Transcript
Welcome to The Download. I'm your host, Dave Richardson, and it is time for the fabulous Sarah Riopelle to join us. Sarah, welcome. You got a big smile on your face. You watched the hockey game last night.
I did watch the hockey game last night. Yay. It was great. Fun to watch.
Now, this is a critical economic and market signal, correct? The Canada win means the Canadian market and Canadian economy are going to race forward and outperform other markets around the world. Again, critical financial data point that we got last night.
Yeah, you heard it here first, that Canada wins the hockey game and then the Canadian market is going to outperform in the next 12 months.
Yeah, it's more likely that we're really just good at hockey, and maybe some of our productivity challenges are tied to the fact that we play a lot of hockey and shovel a lot of snow here. That's what we've been up to for most of the couple of weeks.
Yeah. So hopefully the end is in sight on the snow front, and we can actually get back to actually getting some work done instead of shoveling snow. I missed the snowstorms last week, actually, because I was away last week. So three back-to-back snow storms, and I had my neighbor shoveled all our snow for us.
Well, that's why I want to do these on video because I'm so buff from all of the snow shoveling that I was doing. But the key point here is that the Canadian hockey victory, although tremendously exciting, means nothing from a financial or economic standpoint. But we're going to talk about what does, and positioning portfolios, because that's what you do. You're in charge of the portfolio solutions at RBC Global Asset Management. You do a fantastic job with that. Different kinds of portfolios at different risk levels, diversified all around the world. Let's look at where we are right now, because we've got stock markets are around all-time highs, pretty much everywhere, particular strength in certain in areas the US. Europe's been relatively strong early this year, but there's different risks out there. Of course, we've got a new administration in the US. We've got some new administrations all over the place, lots of elections last year. Some changes coming here in Ontario, where we are today. Some changes coming, likely in Canada, later this year with a federal election whenever that takes place. So you put all of this together, what's our outlook around markets and how has it changed with recent events?
So the stock market is probably the one that most people really have an interest in. I guess bonds are boring, but stocks are interesting. Obviously, there’s lots going on, but there's always lots going on. Every time you and I have this conversation, we're talking about the volatility and the risks and the stuff that's going on. And so this is no different than normal. 2025 began with some meaningful volatility, a variety of risks to the short-term outlook. I think the main one is probably the new President in the United States, so Donald Trump and his goals for his first 100 days in office. We've already seen some announcements from that that are potentially going to impact the economy and markets around the world. Equity markets, especially in the US, have proven to be relatively immune to those headlines so far. So they're currently reflecting a lot of good news, such as sound economic backdrop, robust earnings outlook and the possibility of additional rate cuts coming from the Fed. And we, however, believe that elevated valuations and heightened investor optimism are probably going to pose some vulnerability to equity markets if they get any kind of negative news from here. We saw that a little bit in early February. We had a couple of news. We had some news around tariffs. We had some news around AI and DeepSeek out of China, and that caused some volatility in equity markets. We have this term that we sometimes use in markets, called «priced to perfection». What I mean by that is that everything has to go right to maintain the current levels and valuation levels in the US stock market in particular. So any negative news that does come along, the market is particularly vulnerable to it, and it could react quite strongly. I mentioned DeepSeek. In the US, those mega cap technology stocks had a pretty tough period of performance for a few days as they digested that news that DeepSeek could have developed some technology that would disrupt the big US players. And that's those Magnificent Seven stocks we've talked about so much in the past. Trump's tariffs also pose another risk that could have significant negative consequences, effectively trumping the positive momentum that we've seen in equity markets. Yes, pun intended there. But the impact on tariffs is ultimately going to depend on the scope of what's implemented and how long they actually remain in place. So there's a lot of unknowns around what could actually happen there. We do remain concerned about high valuations in equity markets, mostly in the US large cap space, because we actually see some fairly reasonable opportunities in other areas of the market. Outside of the Mag7, the rest of the S&P 500 in the US market doesn't look too bad from a valuation perspective. Mid- and small-caps companies look good, as well as Europe, which you mentioned earlier, is looking fairly good, showing some fairly good returns over the last couple of weeks, as are emerging markets in Asian equities. So there are some pockets of the market that do show better return potential here.
And getting back to that «priced to perfection» and how to think about that in another setting, I always use the example of my kids at school—or maybe your kids or your grandchildren, or even you going to school, whoever is listening. My daughter goes and gets 100% on a test, and then she gets 100% again, and then she gets 100% again. It keeps doing that for a little while. And then all of a sudden, she brings home a 99%. And you go, okay, well, 99 is fantastic. That's a phenomenal mark. Most of us through school would have loved to have gotten 99 on a test. But 99 is not 100. So you've fallen in below expectations. And this is where you get market valuations, to that point where the expectations are so high, you almost can't meet them anymore. And that's when you're priced to perfection, even that 99 is not good enough. And if you get some actual bad news, that can really affect markets at that point. And that's why valuations are always a concern. And we come into a year with a little bit more uncertainty for many reasons that Sarah has just articulated, and you've got high valuations, well, that can lead to additional volatility. And beyond anything that we've been talking about with Stu Kedwell and others who are guests on the podcast. One of the things to think about—and this is what I've been stressing in a lot of the investor presentations I've been doing lately—is when you get that uncertainty, with high valuations, you're going to get a little bit more volatility. That doesn't necessarily mean it's bad, but more volatility is something you need to manage as an investor or a professional investor like Sarah who needs to take into account as she's building portfolios to meet a certain level of risk for the investors who are investing in her mutual funds.
Yeah. We've always talked about this. It's about seeking out return but also managing the risk. So it's a balancing act between return seeking and risk management. You have to give something up to get something else. So if you want to get better returns, you have to take on more risk. But if you want to manage risk, you have to accept a little bit lower return. So it's about finding the right balance between those two elements.
I've talked about this with some of the other guests, when I'm out talking to investors and to advisors, they ask: why don't I just pile all my money into the US? That seems to have been the place to be for the last 14 years. The US market, and particularly US technology, has been phenomenal in terms of relative performance. Hey, I should just pile everything in there. What's the argument against that?
It's all about diversification. You want to diversify where you are taking risks. I absolutely agree that you should have some investment in the US stock market and US technology stocks, but it should not be your entire investment because of this volatility and this priced-to-perfection concept that we just talked about. You want to make sure that those stocks will correct at some time in the future. I'm not going to say now, I'm not going to say next week, but at some time in the future, they are going to have to meet the high expectations. So either the valuations are going to come down or they're going to have to pause for a while the earnings catch up, while the rest of the market pushes ahead. And so there's going to come a period of time where that is not going to be the best place to be in the market, and you're going to want to have other investments in other area of the market. It's cheesy to say this, but it's a don't-put-all-your-eggs-in-one-basket thing. Like I said, I totally agree with you. You should be invested in the US stock market, but it should be a component of an overall well-thought-out diversified investment plan, not the only thing that you own.
Yeah. And then you want to own some, take Canada for an example, where valuations are less expensive. And just when markets are less expensive, typically your expected returns are higher, and your volatility is lower. Now, the big thing is we don't know when those relative valuations may change or start to come closer together. We just can figure out through a number of different metrics when something is relatively inexpensive versus expensive. That's what I always tell, as I've been telling, is particularly in all this snow, my grandmother telling my mom to go out and buy the winter jackets for the next year when we were kids and still growing. You buy it in May because it's 70% off. Don't buy it in February when the snow is falling a foot at a time, when it's at full price. And again, I'd be standing in May with my new winter jacket on in 30-degree weather, wishing I had a new baseball mitt instead. But sure enough, snow comes in Canada, cold comes in November, December, January, and then you're really happy that you got a nice new coat that fits, and then you recognize the value. So at some point, you get that value back, but it takes a little bit of patience. And one of the way you make sure that you're taking advantage of that is through diversification. You're going to have some of the stuff that's running really well right now, you're going to have some stuff that's a little less expensive. And then as the relative values move around, that gives you, hopefully, above-average rate of return and a little bit less volatility in your portfolio.
Yeah, I was going to say it's the smooth, consistent return stream that you're trying to deliver to clients. You want to keep them happy and comfortable. To do that, you want to deliver smooth and consistent returns because a very volatile return series is going to give them anxiety and have them calling their advisor asking what's going on. So we're willing to, as I said, give up a little bit of return in order to manage the risks to deliver that more smooth and consistent return experience for clients.
Yeah. And then the returns take care of themselves over time relative to risk. And then again, we've talked about this a lot over the years on this podcast, but particularly right now with all of the noise coming out of the US, it's a distinct environment when you have President Trump in power. This is what we learned between 2017 and 2021, that a lot of stuff comes at you every day. And what you want to be is positioned for all of that emotional up and down or even market up and down that's created by that. And part of that is being in a portfolio that you can handle, sticking with over the long term, because all of this is short-term noise against a backdrop of long-term consistency in market performance and growth, which is really what you want to capture as an investor, not a saver or a gambler.
Yeah. And what's really important is we're going to see a lot of headlines coming out over the next 6 to 12 months, let's say, probably the entire presidency. But in his first 100 days, he's got a lot of stuff that he's going to try and get done. You're going to see a lot of headlines. You're going to see him say things and then backtrack on things. Anyway, it's going to cause a lot of uncertainty, and people should not be reacting to that. We should not be reacting to headlines. We should not be focused on short-term events in markets because the majority of us are invested for the long term. And so what somebody says today or tomorrow or says is going to happen next week, it should really not cause you to abandon or stray away from those investment plans that are very focused on long-term results.
Yeah. And what I've been making it akin to here is, what you need to do to get away from the emotion, is the same thing that I go through when I fly. I'm on 100 flights a year. I fly a lot. I've been doing that for 25 years. So I've been on, let me do the math, 2,500 plus flights over that period, and I am deathly afraid of flying. So over time, I've had to try and get to a point where I can manage that fear. And part of that is going and talking to people who understand why the physics, the science behind how that big, giant plane, gets up in the air and stays up. So there's that logical, scientific, objective explanation of why it happens. And then—because I'm more of an investment person and we deal with a lot of numbers and statistics and probabilities—the idea that, hey, just looking at the numbers. So I know this, so it's firm in my mind, I know that flying is the safest way to travel. It's much safer than when I get in the car and drive every day. So I have that in my mind. That's the logical part of my mind. So that helps me overcome the emotion of my fear of flying, because my fear of flying is somewhat irrational. And I want to get back to the concrete, what I should know. Same thing with investments. We know there's going to be volatility in the short term. We know there's going to be uncertainty. People listening to this podcast who aren't in this business every single day like we are, where we understand it deeply, they're maybe still learning about it, but when you dig into it and you learn the probabilities, the numbers—why stocks go up over time, why bonds perform the way they do—then you have that logical backdrop, along with a good financial plan to stick with it, even though there's fear and emotion at different things that happen. As I've been updating investors in my speeches, the clock actually for this now is four years minus four weeks and four days, as we're taping this on a Friday, that we'll have the current president. And whether you like him or not, there is a style. There is an approach to governing that will likely continue through that period. And that's something we need to be able to get our arms and heads wrapped around as investors so that we're making those good logical decisions, not emotional decisions. And again—that's what I would highlight, and we highlighted this with all of our guests—that's the difference between an investor like me, who, although I'm in the business, I don't manage billions of dollars for people like you, which is why when I'm on the plane and I get nervous with some turbulence, who do I look at? Well, I look at the flight attendants. Now, they're not flying, but they're professionals. They've been around a long time. So I look at them. Turbulence? They’re sitting laughing and chuckling about an email that they've just gotten. Then I hear the pilot come on. Ladies and gentlemen, please be seated. Have your seatbelts on. We're going through an area of turbulence. It's a very calm voice. And you're the professional, so you're not reacting to this. Now, you're taking in the information and crunching the numbers to see whether you need to do something in the portfolio. But when you do it, it is purely objective. It's the math, it's the science of portfolio management that you're implementing, not your emotion. Like, I really hate what he said today: I'm selling all my US stocks.
Yeah. If I just take that one step further, I would say, we look at volatility as an opportunity. We look at it as a way to adjust the portfolios, buy stuff on sale, so to speak, and to position us well for the future. We never panic and sell stuff. We've been doing this for a long time. There's been very few scenarios that I would say that I could look back and say, oh, we invested emotionally. We panicked in the face of volatility and sold stuff. Even during the pandemic, when we had that one-month period where everything was closing and selling off, we were in there buying stocks as stocks were selling off because we saw it as an opportunity to buy things cheaper, buy things on sale, as opposed to, oh, my goodness, the whole economy is shutting down and we better get off our equity positions.
Yeah, exactly. And then if we take this discussion of diversification, the next step, which is then we talk about fixed income and how fixed income operates to offset your volatility in stocks. So what are you seeing in fixed income markets? And again, with all of the risks that we've been talking about, what are you seeing there and how are you positioned in fixed income?
Yeah, we've actually had a pretty big move in the fixed-income market over the last several months. So we've had better economic data. The recent inflation print in the US came in a little bit harder than people expected, and that's caused investors to scale back their expectations for rate cuts. And so that's actually really had the US bond market in particular moving quite a bit. So we've actually climbed over about 100 basis points since mid-September. So we've moved the US 10-year bond from about 3.6% to about 4.8% as the high last month. Right now, the US 10-year yield is around 4.5%. We think that government bonds actually offer a fairly appealing return potential from here with modest valuation risk. Our 10-month forward forecast is 4%. So we actually do see some room for yields to come down. Yields come down, prices go up from here. I think the most important thing is that bonds offer a safe haven asset. It's a ballast in a multi-asset portfolio and offers an offset for equity market volatility. So you definitely want to have some bonds in an overall investment strategy to help give you that diversification that we've been talking about so far. We normally focus on the US 10-year bond yield when we're having these conversations, but it's important that I want to highlight right now is the divergence that we're seeing between the US 10-year bonds and bonds in some other regions, Canada in particular. So while the US 10-year bond sold off since September, it's recovered only a small portion of that loss. The Canadian 10-year bond, by contrast, has actually done quite a bit better. The spread between US and Canadian 10-year bonds is actually the largest it's been in over a decade. And so while good returns from Canadian bonds are certainly welcome, we do need to recognize that the relative outperformance is actually being driven by a weaker economic outlook in Canada. We have higher household debt. We've got uncertainty around tariffs. We've got the likelihood that the Bank of Canada is going to need to deliver more easing than the Fed does over the next few months. And so that's actually led to stronger performance and more divergence between the regions. And so it's not an all-good news story because bonds are doing great because the economy is not doing as well. But that being said, the Canadian bond market is delivering pretty solid returns for investors who hold them in a multi-asset portfolio like we do.
Yeah. And when we get into a rate loosening cycle, when interest rates are coming down as set by central banks, and we've had longer term rates coming down for longer, typically that drives pretty decent returns in bonds with a fairly narrow range of returns. You get okay returns, but not a wide range. Whereas in a similar situation, when you're dealing with stocks, typically it's not a bad, it's a good environment for stocks. But if those rates are falling because the economy is weakening and maybe weakening to the point where it's in a recession, then you can get very bad results in the stock market. So your range of returns is exceedingly wide. And that's where bonds give you that nice balance in between to take away from the potential for particularly weak returns in the stock market. Again, it's that insurance policy, which you always talk about.
Yeah, that's a good way to talk about it.
So given all of that, how are you positioned right now, Sarah?
So we have a slight tilt towards bonds in the asset mix. A few weeks ago, we added about half a percent to the fixed income weight when yields got up to about 4.6% or so in the US. And again, that's because we view bonds as having appealing return potential from here. And as I said earlier, the safe haven aspect of bonds is really important, given the amount of volatility and the amount of uncertainty that we've actually been seeing over the last couple of weeks, and we think we'll probably continue to see over the next few weeks as a lot of this discussion around tariffs and various Trump policies continues. So when we added to our bond weight, though, we purposely added to government bonds, specifically, because we're trying to avoid corporate and high yield bonds, given that credit spreads are historically tight. And what that means is that investment grade and high yield bonds are not offering very much in the way of compensation for taking on the additional risk over government bonds. And so when we did put that bond weight to work, we actually focused it on government bonds, specifically, avoiding those allocations to corporate credit. We're still neutral equities in the asset mix. We do continue to believe that stocks can outperform bonds over the long term, but the near-term view is a little bit more murky, given all the stuff that we've talked about so far. And we're cautious, given the risk that something negative could upset stocks and ding the currently elevated optimism that's really embedded into equity market valuations. I think it's important to point out, though, that neutral means that we are still fully participating in the equity bull market. We have 60% equities in our balanced portfolio. And then the other thing you have to remember is that, to change the asset mix, you have to sell something to buy something. It's not just we like stocks, let's buy some stocks. If we want to buy some stocks, we have to sell some bonds. And so given our view on the bond market, the historically low risk premium—that's the amount that equity investors get paid above bonds to take on the additional risk of owning equities—so the equity risk premium is very low right now, historically low relative to history. So we just don't think it makes sense to sell bonds to buy stocks right now. And so there's a variety of reasons that can explain why we're sitting on a neutral position on the equity weight and with a little bit of a bias towards bonds, given where yields have moved the last several months.
Yeah, and now is an important time for me to jump in and say, have you subscribed to the Download, which we'd love you to do wherever you get your podcast or on YouTube now, where we're showing these fantastic videos. Sarah always likes to be on video. You can subscribe there as well. Leave us a review. We'd love a five-star review. Give us your comments and feedback. But again, we’d love you to subscribe where you can. And if you had subscribed, you would have heard Dagmara Fijalkowski go into a detailed explanation in the bond market of why she was going to focus the bond portfolios on government bonds instead of corporate or higher risk high yield bonds and to try and take risk out of the fixed income portfolio because the reason you take on risk is to get paid for it. And if you're not getting paid for it, well, then I'm not doing it. I'm not going to take on that risk. I'm just comfortable sitting in the lower risk position. And then that's another, as Sarah has just articulated, that's why, oh, why aren't you just all in stocks? Well, not getting paid enough to be all in stocks. So we're going to be more balanced in our positioning. And it's that kind of insights that you will get if you regularly subscribe and listen to the podcast, along with information about hockey and snow shoveling and buying winter coats and all those other things that we like to add, fear of flying, getting over that, etc. So Sarah, any final thoughts for Canadian investors?
Yeah. One last thing I want to mention is that we talked about the asset mix through the last couple of minutes. And it's not the only way that you can manage portfolios. There's a lot of active management within the portfolios. We might be neutral on the equity weight, but the weights are drifting around as the markets push them around. So our current position in the balanced portfolio is actually closer to 61% in equities. And so some people are like, well, why are you just neutral equities? Why aren’t you taking advantage of the strength in equity markets? Well, there's a lot going on inside those portfolios. We're letting our winners run. We're constantly monitoring those positions. We're balancing, again, between the return and the risk. So we do want to let the winners run, but only to a point where we are not introducing too much risk into the portfolios. And so it's a balancing act between letting the drift run and managing the risks in the portfolio. It is probably more art than science, but it is a skill set that we've perfected over many years and just another way that we add value when managing the portfolios.
But art, again, out of a lot of experience and a lot of technical training. When you say art, this isn't just stick your thumb up in the air to see which way the wind's blowing. This is done objectively without emotion. It's a very clinical process, that art?
I would describe it as a data-driven process. Ultimately, a person makes the decision, which is me, on what we're going to do. But I am backed up by an enormous amount of resources in terms of experts in asset classes and the economy and markets and an enormous amount of data and information that's at my fingertips to be able to make informed decisions.
That's why she gets paid the big bucks, because I was looking for «data-driven», but it just wasn't coming into my simple mind, and she got it right away. Data-driven, all of that art. Sarah, hey, thanks for joining us again. I really like this one because it really highlights so much of what you need to think about right now when you're managing your overall portfolio. If you want to manage like a professional, you've got to strip that emotion out and be data-driven in the way you're managing, make those good rational decisions. The best way to do that is to get a good financial plan and to stick to that and make sure that you're in the right portfolio. And then you can always get someone like a Sarah Riopelle to manage your money, which may be the best thing. As active as I might be—or you might be—in terms of managing a portfolio, Sarah and her team around the world are doing something virtually every second of every day, 24/7, 365, just constant. It's unbelievable what a professional can do. Sarah, thanks. Hopefully, we'll catch up with you over the next month or so.
Great. Thanks so much.