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This episode, Scott Lysakowski, Head of Canadian Equities, Phillips, Hager & North Investment Management, provides an update on Canadian markets and outlines possible scenarios that could keep the strong performance going for investors. Scott also looks at what a stronger Canadian dollar means for Canadians investing in the U.S. [9 minutes, 28 seconds] (Recorded May 14, 2021)


Hello and welcome to The Download. I'm your host, Dave Richardson, and I am joined by head of Canadian equities at Phillips, Hager & North Investments, Scott Lysakowski. Scott, welcome back.

Hey Dave, thanks for having me.

You all caffeinated for the podcast this morning?

Pretty good. Looking forward for the second shot. I've had my early morning cup and I'm ready for round two, so that'll be next.

Scott comes to us from Vancouver. So we've got him up extra early this morning. But we're early in this next economic cycle too and we've seen some really nice performance out of the Canadian market. We're coming through earnings season. What are you looking at, Scott? And what are you thinking about when you're putting things all together around Canada specifically?

It's been a busy couple of weeks. Most of the companies in the TSX have reported their quarter. The banks are still to report, they report at the end of this month. But it's been a busy couple of weeks. What we've seen, and this has been echoed in other markets as well, there's a lot of companies that are beating the expectations and the estimates that the analysts have laid out in their earnings reports. I think we've seen over 60% of the Canadian companies that beat analysts’ estimates. A couple of things out from that that we've seen, which is not that surprising. But it's not really that normal from a historical perspective. So, as a result of the earnings beats, the analysts, not surprisingly, have increased their earnings estimates for Q1. Most companies have reported their fourth quarter. And then, of course, the analysts are taking their numbers up for the next quarter, which would be Q1. Those numbers have gone up by roughly 10%. What's really interesting is that the analysts are taking up their entire numbers for this year, for 2021, and those numbers have gone up by about 8.5%, which is sort of the biggest analysts estimate revision in over 20 years. It's very different than the normal pattern that we typically see. The listeners may have seen these charts before, but typically analysts start the year really high with their estimates and then, as the year progresses and reality comes into the fold, those estimates actually are revised lower. The typical seasonal pattern that we see around this time of year in the first quarter is that estimates actually come down on average by about 5%. But this year, we're seeing analysts actually take their numbers up by 8.5%. A pretty wide divergence from what we have typically seen for this time of year on the analysts front.

Yes, and Scott, we were just talking before we started taping, I guess what's unusual, in a lot of points in the market, companies report earnings, they have a blowout quarter. They beat the earnings expectations by a lot and you see the stocks pop. With all these good numbers being reported, the market’s reaction has kind of been, OK, yeah, great! You just don't see that big, strong jump right off earnings. Is that in any way telling us something when we see that start to happen?

You bring up a really good point. The companies may be beating the analyst estimates, but are they beating the market's expectations for the earnings? And the muted share price response would tell you, no! So even though the analysts are forced to revise their estimates higher for the full year, the stocks really aren't reacting. There have been some positive reactions. There's been some negative reactions as well. But on average, I'd say the stocks are not reacting as much as you would think with these big beats. So that sort of tells us a couple of things. We've made huge advancements in the recovery in the market and recovering the economy. If we were having this recording session a year ago and we would lay out the current conditions, we would have said, no way! So, we're much further down the road in terms of a recovery. But the expectations are pretty high. We do our bottom up work. We've talked about this in the past, we're very heavily dependent on thinking about scenarios— we really can't predict the future so we think about scenarios. When you tie that together with the dynamics around the earnings reports and the analyst revisions and the share price reactions, it tells us that the stocks are discounting a base case scenario, which is pretty good. It's an economic recovery that we think is quite reasonable and achievable. But in order to generate returns and continue this pace of return, we need to start discounting and the market needs to start believing in a more bullish scenario, which is not that inconceivable given the type of recovery we're in. But we need to start bringing that forward. And for Canada, we have to think to put it in context. TSX is up 15% year to date. That's quite the clip for middle of May. That's two solid years of returns in just a few months. So, in order to continue that pace, we need to start bringing forward a much more robust scenario. In Canada, that would mean an accelerated upside scenario and bank earnings recovery, which we may be well on the path; we'll find out another clue in a couple of weeks when they report. In the commodity front, I think we’d need to see a much more robust commodity price scenario being discounted in the share prices. That would be north of sixty dollars for oil, discounted long term. We’re there on spot price, but we're not really there from a long-term discounting perspective. Copper prices in the four-dollar range being discounted forever. Realistically, where we are today, it's not inconceivable, but that's a scenario that the market needs to really bring forward in order to keep this really strong level of return going for the Canadian market.

I think one other thing we should point out here, Scott, because this is a podcast for Canadian investors, is the impact that currencies had, particularly for Canadian investors investing south of the border in the United States. Of course, there are great companies in the United States and a lot of Canadians like to go and invest in the U.S. The U.S. market has been very strong. But currency has had a real impact this year because the Canadian dollar is up about 10% in the last six to eight months versus the U.S. dollar. So, the Canadian market has done, from a Canadian dollar perspective, likely better than most Canadians recognize. Is that not true?

Yes. We often quote terms either in U.S. dollars just to compare everything. But you think about in Canadian dollars. I said the TSX is up 15% year to date; that would actually be in U.S. dollars. That's what's on my Bloomberg in front of me. But in Canadian dollars, it's up about 10% year to date. The S&P 500 in Canadian dollars is only up 4%, and the Nasdaq, actually, in Canadian dollars, is down on the year. That really is going to toy and play tricks with some of the recency bias that's embedded and that we've come to understand that the Canadian market has been a lagging market. So there could be some interesting outcomes, I think, when clients look at their statements, U.S. investments in Canadian dollars or even U.S. investments inside of Canadian portfolios being translated back into U.S. dollars. So, it'll be an interesting couple of months as the statements start to roll in.

Yes, and if the scenario continues to play out the way it's been playing out, it's a pretty favorable scenario for the Canadian dollar. So currency is just pointing out. Currency is really tough to predict, particularly in the short term. But it is something you need to be aware of as you're investing not just in Canada, but investing outside of Canada. So Scott, great stuff this morning. Go get your second coffee and then we'll do a recap of this and you'll be extra great sharp.

Thanks, Dave. Thanks for having me on.

I think that was great. And thanks. We'll see you back in a couple of weeks. For everyone, all the best. Take a look at that Canadian portfolio, you'll likely have some pleasant surprises.

Thanks, Dave.


Recorded: May 14, 2021

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