Hello and welcome to The Download. I’m your host, Dave Richardson. A little late this week, my fault, as my fall allergies kicked in yesterday. So I was incapacitated for Stu’s days. But we can go to Swendays or Swednesdays — I guess the allergies are affecting my ability to speak. And bring on Stu Kedwell, RBC Global Asset Management’s Co-Head of North American Equities. Stu, welcome and sorry about yesterday.
No problem at all Dave. We’ve done my middle name, Thurston, and so I need a nickname for Wednesdays.
There you go. I can tell you what my nickname is: Puffy Eyes. It’s a good thing this is a podcast because my eyes are swollen up so much, they’re pretty much slam shut. So I’ll leave people with that visual, but we’ll get on to the more important stuff. And as I say, we’ve moved into the unofficial end of summer, which was Labour Day, and into the fall. September and October historically have been periods with lots of volatility. Roll in a global pandemic and a potential second wave. And of course, I think there’s an election coming up in the US. There may be? I watch the news, they don’t talk about it a whole lot. So you’re managing billions of dollars in Canada and the U.S., and looking at the global economy. What are you paying close attention to right now? And what do you think is the most relevant thing for investors to think about?
Yes, well, it’s a great question and there’s definitely lots to pay attention to. Thanks for having me, regardless of the day of the week, as always. When you’re thinking about this environment, the first thing is: you’re mentally preparing yourself for a very wide range of outcomes. For us equity investors, what that means is we’re always thinking longer term. We’re trying not to be shaken by what will undoubtedly be a very fascinating two or three months on multiple fronts. So very important to think about a broad range of outcomes in advance. In advance — that’s one of the key things here. As you mentioned, we have a high degree of economic uncertainty. We have deferral programs starting to end on the loan front. We have an economy that has done, I would say, better than people expected. But the heavier lifting might be a little bit tougher from here. We have a high degree of political uncertainty on both fronts — more so in the United States, but nevertheless, a minority government in Canada. And we have health uncertainty, which could be a positive in some respects. As we think about vaccines, and potential treatments and things like this. While people are worried about a second wave, the evidence seems to go so far that when we get a bit of a second wave, we’re not having the same type of mortality that we’ve had in the past. Which is a big difference. So we know there are three sources of uncertainty and we’re prepared for it in advance. You mentioned your puffy eyes. You’re looking at the stock market and saying, “How can I believe that the stock market is at very high levels with all these sources of uncertainty?” What does that mean? The way we’re thinking about that is: valuations for many businesses are at levels that would be hard to maintain in perpetuity in normal circumstances. But circumstances aren’t really normal, because interest rates are so low. The purchasing power of your money has to be taken into consideration. When we look at the equity risk premium in the stock market, what that does is it tries to break the multiple of the market down into interest rates and the extra risk premium you get for buying equities. The risk premium is not as far off average as the outright valuation would suggest, which means that a lot of this has been driven by the low interest rate environment. And real interest rates are negative. We’ve talked about that on past calls. And central banks are very focused on having elevated asset pricing because it provides real assistance to the economy. They don’t want to deal with slow growth and poor asset pricing. So, our working assumptions are that real growth will be slow. There will be some bumps in the road. We know that when central banks are this accommodative, it leads to some behaviour. In the short term, people take on some more risk than they might want to. Some of you have heard about this very large option buyer that came from SoftBank that has created all sorts of volatility in the market. So, again, going back to those, we know there’s uncertainty. We know that people are doing things in the stock market that might create volatility. But when we weigh that all together, we think that interest rates are likely to remain low, and valuations are likely to remain at higher levels. People ask us a lot about government deficits and what will happen to taxes in the future. I think governments will be slow to react on the tax front. And an important thing to remember is that, with interest rates being so low, this extra debt is not costing as much money as it might have in the past. We sat down with another bank’s economist last week and in some respects, the Canadian federal government’s interest bill might actually be lower even with all this. So that’s an important offset. I think that the things we keep in the back of our mind are that central banks are very focused on keeping asset prices at reasonable levels because of what it does to the economy. Governments and everyone want to see less COVID, and a successful reopening. People’s heads are in the right spot. And that’s what we’re focused on here. But it’s our environment. We’ve also talked in the past about when volatility is on the horizon, the number one tool is dollar-cost averaging.
Yes. And Stu, as always, you’re so good at articulating very clearly what you see is going on in the markets. You focus a lot of comments on the interest rate policy and the impact it has on valuations and other things. But the one thing I hope investors who listen to this podcast took away from your comments was where you started. That is: you’ve mapped out various possible outcomes. Which suggests to me — and I know you always have — a plan on how to deal with something. You’re thinking and planning about it in advance of when it happens. You’ve laid out the scenarios, so you’re prepared for different things that can happen. And that’s so important for investors to do themselves. That’s not just their investment plan, but a financial plan to sit down and think about what are the possibilities? With a professional — if that’s what you need, because I think that’s always a good piece of support — but that plan and that preparation for possible outcomes when you’re facing volatility. And then dollar-cost averaging is just so important for investors.
A hundred percent.
Stu thanks again and we’ll talk to you soon.
Great. Thanks, Dave.