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This episode, Stu Kedwell, Co-Head, North American Equities, explains how broad macroeconomic conditions and market trends factor into the individual investment decisions he makes. Stu shares some important considerations portfolio managers think through when choosing which companies to invest in for long-term success. [9 minutes, 38 seconds] (Recorded May 5, 2021)


Hello and welcome to The Download. I'm your host, Dave Richardson. Even though it's Wednesday, it's (S)Tuesdays! Stu Kedwell, Co-Head of North American Equities at RBC Global Asset Management, is with us today. Stu, how is it going?

Great. How are you doing, Dave? Thanks for having me.

I'm very good. Now, you just came out of a couple of days of grinding, long, tedious meetings with all of the other investment managers at RBC Global Asset Management. Stu won't admit it because he's too modest, but he's still the smartest guy in the room, when you get him into that setting. You come out with a view of markets and the global economy. Stu, what did you take out of the last two grinding days of meetings?

A very interesting couple of days for sure. This is the day when we go around the world and people from all our different offices are presenting on fixed income and equity, having a discussion around what the conditions look like for the companies that we own, what the backdrop is the macro economy, and then trying to marry that with valuation. I would say, without fail, when you look around the world, the economic conditions are improving, and in some cases quite rapidly. Basically, every indicator from an economic standpoint is quite supportive to earnings getting even better as we go forward. There was a really noted strategist last week who suggested that the S&P 500, based on the current pace of earnings growth, could exit 2022— so annualizing—, 250$ of earnings by the fourth quarter of 2022, which would be substantially higher than where estimates are right now. And one of the big discussion points we had is, when you start to pour extra revenue on these cost structures, on the one hand you could have a very substantial margin improvement, but on the other hand, we're also seeing pressures, whether or not it's transportation costs, input costs, copper, grains, lumber, so there could be a little bit of governor on some of those margins or the profits could show up in different companies than they might have otherwise been expected to. But this is a very good backdrop for the corporate earnings pool, generally speaking. The only real fly in the ointment is that sentiment is elevated. It feels pretty good. But bull markets don't die of old age, they die when the Fed starts to tighten liquidity. The second thing is valuation, which is also a little bit more of art and science. It's just a continuation of that discussion which we've had, which is: in absolute terms, it is elevated; relative to fixed income and real interest rates and maintaining the purchasing power of your money, it's certainly more reasonable. So that was the discussion point today. It's always a great discussion for sure.

And all joking aside, a great thing about the podcast for all the listeners is that they don't have to spend two full days in a WebEx or Zoom meeting. They can get a three-minute synopsis from you just listening to the podcast and walk away with everything they need to make investment decisions. And we're going to have Eric Lascelles on later this week to talk about that macroeconomic picture, which, as you say, continues to look good notwithstanding. We've got some outbreaks of the virus in different parts of the world, and we still have to work through some of that, but it's a good-looking economic story. And ultimately, with all the vaccines and everything, a good-looking health story, which is even more important than the money, I would say. But nevertheless, we're talking about investments here. So, sentiment and valuation are the only concern. You take all of this big picture that you get out of a meeting like this Stu, but then you're still making decisions around an individual portfolio. Investors are making decisions around their portfolio. How do you translate all of that big picture discussion and that big picture view down to individual decisions within the portfolio?

Well, it's a great point. Last week we talked a little bit about a stock market versus a market of stocks. When valuation is lower or reasonable in absolute terms and you want to own good companies because those good companies are just firing on all cylinders and they get the job done. But when you get to certain stages in the economy or in the stock market's evolution, not all good companies necessarily will be good stocks. The reason for that is because the expectations can be very high and you need to understand, are we going to live up to those heightened expectations? Even last week, we saw some very strong reports from the likes of Apple and Microsoft, but they weren't quite strong enough to drive the shares to new highs. Any investment process involves a handful of buckets. The first bucket is you identifying, is it a company that we would want to own over a long period of time? That's a very important process. Is it a good management, good business, et cetera? The reason that you want to air on that side is because time will take care of lots of things for you, if you get that part of the decision right. The second thing though is, you want to ask yourself, is it a good setup? Is it a good stock? My partner, Doug Raymond often says there's lots of horses in the barn. Sometimes they're on the track and sometimes they're in the barn. So, we need to have good companies, they're the ones that are in the stables. But there are times when you bring them in and out of the track. What we look for there is business improving. Are the scenarios attractive where we can say this stock could be worth this in a year or two years’ time so we can dial down some of the noise related? Or are the expectations too high? Are there catalysts? This is where you really are trying to determine what makes a good company a good stock? The message from the risk meeting is, if I'm betting on valuation improving or accelerating even further that would not be key to an investment thesis right now. What we really want to understand is if the valuation holds, how do the earnings get better so that we can have a higher share price twelve or eighteen months from now, because the business has compounded on our behalf, even if the valuation is the same or in some cases might even contract a little bit. So that's something that's really important. I think that's really the message of the risk meeting. We've started to talk about it a little bit more where we want investment cases based on the business improving and the valuation staying in the same neighborhood. If we do get further valuation, all the better, but we don't want to bank on that from these levels. We want the business to be improving.

Yes, and as you say, if you're making those right selections, that economic background, that's the positive view of the markets, sets a beautiful environment for you. Then you've just got to make the right picks along the way. The other thing I want to point out for investors who are listening to the podcast and listen to it on a regular basis, particularly Stu’s Days, one of the things you can't see, because it's not a visual medium, is that Stu is not reading this off notes. If you think about it from an investment perspective, what differentiates professional investors from an average investor is their ability to very clearly and succinctly articulate the strategy, articulate the approach, define the disciplined way that they go about managing a portfolio. If you go back and you listen to each of the podcasts we've done with Stu, every time I throw him a question, he has a very clearly defined approach that he and his team are using to make investment selections. Regardless of what direction I come at him from with a particular question, he's able to narrow down exactly the process that he follows. That's one of the keys to being consistent as an investor, being able to articulate that. Now, maybe you as an individual investor aren’t going to have years and years of that background and be able to articulate an encyclopedia of an approach to managing money, but having a clear idea of what you're trying to do as an investor, having that plan is so critically important. So, Stu, always interesting to hear what you have to say around the markets and how you translate big picture ideas into small picture results. Those are still big picture because you manage a lot of money, but macro to micro, I guess, is what I'm trying to say.

You've got it a hundred percent. Well, thanks very much for having me, Dave.

Excellent. Thanks Stu and thanks everyone for listening.


Recorded: May 5, 2021

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