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Following some volatility towards the end of November, the rebound in global markets is being led by a broad range of stocks and sectors. With bank stocks rallying, Stu Kedwell, Co-Head, North American Equities, shares how Canadian banks are looking beyond the pandemic – and why investors may want to follow suit. [7 minutes, 56 seconds] (Recorded December 1, 2020)


Hello and welcome to the Download. I'm your host, Dave Richardson, and I am joined once again this week by Stu Kedwell, co-head of North American Equities at RBC Global Asset Management. Stu, great to have you back.

Great to be here, Dave. Thanks for having me, as always.

‘Been shoveling snow this morning?

That’s right.

Well, just a little bit of snow here in Toronto today but markets continue to be pretty good. We had a little bit of a pullback yesterday, but things are rallying again this morning. And, Stu, what we wanted to talk about today was this rally overall that we've had since the market pullback as a result of the lockdown back in February and March and this recovery phase, and we're starting to see some signs of a broadening out of the market. It was led by some names early on that were associated with the work from home or online shopping, those types of things, technology, etc. And now we're starting to see some broadening within the market.

Yes, hundred percent, and it's not just within U.S. and Canadian markets, we're seeing a broadening of global markets. In Europe and on emerging markets, there's been a lot more participation in the last couple of months relative to what we saw in those first couple of weeks coming out of March and April after the central banks unleashed a torrent of liquidity. And what it really highlights is that economies are starting to do better. The prospects of a vaccine allowed investors to really broaden the things they would think about in terms of getting better into the future. You've heard in the past that we've talked about three buckets of stocks. The ones that are COVID beneficiaries, some of the big tech names, those businesses valuations are at, I would say elevated, but not super-stretched levels. And in a low interest rate environment, those businesses can continue to grow. Then there's the basket of stocks that really need the economy to improve for their business outlook to get better. And that's what the vaccine has done for many of those stocks. Those would be banking companies, consumer discretionary, all sorts of things. And notwithstanding very troubling near-term headlines, the vaccine has allowed people to look beyond some of those troubling headlines. It's a good thing to remind ourselves that the stock market always looks out six to twelve months. The long nose of the market is something that we often keep in mind. So, it's sniffing out what's next. And that's what the market is focused on right now. We did have a sell-off yesterday, but the month had been spectacular. So there would be some rebalancing and what have you going into the month end, which can always cause a little bit of volatility, but the market is still generally focused on when will the vaccine arrive and what will the economy look like afterwards. We did have a couple of banks in Canada report today. And one of the bank executives, because we got talking about loan growth going into next year, actually had the exact same comment that, notwithstanding the near-term headlines being pretty tough to read, a lot of company executives were very much focused on how to position their business for the other side of the vaccine. And for them, that means starting to build inventory, use some working capital, get some production back, think about what will my business look like once we get back to what may not be supernormal right away, but a semblance of normal that can carry on through the back half of 2021 and into early 2022.

Yes, always important for investors to have that longer-term view, and particularly in a situation like now where it's so important to be able to look beyond and see what's on the other side of the pandemic. Now that I think we can be fairly sure that with a vaccine coming on there is an end in sight and you want to have your portfolio positioned for where we're going to be in a post COVID world. You mentioned the banks reporting today and more to follow here in Canada; was there anything that you saw in the results of those first two banks that reported that raise any concerns or highlight perhaps some positives that are in the near distant future for the financial services industry in Canada?

Well, I think first and foremost, something that we've talked about is that the banks are very well capitalized and they have a lot of provisions for credit that they've taken earlier this year. And we would be looking for signs that, in fact, enough provisions had been taken, that there wouldn't be the need to keep filling the cookie jar with provisions so that they could draw them out later in the year. And while the provisions were still elevated relative to history, they were down quite a bit from past quarters. So both banks that reported today, Scotia and Bank of Montreal, reported better than expected earnings, by and large because the provisions for credit were lower than expectations. So that's a very good first sign. Over time, we value a bank on its earnings power in a more normalized environment anyways and what kind of growth that bank can generate over time. But in the period of stress that we've been through, the two things you look for are the capital ratios — and in both cases, the bank's capital ratios were up —, and see if they have enough reserves to get them through this period of perhaps problem loans. And in both cases, the answer to that question appears to be yes. So that's why the market has rallied these stocks this morning. And it allows us to get back to that focus of what will these banks earn in 2022. And I don't know if we really saw anything today that says it's going to be any better or worse, but it certainly gives us some confidence that they're through the worst of what they've seen.

Yeah. And we talk about the banks regularly from a Canadian perspective for a few reasons. One is, those are large institutions. So obviously it reflects what's going on in the broader Canadian economy and somewhat in the U.S. economy because of the ties of Canada and the US. As we talked about on an earlier podcast, dividends and the importance of dividends to not just investors who are living off investment income, but investors who are growing their portfolios towards retirement. And so those are firms that are reflective and tell us a lesson. And Stu, as you say, the long nose of the market! People can't see it because it's a podcast, it's only audio, but you're known for having the longest nose on Bay Street! So if anyone can sniff out what's going on in the banks, it's going to be you. So I always like to check in with you once a quarter on what's going on with banks.

Yeah. One hundred percent.

You sound angry. Your nose looks great. It’s just long.

Well, I'm not Pinocchio.

OK, Stuart, thanks for that. We'll follow up next week on the rest of the banks and start looking forward into what's coming in the next year. But thanks for joining us again today.

Great. Thanks for having me. Dave.


Recorded: December 1, 2020

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