, net-net, what do you think people should keep in mind for 2020 and beyond?
- We talked about being fully invested when we've been on the program previously, and to continue to do that and to look at the long-term goals and to set your asset allocation based upon those long-term expectations. The market timing, as we know, didn't prove out to work very well earlier this year. So again, maintain that long-term focus on portfolios and consistent asset allocation.
- Rob, thanks so much for joining us.
- Thank you.
- You know, we're probably seeing a little bit better economic performance than we would have thought to this point in the absence of significant improvements in treatment or a vaccine. So the economic rebound has probably been, to a degree, better than we would have thought. And certainly the equity market rebound has been significantly better than we would have thought off of the bottom.
When you're looking at, in the US, for example, some pretty good performance in some of the first-wave states-- in New York, New Jersey, et cetera, more concerning, some of the other states that have been later but are seeing peaks-- California, Florida, Arizona, et cetera. But we're encouraged by the pace of economic growth at this point.
- Let me ask you, though-- I mean, I know you're watching this closely. You talk about the first-wave states, but what about if we start seeing more halting or reversing of openings in the states, and what's that going to tell you?
- Yeah that is certainly a concern in the first-wave states. We're less concerned where-- if everybody followed the path of New York and New Jersey, things would be great, certainly well under control. We are still seeing acceleration in some later-wave states and some reacceleration in a couple of states as well. But we're carefully watching that. But in more populous states, we are seeing a rollover in cases. Net hospitalizations are actually moving lower now, which also is a good sign, but the US is relatively-- in terms of COVID cases, it has about almost half the active cases now. So concerned, but we are seeing some positive signs of rollover.
- Let me bring up a chart right now. I think back to when we last talked in May, Rob, and markets were already in their second month of a move up. Fast forward to today. As you can see, we've got markets significantly higher, but the NASDAQ and fresh all-time highs. You're neutral in equities right now. Maybe you can tell me your thinking on why.
- Yeah, neutral-- we've seen economic growth pick up. We are seeing earnings revisions begin to turn more positive, so there are some positive signs. But valuations have moved well in advance of the turn in earnings. So valuations in all equity markets are really the higher end of their value.
And so we're a bit cautious. We're certainly not out of the woods with respect to COVID-19 and some of the concerns about a second wave, et cetera. So we've got a relatively modest risk position on right now, and we'll continue with that given those circumstances of valuation and lag in earnings.
- I know we're going to get into more detail on all the asset classes in just a minute, but I wanted to focus on a couple of changes that you recently made, specifically in the equity space. You recently upgraded international equities. Was a modest underweight. You've gone to neutral. Why that move?
- Yeah. In part, European economies were hit harder earlier by COVID-19 and are emerging. So if you look at a combination of valuations, a return to earnings, it does look relatively attractive to us at this point.
- You also made the move-- you upgraded Chinese equities from neutral to modest overweight. How come?
- If you look at that where China is in terms of economic growth, a big impact in the first part of the year with COVID-19 has really recovered to a great degree. If you look at industrial production, very, very-- really quite strong, returning almost to normal. And so we are seeing a positive impact on earnings.
Where we are less positive, perhaps, is on the retail sales side in China, where that continues to lag. And we're seeing that in most markets where industrial activity has picked up. Retail activity is slower to pick up.
- I want to back up if we could and talk about just your overall take on all the asset classes. If we take a look at equities overall-- obviously, that compiles Canadian, US, international, Chinese, and emerging market equities-- you are neutral, as you talked about. But I know you're monitoring PMIs. Maybe tell me a bit more about why and what you're seeing there.
- Yeah. PMIs are a barometer of industrial activity, Purchasing Managers Index. And so we are seeing those pick up, and it's a pretty good signal of economic growth. And we're also looking at, as we talked about earlier, retail sales. But PMIs are a pretty good barometer, and they're generally picking up to above 50, which is a positive number.
- All right. Let's take a look at the next asset class-- fixed income. You're currently modest underweight right now, and you're saying that you are comfortable with the modest underweight-- excuse me-- overweight on corporate bonds. Maybe take me through what you're seeing there.
- Yeah. If you look at interest rates, we're underweight fixed income overall. We don't see rates really moving lower from here. We would expect that as the pace of economic activity picks up, that rates will move higher-- so government bonds, less positive on corporate bonds where we are seeing reasonably good yields still. Spreads did widen. Yields did move out. They've come back somewhat, but they're still relatively attractive on a yield basis versus government bonds. So we're overweight on the corporate bonds still.
- Can I ask again a bit on the corporate bonds? Can you tell me a bit more about what specifically you're going to be watching just to make sure that that yield is maintained?
- Yeah, that's a good question. Very specific industries, et cetera. If you look at travel-related industries, if you look at the oil and gas area, more credit impact there, more earnings impact within those areas. The retail sales-- different retailers, very different outcomes through this, so very important to differentiate between credit quality through what we've seen here.
- Interesting. Because I know we've always talked about the importance of active management, and I think it becomes even clearer in this kind of scenario. Let's move to real assets and alternatives. Again, you've got an overweight in this space right now. But the interesting thing if we dial in on one-- you're saying you're seeing a pickup in transaction volume in the commercial mortgage market. Tell me a bit more about that.
- Yeah. That's beginning to pick up now. We went through a period, obviously, early this year where really, not a lot of activity was happening in that space. But we have seen more mortgage activity more recently.
And if you look at spreads in the mortgage area versus the government of Canada's, there's still an attractive yield spread. It's coming in a little bit, but it's kind of lagged what we've seen on the corporate side in terms of spread compression, so very attractive interest rates in mortgages right now. So we're really quite favorable on mortgages.
- And how are you feeling about commercial real estate? I mean, I can see here that relatively neutral at this point. But I think a lot of people who are sitting at home who are not in the offices-- it begs the question what you're seeing on that front.
- Yeah. If you look at it, very different in terms of impacts on the various sectors. The real estate market, industrial activity is actually reasonably good. If you look at the office market, class A space, fine. If you look at multi-unit residential, very-- really, quite positive. And where we've seen more impact in terms of valuations to a degree is on the retail side. So that's pulled back a little bit more than the balance of the market. But overall returns, while slightly negative, are still relatively-- in a relatively good position at this point.
- We move to the last class here, taking a look at gold and currencies, obviously, the relationship between. But we've seen gold move a leg up, so curious to get your thoughts on what you see there.
- The cost of holding gold is obviously very low with interest rates being very, very low. So as a hedge against other risks, it has a place in portfolios for a lot of people. We're certainly not gold bugs. But in terms of as a component of risk protection, it does have a place in a lot of portfolios. Therefore, we think gold could move a little bit higher.
- You've also got a look here at the Canadian dollar versus the US dollar, underweight on that. Is this a case more of the Canadian currency story or the US dollar story?
- Yeah, it is more a case of the Canadian currency story. Economic activity a little bit slower in Canada. If you look at the impact of oil and gas, there's a significant correlation between oil and gas and other commodities with the Canadian dollar. And really, you can't find a lot of commodities that are very positive. And while oil has rebounded, it's still far from where it needs to be to really drive economic growth in Canada and to drive the Canadian dollar.
- I saved, I think, one of the more interesting questions for me to the end. I want to talk a bit about the US dollar. I mean, the US dollar is the reserve currency. And obviously, the Fed is doing so much to help the markets. But again, it's that safety play.
When you fast forward, though, and think of the election that's coming in four months, I mean, how does that play into, I guess, the larger economy, the US dollar? Is it going to be tumultuous for a short period, or are there some longer-run things we should be paying attention to?
- Yeah, it probably is the longer-run things that we should pay attention to. If you look at polls at the moment, in past history, there's been no incumbent president that has had a seven-point deficit and has gone on to win the election. And we're now at-- Joe Biden is an 11-point lead over Trump. So again, you can't count Trump out, as we know, but the odds aren't stacking up in his favor.
In terms of impact of a Biden government, probably a rollback of taxes-- or sorry-- tax cuts, Medicare, social spending, et cetera. So there probably will be an additional fiscal burden onto the economy going forward in addition to the amount of fiscal burden that we are picking up as a result of COVID-19. So it does have a longer-term implications for the pace of economic growth going forward, which may be, therefore, a little bit lower than what we otherwise might have seen.
- And Rob, what does that longer-term political outlook mean for the US dollar? Does it shift in terms of, again, this idea of the reserve currency? Or is it really, until there's something else, it will maintain that position?
- Yeah, it will maintain that position as reserve currency going forward. That likely doesn't change. And that changes over a very, very long, long period of time or could change over a very long period of time, so not something that we would expect to happen immediately.
- Let me ask you-- I've only got about 15 seconds left, but for those who are listening, net-net, what do you think people should keep in mind for 2020 and beyond?
- We talked about being fully invested when we've been on the program previously, and to continue to do that and to look at the long-term goals and to set your asset allocation based upon those long-term expectations. The market timing, as we know, didn't prove out to work very well earlier this year. So again, maintain that long-term focus on portfolios and consistent asset allocation.
- Rob, thanks so much for joining us.
- Thank you.
