Nineteen months into the COVID-19 pandemic, there are signs of light emerging at the end of the pandemic tunnel. Kim Parlee speaks with Damian Fernandes, Portfolio Manager, TD Asset Management, about which sectors and businesses could benefit in the next phase of the recovery.
Print Transcript
[MUSIC PLAYING]
- We are now 19 months into the pandemic, but there are signs, even light, at the end of the pandemic tunnel that things could be changing. So with things changing, what will this transition be like going back to the new normal? And what will it mean for companies and markets?
Damian Fernandes is Portfolio Manager at TD Asset Management. He joins me now. Damian, nice to talk to you. It's been a while. If we look back to 2020, the pandemic really was the driver for much of the activity we saw in the economy, in the markets. When you look ahead, now, what do you see as being the biggest driver for the economy?
- Thanks Kim. Great to be on as always. I love how you preface this with 19 months. 19 months feels like a really long time. And it feels like the market has had a fair amount of volatility. But when you look at what's happened this year, we started with 2020, the pandemic, and then 2021. And whether you look at the US market, the S&P 500, the TSX, they're up about 20%.
And many people think that that phenomenal return that's being experienced so far is a function of just market multiples expanding, just like the PE multiple expanding. In fact, it's been the opposite. What's actually driven the market, at least year to date, has been earnings that have been coming in much better than expectations.
We know that the consumer is fine. We know that there's tons of policy support. We know there's demand for goods, and even activity is increasing globally. So that's actually allowed earnings to be the driver of return so far, year to date. And I think that continues going forward. I think as we move into-- we're in the latter half of-- we're in the midst of Q3 reporting right now, and as we progress into next year, I still see earnings as being the primary driver of what moves this market forward.
- I guess the only thing restricting earnings right now is we're hearing a lot about supply chains being blocked and what that could mean when those open up. That could change things. But if I could, tell me about what you see for investment opportunities. I mean, where are you seeing them right now?
- Well, look when you mentioned supply chains opening up, incipient talk about inflation slowly rearing its head. For us I think the biggest opportunities are two-fold. We want to be in companies with pricing power.
Now, there's two ways to think about that. When you think about an extraction company, an oil and gas company, it has pricing power because commodity prices are actually-- do quite well. And it doesn't have a lot of fixed labor. There's not a lot of people once you drill a well. You use machines to extract those resources out. So an oil and gas company, an extraction company, actually benefits from this current environment. So that's one area of the market we're quite interested in. When you look at some of these oil and gas, or material companies, they're generating a significant amount of free cash flow that ultimately should push the stock price higher.
On the other side is companies that have-- that can exercise pricing power because of their business model. Think about software companies that, again, do not employ significant amount of employees but actually are able to raise prices through their platforms. They, too, should benefit. Yes, they're not considered cyclical. But they should see steady earnings growth into next year because we're still going to enjoy a recovery into next year. We're still in the midst of the early to mid- stages of recovery and that should continue this.
Where I want to avoid, to your question, is companies that are facing supply crunches, supply issues, companies where labor is a major input. Those companies are where you probably see headwinds, and that's where we want to stay away from.
- Damian, you've given your thesis about what you think is going to be strong. Can you give me a few names that you think are attractive right now?
- Sure. So Kim, we talked about pricing power. I think a name with pricing power, as I mentioned, oil and gas names. A name we really, really like is ConocoPhillips in the US. You know, that company, where oil prices are at $75 and more of WTI prices, it generates significant amounts of free cash flow. And they've committed to return that back to shareholders through rising dividends and potentially share repurchases. I think that company will participate in this recovery.
Another company with pricing power we all-- as we think about how the next leg of this recovery will unfold as we move from goods consumption, to service consumption, is a financial company like American Express. Right? Transactions as the higher net-- as the higher income consumer actually starts consuming more in personal services, Amex benefits disproportionately from that. They see a lot of spending going through their cards. And that company, too, will start increasing, will start focusing more on capital return, whether through share repurchases or increased dividends.
And so where we are in the cycle-- mid cycle, continued economic recovery, focused on earnings-- those are examples of two companies I think where you'll see that take place, both in the next quarter and the next year.
- Are there other sectors that when you look back said, these did really well, now could they lose their luster as we get to this next phase of the endemic?
- Yeah, it's-- I love endemic, right, it's going to be with us. So when you think about consumption over the last 18 months, most of us were quarantined at home and were consuming goods. As we've had like efficacious vaccines that allow us to move on, there's only so many goods we can buy. There's only so many decks you can remodel. There's only so many cars you can purchase.
What I think is going to be the next stage, to your question, is this consumption is towards services. What that means is that companies that benefited disproportionately from goods consumption over this last little while, whether it's staples companies or whether it's even companies, capital goods companies, I think they will see some pressure going forward. Just because I do think that as consumers start accepting this endemic phase and that they will start consuming things that they haven't.
And front and center in my mind are services-- so vacations, personal services, health care facilities, that they, you know, they're not visiting the doctor. All of those things are what I think the next stage of growth will come from.
- What would you say is the biggest surprise that you've seen in terms of how investments have panned out, in terms of which ones have and which ones haven't over the past year?
- Yeah, I think the biggest surprise has just been the strength of this recovery. I know we talk about how much the market's up. But if we take a step back, at the end of last year going into 2021, the market was expecting-- estimates, forecasts-- people were expecting about $160 in earnings for the S&P 500. We are basically almost at the end of the finish line, and we're going to be coming in close to 200.
That's a significant increase to where initial expectations were. And I think that's just a function of the consumer is in great shape. You've had tons of policy support. You've actually had very strong demand globally. And so I think if you ask me to think back, I always thought that earnings were underappreciated, the strength of earnings in this recovery, and we were in recovery, but I've been surprised about how strong it's been, so far.
- Damian, always a pleasure. Thanks so much for joining us.
- Sure. Thanks Kim.
[MUSIC PLAYING]
211022_MT_Inv-Fernandes-en
[MUSIC PLAYING]
- We are now 19 months into the pandemic, but there are signs, even light, at the end of the pandemic tunnel that things could be changing. So with things changing, what will this transition be like going back to the new normal? And what will it mean for companies and markets?
Damian Fernandes is Portfolio Manager at TD Asset Management. He joins me now. Damian, nice to talk to you. It's been a while. If we look back to 2020, the pandemic really was the driver for much of the activity we saw in the economy, in the markets. When you look ahead, now, what do you see as being the biggest driver for the economy?
- Thanks Kim. Great to be on as always. I love how you preface this with 19 months. 19 months feels like a really long time. And it feels like the market has had a fair amount of volatility. But when you look at what's happened this year, we started with 2020, the pandemic, and then 2021. And whether you look at the US market, the S&P 500, the TSX, they're up about 20%.
And many people think that that phenomenal return that's being experienced so far is a function of just market multiples expanding, just like the PE multiple expanding. In fact, it's been the opposite. What's actually driven the market, at least year to date, has been earnings that have been coming in much better than expectations.
We know that the consumer is fine. We know that there's tons of policy support. We know there's demand for goods, and even activity is increasing globally. So that's actually allowed earnings to be the driver of return so far, year to date. And I think that continues going forward. I think as we move into-- we're in the latter half of-- we're in the midst of Q3 reporting right now, and as we progress into next year, I still see earnings as being the primary driver of what moves this market forward.
- I guess the only thing restricting earnings right now is we're hearing a lot about supply chains being blocked and what that could mean when those open up. That could change things. But if I could, tell me about what you see for investment opportunities. I mean, where are you seeing them right now?
- Well, look when you mentioned supply chains opening up, incipient talk about inflation slowly rearing its head. For us I think the biggest opportunities are two-fold. We want to be in companies with pricing power.
Now, there's two ways to think about that. When you think about an extraction company, an oil and gas company, it has pricing power because commodity prices are actually-- do quite well. And it doesn't have a lot of fixed labor. There's not a lot of people once you drill a well. You use machines to extract those resources out. So an oil and gas company, an extraction company, actually benefits from this current environment. So that's one area of the market we're quite interested in. When you look at some of these oil and gas, or material companies, they're generating a significant amount of free cash flow that ultimately should push the stock price higher.
On the other side is companies that have-- that can exercise pricing power because of their business model. Think about software companies that, again, do not employ significant amount of employees but actually are able to raise prices through their platforms. They, too, should benefit. Yes, they're not considered cyclical. But they should see steady earnings growth into next year because we're still going to enjoy a recovery into next year. We're still in the midst of the early to mid- stages of recovery and that should continue this.
Where I want to avoid, to your question, is companies that are facing supply crunches, supply issues, companies where labor is a major input. Those companies are where you probably see headwinds, and that's where we want to stay away from.
- Damian, you've given your thesis about what you think is going to be strong. Can you give me a few names that you think are attractive right now?
- Sure. So Kim, we talked about pricing power. I think a name with pricing power, as I mentioned, oil and gas names. A name we really, really like is ConocoPhillips in the US. You know, that company, where oil prices are at $75 and more of WTI prices, it generates significant amounts of free cash flow. And they've committed to return that back to shareholders through rising dividends and potentially share repurchases. I think that company will participate in this recovery.
Another company with pricing power we all-- as we think about how the next leg of this recovery will unfold as we move from goods consumption, to service consumption, is a financial company like American Express. Right? Transactions as the higher net-- as the higher income consumer actually starts consuming more in personal services, Amex benefits disproportionately from that. They see a lot of spending going through their cards. And that company, too, will start increasing, will start focusing more on capital return, whether through share repurchases or increased dividends.
And so where we are in the cycle-- mid cycle, continued economic recovery, focused on earnings-- those are examples of two companies I think where you'll see that take place, both in the next quarter and the next year.
- Are there other sectors that when you look back said, these did really well, now could they lose their luster as we get to this next phase of the endemic?
- Yeah, it's-- I love endemic, right, it's going to be with us. So when you think about consumption over the last 18 months, most of us were quarantined at home and were consuming goods. As we've had like efficacious vaccines that allow us to move on, there's only so many goods we can buy. There's only so many decks you can remodel. There's only so many cars you can purchase.
What I think is going to be the next stage, to your question, is this consumption is towards services. What that means is that companies that benefited disproportionately from goods consumption over this last little while, whether it's staples companies or whether it's even companies, capital goods companies, I think they will see some pressure going forward. Just because I do think that as consumers start accepting this endemic phase and that they will start consuming things that they haven't.
And front and center in my mind are services-- so vacations, personal services, health care facilities, that they, you know, they're not visiting the doctor. All of those things are what I think the next stage of growth will come from.
- What would you say is the biggest surprise that you've seen in terms of how investments have panned out, in terms of which ones have and which ones haven't over the past year?
- Yeah, I think the biggest surprise has just been the strength of this recovery. I know we talk about how much the market's up. But if we take a step back, at the end of last year going into 2021, the market was expecting-- estimates, forecasts-- people were expecting about $160 in earnings for the S&P 500. We are basically almost at the end of the finish line, and we're going to be coming in close to 200.
That's a significant increase to where initial expectations were. And I think that's just a function of the consumer is in great shape. You've had tons of policy support. You've actually had very strong demand globally. And so I think if you ask me to think back, I always thought that earnings were underappreciated, the strength of earnings in this recovery, and we were in recovery, but I've been surprised about how strong it's been, so far.
- Damian, always a pleasure. Thanks so much for joining us.
- Sure. Thanks Kim.
[MUSIC PLAYING]
- We are now 19 months into the pandemic, but there are signs, even light, at the end of the pandemic tunnel that things could be changing. So with things changing, what will this transition be like going back to the new normal? And what will it mean for companies and markets?
Damian Fernandes is Portfolio Manager at TD Asset Management. He joins me now. Damian, nice to talk to you. It's been a while. If we look back to 2020, the pandemic really was the driver for much of the activity we saw in the economy, in the markets. When you look ahead, now, what do you see as being the biggest driver for the economy?
- Thanks Kim. Great to be on as always. I love how you preface this with 19 months. 19 months feels like a really long time. And it feels like the market has had a fair amount of volatility. But when you look at what's happened this year, we started with 2020, the pandemic, and then 2021. And whether you look at the US market, the S&P 500, the TSX, they're up about 20%.
And many people think that that phenomenal return that's being experienced so far is a function of just market multiples expanding, just like the PE multiple expanding. In fact, it's been the opposite. What's actually driven the market, at least year to date, has been earnings that have been coming in much better than expectations.
We know that the consumer is fine. We know that there's tons of policy support. We know there's demand for goods, and even activity is increasing globally. So that's actually allowed earnings to be the driver of return so far, year to date. And I think that continues going forward. I think as we move into-- we're in the latter half of-- we're in the midst of Q3 reporting right now, and as we progress into next year, I still see earnings as being the primary driver of what moves this market forward.
- I guess the only thing restricting earnings right now is we're hearing a lot about supply chains being blocked and what that could mean when those open up. That could change things. But if I could, tell me about what you see for investment opportunities. I mean, where are you seeing them right now?
- Well, look when you mentioned supply chains opening up, incipient talk about inflation slowly rearing its head. For us I think the biggest opportunities are two-fold. We want to be in companies with pricing power.
Now, there's two ways to think about that. When you think about an extraction company, an oil and gas company, it has pricing power because commodity prices are actually-- do quite well. And it doesn't have a lot of fixed labor. There's not a lot of people once you drill a well. You use machines to extract those resources out. So an oil and gas company, an extraction company, actually benefits from this current environment. So that's one area of the market we're quite interested in. When you look at some of these oil and gas, or material companies, they're generating a significant amount of free cash flow that ultimately should push the stock price higher.
On the other side is companies that have-- that can exercise pricing power because of their business model. Think about software companies that, again, do not employ significant amount of employees but actually are able to raise prices through their platforms. They, too, should benefit. Yes, they're not considered cyclical. But they should see steady earnings growth into next year because we're still going to enjoy a recovery into next year. We're still in the midst of the early to mid- stages of recovery and that should continue this.
Where I want to avoid, to your question, is companies that are facing supply crunches, supply issues, companies where labor is a major input. Those companies are where you probably see headwinds, and that's where we want to stay away from.
- Damian, you've given your thesis about what you think is going to be strong. Can you give me a few names that you think are attractive right now?
- Sure. So Kim, we talked about pricing power. I think a name with pricing power, as I mentioned, oil and gas names. A name we really, really like is ConocoPhillips in the US. You know, that company, where oil prices are at $75 and more of WTI prices, it generates significant amounts of free cash flow. And they've committed to return that back to shareholders through rising dividends and potentially share repurchases. I think that company will participate in this recovery.
Another company with pricing power we all-- as we think about how the next leg of this recovery will unfold as we move from goods consumption, to service consumption, is a financial company like American Express. Right? Transactions as the higher net-- as the higher income consumer actually starts consuming more in personal services, Amex benefits disproportionately from that. They see a lot of spending going through their cards. And that company, too, will start increasing, will start focusing more on capital return, whether through share repurchases or increased dividends.
And so where we are in the cycle-- mid cycle, continued economic recovery, focused on earnings-- those are examples of two companies I think where you'll see that take place, both in the next quarter and the next year.
- Are there other sectors that when you look back said, these did really well, now could they lose their luster as we get to this next phase of the endemic?
- Yeah, it's-- I love endemic, right, it's going to be with us. So when you think about consumption over the last 18 months, most of us were quarantined at home and were consuming goods. As we've had like efficacious vaccines that allow us to move on, there's only so many goods we can buy. There's only so many decks you can remodel. There's only so many cars you can purchase.
What I think is going to be the next stage, to your question, is this consumption is towards services. What that means is that companies that benefited disproportionately from goods consumption over this last little while, whether it's staples companies or whether it's even companies, capital goods companies, I think they will see some pressure going forward. Just because I do think that as consumers start accepting this endemic phase and that they will start consuming things that they haven't.
And front and center in my mind are services-- so vacations, personal services, health care facilities, that they, you know, they're not visiting the doctor. All of those things are what I think the next stage of growth will come from.
- What would you say is the biggest surprise that you've seen in terms of how investments have panned out, in terms of which ones have and which ones haven't over the past year?
- Yeah, I think the biggest surprise has just been the strength of this recovery. I know we talk about how much the market's up. But if we take a step back, at the end of last year going into 2021, the market was expecting-- estimates, forecasts-- people were expecting about $160 in earnings for the S&P 500. We are basically almost at the end of the finish line, and we're going to be coming in close to 200.
That's a significant increase to where initial expectations were. And I think that's just a function of the consumer is in great shape. You've had tons of policy support. You've actually had very strong demand globally. And so I think if you ask me to think back, I always thought that earnings were underappreciated, the strength of earnings in this recovery, and we were in recovery, but I've been surprised about how strong it's been, so far.
- Damian, always a pleasure. Thanks so much for joining us.
- Sure. Thanks Kim.
[MUSIC PLAYING]
211022_MT_Inv-Fernandes-en
[MUSIC PLAYING]
- We are now 19 months into the pandemic, but there are signs, even light, at the end of the pandemic tunnel that things could be changing. So with things changing, what will this transition be like going back to the new normal? And what will it mean for companies and markets?
Damian Fernandes is Portfolio Manager at TD Asset Management. He joins me now. Damian, nice to talk to you. It's been a while. If we look back to 2020, the pandemic really was the driver for much of the activity we saw in the economy, in the markets. When you look ahead, now, what do you see as being the biggest driver for the economy?
- Thanks Kim. Great to be on as always. I love how you preface this with 19 months. 19 months feels like a really long time. And it feels like the market has had a fair amount of volatility. But when you look at what's happened this year, we started with 2020, the pandemic, and then 2021. And whether you look at the US market, the S&P 500, the TSX, they're up about 20%.
And many people think that that phenomenal return that's being experienced so far is a function of just market multiples expanding, just like the PE multiple expanding. In fact, it's been the opposite. What's actually driven the market, at least year to date, has been earnings that have been coming in much better than expectations.
We know that the consumer is fine. We know that there's tons of policy support. We know there's demand for goods, and even activity is increasing globally. So that's actually allowed earnings to be the driver of return so far, year to date. And I think that continues going forward. I think as we move into-- we're in the latter half of-- we're in the midst of Q3 reporting right now, and as we progress into next year, I still see earnings as being the primary driver of what moves this market forward.
- I guess the only thing restricting earnings right now is we're hearing a lot about supply chains being blocked and what that could mean when those open up. That could change things. But if I could, tell me about what you see for investment opportunities. I mean, where are you seeing them right now?
- Well, look when you mentioned supply chains opening up, incipient talk about inflation slowly rearing its head. For us I think the biggest opportunities are two-fold. We want to be in companies with pricing power.
Now, there's two ways to think about that. When you think about an extraction company, an oil and gas company, it has pricing power because commodity prices are actually-- do quite well. And it doesn't have a lot of fixed labor. There's not a lot of people once you drill a well. You use machines to extract those resources out. So an oil and gas company, an extraction company, actually benefits from this current environment. So that's one area of the market we're quite interested in. When you look at some of these oil and gas, or material companies, they're generating a significant amount of free cash flow that ultimately should push the stock price higher.
On the other side is companies that have-- that can exercise pricing power because of their business model. Think about software companies that, again, do not employ significant amount of employees but actually are able to raise prices through their platforms. They, too, should benefit. Yes, they're not considered cyclical. But they should see steady earnings growth into next year because we're still going to enjoy a recovery into next year. We're still in the midst of the early to mid- stages of recovery and that should continue this.
Where I want to avoid, to your question, is companies that are facing supply crunches, supply issues, companies where labor is a major input. Those companies are where you probably see headwinds, and that's where we want to stay away from.
- Damian, you've given your thesis about what you think is going to be strong. Can you give me a few names that you think are attractive right now?
- Sure. So Kim, we talked about pricing power. I think a name with pricing power, as I mentioned, oil and gas names. A name we really, really like is ConocoPhillips in the US. You know, that company, where oil prices are at $75 and more of WTI prices, it generates significant amounts of free cash flow. And they've committed to return that back to shareholders through rising dividends and potentially share repurchases. I think that company will participate in this recovery.
Another company with pricing power we all-- as we think about how the next leg of this recovery will unfold as we move from goods consumption, to service consumption, is a financial company like American Express. Right? Transactions as the higher net-- as the higher income consumer actually starts consuming more in personal services, Amex benefits disproportionately from that. They see a lot of spending going through their cards. And that company, too, will start increasing, will start focusing more on capital return, whether through share repurchases or increased dividends.
And so where we are in the cycle-- mid cycle, continued economic recovery, focused on earnings-- those are examples of two companies I think where you'll see that take place, both in the next quarter and the next year.
- Are there other sectors that when you look back said, these did really well, now could they lose their luster as we get to this next phase of the endemic?
- Yeah, it's-- I love endemic, right, it's going to be with us. So when you think about consumption over the last 18 months, most of us were quarantined at home and were consuming goods. As we've had like efficacious vaccines that allow us to move on, there's only so many goods we can buy. There's only so many decks you can remodel. There's only so many cars you can purchase.
What I think is going to be the next stage, to your question, is this consumption is towards services. What that means is that companies that benefited disproportionately from goods consumption over this last little while, whether it's staples companies or whether it's even companies, capital goods companies, I think they will see some pressure going forward. Just because I do think that as consumers start accepting this endemic phase and that they will start consuming things that they haven't.
And front and center in my mind are services-- so vacations, personal services, health care facilities, that they, you know, they're not visiting the doctor. All of those things are what I think the next stage of growth will come from.
- What would you say is the biggest surprise that you've seen in terms of how investments have panned out, in terms of which ones have and which ones haven't over the past year?
- Yeah, I think the biggest surprise has just been the strength of this recovery. I know we talk about how much the market's up. But if we take a step back, at the end of last year going into 2021, the market was expecting-- estimates, forecasts-- people were expecting about $160 in earnings for the S&P 500. We are basically almost at the end of the finish line, and we're going to be coming in close to 200.
That's a significant increase to where initial expectations were. And I think that's just a function of the consumer is in great shape. You've had tons of policy support. You've actually had very strong demand globally. And so I think if you ask me to think back, I always thought that earnings were underappreciated, the strength of earnings in this recovery, and we were in recovery, but I've been surprised about how strong it's been, so far.
- Damian, always a pleasure. Thanks so much for joining us.
- Sure. Thanks Kim.
[MUSIC PLAYING]