Show Transcript
With interest rates potentially staying higher for longer, investors may be looking for new and different sectors to focus on. Greg Bonnell speaks to Justin Flowerday, Managing Director & Head of Fundamental Equities about the potential opportunities in AI and agriculture.
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[AUDIO LOGO]
* Well, US treasury yields continuing to push higher, the Fed signaling, of course, that rates may stay higher for longer. So what does it mean for equity investors? Joining us now to discuss, Justin Flowerday, Managing Director and Head of Fundamental Equities at TD Asset Management. Justin, always great to have you on the program.
* Great to be here, Greg.
* Interesting day as, of course, we're seeing yields continuing to grind higher, investors trying to wrap their minds, I guess, around what could come next. So if we believe-- if we take the Fed at its word, and we take the central banks at their word, higher for longer, what should we be thinking about the market?
* Yeah, so look, interesting times for sure. And I think it's come as a bit of a surprise for people that central bank policymakers across the world have remained a little more vigilant than a lot of folks thought in terms of the policy rates. And it's because of inflation. And inflation's come down. It just hasn't come down as quickly as many had thought.
* And because of that, financial conditions have started to tighten. Credit conditions have started to tighten. Lending standards have started to tighten. And with that backdrop, one of the things we're focusing on quite a bit right now is quality. And we think that quality-- companies in the market are in particular in a position to outperform.
* So let's dig a bit deeper into that and maybe even how we define quality, right? If credit conditions are tightening, people are worried about the economic outlook, what are you looking for? What qualifies as quality?
* Yeah. So a couple points here. I think going back to first principles, when you think about the different cycles in the market, different companies are going to outperform or perform differently in different cycles of the market. Earlier in this cycle, we had a period where interest rates were very low. Consumers and businesses were incentivized to spend and potentially lever up their balance sheet.
* And in that type of cycle, you have investors not necessarily discriminating against-- between companies. They're really looking for-- they know many companies are not going to fail. And they're actually looking for companies that may have a higher level of torque to the market as opposed to anything else.
* And part of the issue is right now we're not necessarily in that type of phase. We're in a phase where central banks around the world are trying to slow down spending, slow down the economy, slow down hiring. And there's going to be some vulnerable companies out there.
* So in terms of how we define quality and what we're looking for, it's a few different things. Number one is pricing power. Companies that have really solid pricing power means typically that they have really good brands. They have really strong network effects, which allow them to raise price if the costs of their goods have increased. That's a really, really important one.
* Balance sheet stability and flexibility is a really important one. Because you often see in different points of the cycle where management teams are forced to make decisions that may end up deteriorating or destroying shareholder value. And so you want to have the flexibility on the balance sheet to be able to avoid that.
* Capital allocation, for us, is a really, really important one. And that just refers to a company's allocation of any excess profits and capital to paying down debt to buying back shares to doing acquisitions to Capex, increasing dividends.
* And when you think about the different inflection points in cycles, some of the biggest decisions that management teams are going to make happen at the peaks and the troughs. And they really have the ability to create shareholder value or destroy it during those periods. And so capital allocation for us is a big one.
* One of the things that I found a bit perplexing this year-- and it makes some sense when you think about what was happening, but central banks just didn't start raising rates yesterday. This has been about a year and a half. And then you come into this year. And the tech shares take off. But then, of course, people got excited about artificial intelligence. As we sort of get deeper into the-- to the AI world, are we overlooking some parts of the market?
* Because right now it's clear, right? NVIDIA makes the chips. They make the GPUs. They were the beneficiary. Are there other beneficiaries going down the road?
* Yeah, it's a really good question. And I think there's some general observations around companies that are going to benefit simply from reducing costs in their organization.
* And that's going to be across a whole bunch of different industries. But if you think about companies that are going to be transformed in some ways that folks aren't necessarily paying attention to-- I mean, we've done some work recently on the agriculture sector and AI's application.
* And it's kind of a neat one because you have the world's newest industry, essentially, in artificial intelligence with the potential to revolutionize the world's oldest industry, which is agriculture. And the beautiful thing about AI in agriculture is actually that it has the potential to revolutionize every phase of the production cycle.
* So planting with seeds-- we plant, fertilize seeds, and then harvest them. And with planting, I mean they're putting soils in, sorry, sensors in the soil, which allow them to determine, OK, what's the proper overall moisture level? Where's the best place for crops to be planted in order to optimize scheduling and planting location?
* In terms of fertilization and kind of weed control, there's some really interesting applications of machine learning, which are allowing some of these kind of new technologies to identify specifically weeds through machine learning and apply any sort of weed control just to the weeds so they don't hit the crops. So you get better yields. You get better product for consumers, which is a really good one. So we're curious about this. There's a lot of companies we watch that are selling goods and services into this industry. And we think it's quite an exciting opportunity.
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* Well, US treasury yields continuing to push higher, the Fed signaling, of course, that rates may stay higher for longer. So what does it mean for equity investors? Joining us now to discuss, Justin Flowerday, Managing Director and Head of Fundamental Equities at TD Asset Management. Justin, always great to have you on the program.
* Great to be here, Greg.
* Interesting day as, of course, we're seeing yields continuing to grind higher, investors trying to wrap their minds, I guess, around what could come next. So if we believe-- if we take the Fed at its word, and we take the central banks at their word, higher for longer, what should we be thinking about the market?
* Yeah, so look, interesting times for sure. And I think it's come as a bit of a surprise for people that central bank policymakers across the world have remained a little more vigilant than a lot of folks thought in terms of the policy rates. And it's because of inflation. And inflation's come down. It just hasn't come down as quickly as many had thought.
* And because of that, financial conditions have started to tighten. Credit conditions have started to tighten. Lending standards have started to tighten. And with that backdrop, one of the things we're focusing on quite a bit right now is quality. And we think that quality-- companies in the market are in particular in a position to outperform.
* So let's dig a bit deeper into that and maybe even how we define quality, right? If credit conditions are tightening, people are worried about the economic outlook, what are you looking for? What qualifies as quality?
* Yeah. So a couple points here. I think going back to first principles, when you think about the different cycles in the market, different companies are going to outperform or perform differently in different cycles of the market. Earlier in this cycle, we had a period where interest rates were very low. Consumers and businesses were incentivized to spend and potentially lever up their balance sheet.
* And in that type of cycle, you have investors not necessarily discriminating against-- between companies. They're really looking for-- they know many companies are not going to fail. And they're actually looking for companies that may have a higher level of torque to the market as opposed to anything else.
* And part of the issue is right now we're not necessarily in that type of phase. We're in a phase where central banks around the world are trying to slow down spending, slow down the economy, slow down hiring. And there's going to be some vulnerable companies out there.
* So in terms of how we define quality and what we're looking for, it's a few different things. Number one is pricing power. Companies that have really solid pricing power means typically that they have really good brands. They have really strong network effects, which allow them to raise price if the costs of their goods have increased. That's a really, really important one.
* Balance sheet stability and flexibility is a really important one. Because you often see in different points of the cycle where management teams are forced to make decisions that may end up deteriorating or destroying shareholder value. And so you want to have the flexibility on the balance sheet to be able to avoid that.
* Capital allocation, for us, is a really, really important one. And that just refers to a company's allocation of any excess profits and capital to paying down debt to buying back shares to doing acquisitions to Capex, increasing dividends.
* And when you think about the different inflection points in cycles, some of the biggest decisions that management teams are going to make happen at the peaks and the troughs. And they really have the ability to create shareholder value or destroy it during those periods. And so capital allocation for us is a big one.
* One of the things that I found a bit perplexing this year-- and it makes some sense when you think about what was happening, but central banks just didn't start raising rates yesterday. This has been about a year and a half. And then you come into this year. And the tech shares take off. But then, of course, people got excited about artificial intelligence. As we sort of get deeper into the-- to the AI world, are we overlooking some parts of the market?
* Because right now it's clear, right? NVIDIA makes the chips. They make the GPUs. They were the beneficiary. Are there other beneficiaries going down the road?
* Yeah, it's a really good question. And I think there's some general observations around companies that are going to benefit simply from reducing costs in their organization.
* And that's going to be across a whole bunch of different industries. But if you think about companies that are going to be transformed in some ways that folks aren't necessarily paying attention to-- I mean, we've done some work recently on the agriculture sector and AI's application.
* And it's kind of a neat one because you have the world's newest industry, essentially, in artificial intelligence with the potential to revolutionize the world's oldest industry, which is agriculture. And the beautiful thing about AI in agriculture is actually that it has the potential to revolutionize every phase of the production cycle.
* So planting with seeds-- we plant, fertilize seeds, and then harvest them. And with planting, I mean they're putting soils in, sorry, sensors in the soil, which allow them to determine, OK, what's the proper overall moisture level? Where's the best place for crops to be planted in order to optimize scheduling and planting location?
* In terms of fertilization and kind of weed control, there's some really interesting applications of machine learning, which are allowing some of these kind of new technologies to identify specifically weeds through machine learning and apply any sort of weed control just to the weeds so they don't hit the crops. So you get better yields. You get better product for consumers, which is a really good one. So we're curious about this. There's a lot of companies we watch that are selling goods and services into this industry. And we think it's quite an exciting opportunity.
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