Transcript
Hello and welcome to a special edition of The Download. I'm Dave Richardson, and I'm here with Stu Kedwell. It is Thursdays. And if you're wondering, this is the first time you've ever seen us side by side. A lot of people thought that we never talk. We're actually one floor away from each other in Toronto. We very rarely see each other there. So we came to London, England, to actually be able to connect. This is the second of two special editions that we're doing with the announcements from US President Donald Trump of tariffs applied to 180 different countries. If you want to hear more of a focus on the economic impact or what Eric Lascelles, our chief economist, was thinking about the announcement yesterday, please go and listen to the other special edition. In fact, subscribe, and you'll automatically have that podcast dropped whenever we do a special edition. But Eric was talking a lot about the idea that with all of this around the tariffs, since Trump's election, through the campaign where he talked about tariffs, that nothing has been a given, nothing has been overly predictable. And once again, this was a bit of a curveball, but you could actually go back and look at countries and their specific trading relationship with the US and you could almost have calculated where this tariff was going to come in. Of course, this is the initial announcement. Like a lot of the announcements around tariffs, this may not be the end of it. In fact, it may be the big bazooka. This might be the first announcement, and then we move back from there. We're going to touch on that, I think, Stu. But one of the biggest surprises was the extent to which Mexico and our beloved Canada were left to the side, and Eric goes on a few of the reasons for that. So I encourage you to listen to that. But let's talk to Stu because Stu is the co-head of global equities at RBC Global Asset Management. And we always like to get Stu's perspective from what he's doing as an investment manager in portfolios, or how these announcements impact the decision making, and the scenario analysis that he does as a portfolio manager, and what you as an investor, either investing through someone like Stu or trying to invest on yourself, how you digest this information and react to it. So, Stu, what are your thoughts on the announcement yesterday?
Yeah. Thanks, Dave. It was different than people thought it was going to be. We were listening to the press conference last night, and it was definitely a unique press conference. The way that some of the tariffs were calculated was a little bit of a surprise in some of the countries that it has ended up hitting, and particularly, some of the impact on some US consumer stocks that import from a variety of areas. I think the second thing is the level of exemption. There's some question mark around that. So already, depending on how you interpret it, maybe a third of US imports might be exempt from some of the tariffs. Will that list change going forward? So to your point around, is this the opening salvo? It's hard to think that it gets magnitudes from here. So this is some beginning of a negotiation. The second thing is, we like to get in a couple of things. All the discussion we've had around tariffs has strengthened the US dollar, and today it's weak. That is a big change, and I think there's fundamental value and there's capital flow in the near term. And with the US market weakness today and the US dollar weakness for a non-US holder of equities, the decline is magnified. And that can contribute to deleveraging and all sorts of things. So watching the currency react. The second was looking at the 10-year bond. Given that this is likely a negative for the economy, the 10-year yield is down, so bonds have rallied, but maybe not as much as you would have thought otherwise. Those two things before the market opens, you've taken note of. And then what you're trying to do when the market opens is you know areas of the market that are a bit more economically sensitive are going to get hit a little bit harder because the market is trying to handicap the possibility of a slowdown in earnings. So you're just watchful for that. Many people like to look at the first half hour of trade and see, do we make a new low after the first half hour? These are just in the day type things. The second thing is that some areas of the market that are viewed as defensive, they start the day up. And I think inside of a portfolio, just buying a defensive stock, which is already at an elevated valuation because of a slowdown, that's not something that we often do. And then, to your point, Canada has fared better amongst domestic-oriented names. So some of the domestic banks are better than US banks and things like this. When you get into scenarios, it's not a new analysis, it's just a refreshing. So the first thing that happened is a meeting at eight o'clock this morning on the team and running through every sector and what could be the possible implications of this and what scenarios we need to go refresh and be aware of. And then you're trying to find stocks that are getting close to that more bearish case. We're finding stocks that are getting there. The market as a whole is a little bit more challenging because while estimates are coming down, they're quite sensitive to the actual growth of the economy. And with some of this tariff activity, it does lead to the possibility of lower economic growth. So you have to resize some of the broader market-type assumptions. But all that said, when you get weakness and it could persist, we had discussed last time that the quality of the rally wasn't really great. So now we're at new lower levels and trying to turn this volatility into the friend of the longer-term investor is something that very much is still the case for us.
Yeah. A couple of things that we talked about. I was in your office earlier and we looked right away at, did we did go down to another low? Now it's that question of where we put in the next low. I said the bazooka, and we talked about the first salvo, but what you think sometimes doesn't end up coming to pass, but you think you start out very strong. At least that's been the negotiating tactic that he's used on a number of fronts over his many years in public life, that perhaps this is the worst. And we've talked about how sometimes things are really bad, but then when they're really bad, there's only one direction they can go. They could still be bad, but not as bad. And each adjustment might help settle things down. Actually, would you say that we have more certainty in the market after these announcements because it helps us understand some of the thinking around the tariffs, or are we still out in the woods to a large extent?
Well, there's more certainty because he's detailed the mechanism, which was a little bit different than what people thought. But then the other side to it is the uncertainty around the estimates of the significance you could drive a truck through. Some economists are saying, when you look at the impact, and then you have about a third in pharmaceuticals, perhaps semiconductors, other goods that are going to receive an exemption, that the impact might be around 13% or something like this. A lot of people have been in the 10 to 15% neighborhood. Without exemptions, you'd be closer to 18%. Some people have estimates even higher. It's a bit of a moving target. Your question around the negotiation is, will the exemption list expand? It's something that we need to pay careful attention to. And in the area that we're most focused on there are many of the US consumer companies that are importing products largely from Asia. And will some of those get exempted? Because those share prices have borne the brunt today. So we'll have to pay careful attention to that. You're getting commodity weakness around potentially a lower global growth. Commodity weakness is a bit more of a straightforward playbook because you can resize the new level of growth and you can say, well, this is the commodity price it will endure in that environment, and we can go look at the stocks on that basis. I think the other thing, too, is many of the commodity businesses have much better balance sheets than they may have had in similar type cycles. So that's definitely a positive as well. But I would go back to when you see a movement in the currency market like we've seen, I think that is the signal of uncertainty in this instant. If we had it all buttoned down, I'm not sure the currency markets would have necessarily swung in quite the same manner. So it's going to be a very active environment for analysis in the coming days and weeks.
And because of that uncertainty, do you take any action today? Or as you said, you've seen a lot of action in markets where it's almost a move to a very defensive type of stock. But you've seen the valuation on those defensive types of stocks shift up, so they're just not as attractive, maybe even completely unattractive. So that's not a place you want to go to hide at this point. But is there anywhere you're looking around and finding opportunities, or is this a day where you just want to sit back and analyze what's going on and maybe look at something later?
I think the two or three things you're always thinking through in the portfolio, just as an equity portfolio, we do have some cash, so putting that cash to work. Then the second is we have many of these defensive names. Is the spread and valuation between the defensive name and something that might be a little bit more cyclical too wide? So we do have a time horizon. Should we act on that? And then within sector, you often look at two defensive stocks or two more cyclical stocks that are reacting differently today than you might have thought, and maybe there's opportunity there. Those are the three major decisions, the buckets of decisions that you're going through in the portfolio. And then at the asset allocation level, obviously, you're looking at the change in the bond market. So in a day like today, while the equity market is selling off, the bonds are rallying. So do we want to do some rebalancing on that front? And that's more of an asset allocation decision that you look at today. I would say in this environment, your thought process is very fluid, and it is usually a period of activity.
So this is a day where you and the team are relatively active, not only from working, analyzing, doing the calculations, crunching the numbers, but actually in market making moves?
Yeah. And I expect that that will likely continue. Going back to the part about the quality of the recent rally, I think volatility is likely to remain a little bit higher, and activity is likely to remain higher as a result. You don't come to work each day saying, I need to change my portfolio, but the puzzle piece has changed, and sometimes it's significant on a day like today. You're likely to make some changes that you think are improving the odds of longer-term success.
Yeah. So a few points come out of that as we sit where we are today. One of the things that was amazing to me. I'm in the business, but I don't often get to walk the trading floor. And I'm not asking the trading floor to look at anything specific that anyone's doing, but I'm looking more for the tone. I'm looking for how are the individual investment managers, what do their emotions look like? And then I think to when I was advising customers many years ago, and I'm still out with customers and advisors from time to time. It was just a very, very calm environment. People are working hard, as you say, because the activity is there, but there's just no emotion in the calculus. It's just a straight, okay, this has happened. This recalibrates. We might need to reposition some things. But it's all about where are the opportunities. And it's not oh, we got to get out of this because it's down 5%. It's more about, okay, is this something we need to continue to hold, or is this going to go down more? If not, we might hold on to it. It might even add to it. It's amazing. This is what I wish most investors could see, just the behavior and the personality, the way investment managers react. And you can see Stu. Look at him. He's not even reacting. I'm trying to draw a reaction out of him from time to time, which I don't often get. But it is amazing. This is the way you guys are wired.
And it's very iterative. And you know that it's going to be iterative. And ultimately, there'll be opportunity that finds its way out of this. There's times where you get focused on trying to capture the last part of a move, and there's times when you have to think about, well, where is the next big move. And so when you make decisions, you have to be honest with yourself. Like, what am I doing? Am I doing one or the other? If I'm doing something more short term, then I have to have a different playbook. But we've seen uncertainty rise. We've seen stock price change. We haven't quite seen a full valuation change relative to the uncertainty rise. But uncertainty rising, valuation improving is something that eventually we want to lean into.
Yeah. And then when you look at the professional investor a little more active. We talked about the idea that there'd be more volatility this year. So there's another example of that playing out, and we've seen that through the first three months plus of this year. We've talked about the portfolio and the importance that bonds could play as a counterbalance or insurance against that equity volatility or downside in equities. And again, that activity level for you with a group of professional investors—and you're moving big portfolios, different stocks, different bond holdings—but for an individual investor at home who's maybe using one of the investment funds that you manage or using a portfolio solution that Sarah Riopelle, who's a guest on the podcast, is managing. For you today, do you think it's the same for an investor saving for retirement 20 years from now?
Yeah, I think it is. The things that we know, long-term earnings growth is not very volatile, but share prices on any given day can be volatile. So we're just in there looking. How do we attach ourselves to even better long-term earnings growth that eventually will find its ways? For businesses, with tariffs, there'll be some restructuring, but management teams have all the same discussions and questions that you're asking, they’re going about their business and they're coming up with new plans. And that is the option that the equity investor gets, particularly in the midst of a concerning period, that business will find new ways to make money, new markets, reorient their business, and what have you.
Yeah. And so, any strategies that you can think of, maybe you've been recommending for a while, and then you can say, I told you so?
Yeah. Obviously, the dollar cost average boy, he can be in Toronto, he can be in London.
That's right. He's quite popular here in London. I saw you in your tights running around the palace this morning.
But I continue to think that's the way to approach this environment, where valuation is improving. You wouldn't say it's like a bargain basement, cheap, where you'd eliminate the dollar cost average plan. When you get into an environment like this, you never know what is the piece of news that changes sentiment in the other direction. And dollar cost averaging just assists with taking that issue off the table.
Yeah. One of the other things that I wanted to highlight. My wife doesn't really understand time zones. When I'm over here, she'll call me at 2:00 in the morning and wake me up. But people who do understand time zone know that if you were at an 08:00 AM meeting this morning, in Toronto time, that was 3:00 in the morning. If you weren't here in London, all your colleagues are here working at 3:00 in the morning, Toronto time, every day, all around the clock. And by the way, you've got colleagues in Asia who were up several hours before that. And so the value, when you have moments like this where you need to be active, you need someone on top of your portfolio, this is the value. And just all the things we talked about, the way the professional investment manager is wired, which we tried to show you through Stu and others over the last several years, the advantage of professional investment management, to me, just always shines through, and it shines through, particularly on a day like this.
I hope so.
Oh, you hope so? You know, one of the other things, if you spend a lot of time with investment managers like me, one of the great privileges I have in my role, the best ones are not only emotion-out and clinical, they're humbled, too, and understand that this is a really hard thing to do. And it's something that you're not always right at. You're certainly not ever perfect. But if you do it the right way, you can really add a lot of value. Anyway, Stu, I know how busy you are today, so thanks for popping down and doing this quick taping.
Great. Thanks, Dave.