Hello and welcome to The Download. I'm your host, Dave Richardson, and it is Stu’s days with a tired and broken-down Stu. Stu, you were riding around the Italian Alps, and it didn't go too well.

Well, it went reasonably well. It’s just that the elevation definitely was bigger than I thought. Every hill you go down, you got to go back up one, and you get to the top, and you see in the distance the Alps, and you're like, that's magnificent. Then down you go and back up you go. I was riding with some great people who provide lots of motivation. So it was good. It was a vacation that had a lot of elements of work. That's for sure.

Wow. It's just beautiful there, isn't it?

It's stunning. It really is. Although there's times when you're just staring at the handlebars on your bike going, when does this stop? When do I get my glass of wine?

Exactly. I was going to say it stops at the restaurant. I imagine you got some pretty good food there as well.

Fantastic.

So, we're not going to push you too hard today. We've got a new theme for Stu’s days called the Stute of the Nation address. I don't think we've done a reset on where we are. The Toronto market hits 30,000 yesterday. I don't hear anyone that I talk to, on a personal level or even when I'm out with investors or advisors, who are excited about the Canadian market. I'm going to say nobody's been particularly excited about this bull market that for the last 30 months has been about as crazy as anything I've ever seen, but no one seems that excited about it. There's still lots of money sitting on the sidelines in cash. I mean, it just goes on and on. So, Stu, where do you see where we're at? What are the things you're looking at? What are you interpreting from economic data? What you're seeing from companies? Just ground level, where do you see things? I don't know if you want to go regional because you are the co-head of global equities at RBC Global Asset Management. Let's not forget that. So you can go global if we have to. But what are you looking at and what's interesting to you?

When you think about the stock market, unfortunately, you got to go back a little bit to the bond market. So after a period of worrying about rising interest rates—this was 12, 18 months ago around inflation—the bond market has been extremely well-behaved. In the short end the bond market has come down, and the long end has been range-bound, but slightly better through the piece. When you get into an environment like that, it can be supportive for equity valuation because you don't worry as much about the rug being pulled out from that context. So the bond market has been healthy. Within that, this notion of interest rates still being restrictive. So it also makes people believe that there is the optionality of a cushion, that rates could come down to provide a cushion. So again, you have people saying the bond market is not going to be a challenge. If anything, it can be an assistance to the earnings wobble. So when you think about stock markets or stock pricing, you have the two-legged stool, valuation and earnings. And valuations are elevated for sure, in some cases more so than others. Globally, we don't see valuations super elevated. It's really in a handful of stocks, most of them in the United States. And then so you have valuation on one hand, you're sitting there saying, okay, the bond market is not going to pull the rug out from under me on the valuation side. And on the earnings side, earnings have been pretty good. And the view is, well, there could be this cushion should earnings falter from lower interest rates. And so that's the two legs of the stool. And it's led to very strong markets. And when you get into periods of time where you get a lot of strength and you get some valuation that might be concerning, the question is, well, when will that be a concern? And it's hard to sit there. Valuation is a very good long-term tool, but it's not a timing-oriented tool. So then when we get into the different markets, we've seen some renewed strength from the Chinese equity market. We've seen strength from overseas equity markets. In fact, while the S&P has been pretty good because of some of the top stocks, the average stock has performed better outside of the United States than it has inside. And in Canada, we've had a lot of strength because we have a lot of exposures to the things that have beneficial characteristics. Gold has been very strong. I know you've had Dagmara and others on worries about the US dollar weakening. Gold is definitely a beneficiary from that. I heard a great line the other day about a fiscal deficit. The only thing that holds fiscal deficit back is if there's inflation that they have to worry about from an interest rate standpoint. So as inflation has come down, you do have this idea that there could be a fair amount of fiscal deficit around the world that can be stimulative to the economy. It can cause the currency of the country that's doing it to be a little bit weaker. It can cause a lot of positives in gold. And as strong as the price of gold has been, the companies didn't pay attention to the share prices at 700 or $800, price action in gold. And then we got another 300 or $400 on the price action of gold, and it's been huge beneficiary to the stocks. So Canada has the largest gold sector in the world. The other area that's been really strong around the world has been financial stocks. And we've talked at length about the slope of the yield curve being wind in the sails for financial stocks. You couple that with the idea that maybe provisions for credit in Canada are peaking. You had strength in the banking sector. Canada is overrepresented in banks. It's overrepresented in gold. Other metals have been strong, copper, things like this. Energy has meandered, but has been okay, and there's lots of yield in that area. So sometimes you just need to be in the right spots and you get a strong stock market. So like anything, when we look at some index hitting new highs, we want to really make sure that we understand why that's taking place. So some of those themes in Canada are a little bit stretched. But all that said, we could see some persistence to them as well. And then there is this burgeoning a potential enthusiasm around—I don't know what the right word is—a renaissance or whatever in Canada about the big project office. Could we get our ducks in order here and have some investment and have some corporate commercial-led recovery in the economy. The benefits of that would be obviously good for the economy, but to help rebalance away from housing, hopefully would lead to real income growth, all sorts of things. So that's the dynamic in Canada. When we talk about non-canadian stocks, and we've mentioned this in the past, again, financials have been strong and they're overrepresented globally versus the S&P 500. Inside of the S&P 500, we've had a couple of different dynamics. Generally speaking, the consumer has been strong, although there's been a lot of bifurcation. Lower income consumers have been a little more challenged. That has shown up in the stock market, but it doesn't have a tremendous amount of weight in the index. And then there has just been this enthusiasm around artificial intelligence. The Magnificent Seven, it's almost been like a relay race. They passed the baton between one and the other. And so the Google and Apple have grabbed the baton in the last six or eight weeks, and they've led to some strength in the S&P 500. The other ones have been okay, although they've been a little bit more flat-line. That's why I like this baton race, because we've seen from time to time, the baton go from NVIDIA to Meta to Google to Apple to Microsoft and what have you. I think there's also been a lot of interesting development with NVIDIA who is going to make an investment in OpenAI. On the one hand, it's going to create the framework for a lot of AI application and a lot of AI usage because the data centers, you can start to see the funding and what have you. People do worry a little bit that there's some circularity to all this as well. Investment in my customer, my customer buying for me, it just needs some study. And then financials have been okay in the S&P 500. And that's where we're at in the market as a whole. But it's been very much like a rotating period of momentum without any major area falling back.

Yeah. And by the way, my favorite part of your comments was about ducks being in a row because, of course, my Oregon ducks are headed to Penn State this weekend for the college football game of the year. I will be in attendance. It's what they call a whiteout at Penn State. Everyone will be wearing white. I will not. I'll be in green representing my ducks. But I think this has been one of my favorite bull markets of all time, because while there's all that attention on AI and the other drivers in technology and those big platform companies that are spending all the money on tech, you don't have to even go there to make solid returns. You've been able to sit in financials really anywhere in the world. You've been able to sit in miners and metals. Again, as you look at the representation of the different markets, well, the S&P 500 is about 40% tech. I think we're up in that range. Okay, but maybe I like my financials and I like my metals, and I can just sit right here in Canada and take advantage. If I'm excited about gold, buy a Canadian portfolio that maybe you're managing, and I'm going to do pretty well. Then the risk profile and valuation on that portfolio is not out of range at all. As we've talked about many times, I just sometimes break things down to very simple terms, as you know. I just look «stock market's making an all-time high» and I look at the background, it's like, well, what's it saying? It's saying that a year from now, probably growth is better and interest rates are down. Well, who doesn't like that? I think the bond market likes that. I think the stock market likes that. Maybe the long end of the yield curve starts to drift up a little under those circumstances. Like you say, we're just steepening it out, and, hey, that's not too bad for financials. So there's a whole lot of things to like, in terms of where we're at. But as always, I know that someone like me is just sitting there thinking about all the upside and, oh, it's just going to charge, shoot through the moon. But a real investment manager like you is always got that one eye off to the side thinking about the risks that are out there. What are you worried about?

Well, the thing that you worry about is, first, when you get this amount of enthusiasm, it's subject to change in a hurry. We go through the portfolio. We all have to be honest with ourselves when we go through the stocks that we own and say, do I think that this business justifies this share price? And do I think it'll be higher in a year, two years, three years down the road? And if the answer to that is yes, then you're acknowledging that you'll withstand the volatility. If you are looking at a stock where you're like, wow, this valuation is something that I’ve never seen before and the margins of this business, I’ve never seen before, then if I'm going to carry on with it, I'm really telling myself I need to change toolboxes because I'm going to have an exit mechanism that is a bit more technically driven. Or I might just say enough is enough and away we go and find stocks that we think can get the job done. And I think your point is an excellent one about there are lots of different things working in this stock market. There's been periods of time where you felt like you had to be attached to the AI trade to make this all work. Right now, there's lots of things to think about when it comes to the portfolio. So like everyone else, we read the headlines and we look at the stats about the outright valuation. And when you see those statistics, you sometimes sit there and say, well, boy, there must be things to sell. And then we go in through the portfolio company by company, and those big headline statistics have lots of nuance to them. In our portfolio, like anything, we're being active, but we're trying not to carry this embedded valuation risk relative to the fundamentals of the businesses we own. Stock markets have been great, so you're naturally a little bit cautious. But not every stock is trading at its all-time highest valuation and what have you. And there's some of these sectors that have had big moves, and we go back through time, and they are elevated relative to where the valuations have been in, say, the last one to three years. But I look back to when I started in my career in the mid '90s, and the valuations are not at all-time elevated levels. So you're trying to be very open minded. You know some of the sayings that I love. Cross the river while you're touching the stones. Stay at the party and dance by the door. Whatever the metric might be. But it's just trying to remain not overly emotional and as it's a very iterative process around, do the fundamentals of the company, can they work their way out, even if the valuation is a little bit elevated in the short term, can I still make money? If I sit there and say, I want this business, I want to compound my capital at 7 to 10% or whatever the number might be, three years from now, what has to happen for this business to be up 10% in the stock market? If the valuation was to compress a little bit, is there enough earnings growth to get the job done? And this just very iterative constant study of the portfolio, and that's the way we're handling the situation.

I just recorded a series of videos with some of your colleagues over the last couple of weeks. Particularly in some of the very specific, narrow areas, they talk about a barbell strategy. Where they have the core of the portfolio, the bulk is anchored in things that you know you have long term value, that are a little bit more stable, that might withstand a downturn in the markets a little bit better. But then at the same time on the other end of the barbell, you're making sure that you're taking enough risk and you're identifying those big growth companies through the next cycle, the next wave of upside in the market. Is that something you're doing? Because your portfolios tend to be a little bit broader, would that be an approach that you're using or is that more for niche markets?

Well, it's like the old Warren Buffet line from Aesop’s fables. How many birds are in the bush and when are they coming out? When you look at a valuation, what it is defining for you is a set of assumptions that you either are willing to accept or not. Sometimes you can have highly valued stocks where the growth is going to be so spectacular that valuation, in fact, looks cheap, even though on the headline, it looks expensive. So when we're going through the portfolio, you have some businesses that are, we would say, three yards in a cloud of dust, which was an old saying from a Ohio State football coach. But if you take a business that has nominal GDP revenue growth—so you're talking 5 to 7%, 5 on the revenue line, 3 on the expense—you're just grinding out. That's going to deliver you 7 to 8% earnings growth. The valuation sometimes gets a little bit elevated. So sometimes the 7 looks like 5 and sometimes the 7 looks like 9. And you're just very mechanically moving the portfolio amongst all these good companies to try and maximize returns. And then other times you have a company that has a pretty good valuation here, and then you have this large potential, and you're trying to handicap the odds of that potential coming in. So maybe you get into a situation where you have a $20 stock, and there's this bubble over here that if it all went appropriately, it would be worth 7 or $8 a share or something like that. And if I'm not paying for that option and I'm comfortable with the business at 20. That stock on paper may not look cheap at 20. It may just look adequately priced. But you're like, yeah, but I got this option over here that's free to me. I'm going to be all over that. And sometimes you have to fully pay for options and you say, I'm out, I'm moving on. And that's what I mean. It's this constant iteration. What could happen next? What could happen next? How could it get better? How could it get worse? It's just this very open-minded discussion process that is a hallmark of any activity, any environment, but particularly now.

I think what's really neat for an investor through this bull marketing—we have to say that the big driver is technology, and then the focus in technology is artificial intelligence and everything that's happening around there—but if I want to take advantage of that, I don't have to go into the riskiest companies in artificial intelligence. We're building data centers. Data centers do that through a REIT, a real estate investment trust that's managing data centers. Those data centers, I need cement and steel to build those buildings. Cement is really dull and boring. Dull and boring stocks can sometimes be exciting when they get a little bit of wind in their sails. I need copper for all the wiring through there. I need actually some fairly traditional electrical switches just to make the power run. I need a power source. Again, it's just spurring all these different areas that maybe aren't as exciting and aren't going to give you a double every couple of weeks, but they drive really nice returns and let you sleep at night to some extent. But it's just an interesting market that way.

A 100%. And some people might worry that it'll be overbuilt, which is certainly possible when we think back to the internet era, and there are some similarities. The overbuilding of the internet was not great for some of the stocks directly involved, but ended up being spectacular for some service businesses that were able to get this very cheap capacity and turn it into different businesses. And you think about all these traditional businesses where 20 years ago, there wasn't apps at bank, all sorts of things. So there'll just be this constant evolution through the process. And some days we see it in the stock market accelerated, and it looks like we're pulling the future forward to today. And other days we talk about the future and it looks like it's sitting in some stocks for a very reasonable price. And that's what portfolio management is.

That's it, right? If it's exciting just for an average investor, it's got to be particularly exciting for you. Then there’s this other thing I've been reminding people about. You talk about the '90s and you talk about the dot com era, the internet bubble and the overbuild in the late '90s and into 2000. Technology stocks were down, what, 80, 90% from 2000 to 2002. Many disappeared. But the broader stock market value stocks, say, dividend stocks, actually were up through that same period. If things get out of hand in one part of the market, there's still another part of the market that you need to be conscious of and think about and have that exposure as well, which is where I was going with the barbell. But what are your thoughts on that?

Well, I always go back to that Aesop's fable. You always want to understand what you're paying for. If you buy something and you know that if it is volatile, it might shake you out of it, then you have to be honest with yourself upfront. I personally tend to be the water-on-stone investor, which probably has come out. I was just thinking, I think I'm coming up on owning the dividend fund for 20 years. I plan to be there for another 20 years. So a bunch of businesses that are well run, collecting cash flow for you, reinvesting it, paying some out in dividends, that tends to be my style. It's never overly exciting on any given day, but it tends to work over time. When you get involved in some of the super growth areas, as I say, when you buy a stock, you're buying a set of assumptions. Those assumptions involve the amount of cash flow that the business will eventually earn and the valuation that it will trade at. During periods of rapid enthusiasm, valuations often motor far ahead of the ending level. And there's nothing wrong with that. It's just the way markets work. And it's that enthusiasm that allows those companies to raise capital at attractive prices and eventually let you realize in a bunch of things. But when you own a stock, you have to be wary of those two sets of assumptions. And when you get rapid price change and the earnings haven't really changed, you just pulled things forward. And that's a discussion that we can all have. And when is enough enough? Those are million-dollar questions. If we knew the answers to all that, we wouldn't be doing a podcast, right?

Yeah, exactly.

But those are the things that we have to constantly think about in all of these environments. So what I do on my Bloomberg is I have two screens that I pull up on any investment opportunity. One is the longer-term margin profile of the business, and one is a longer-term picture of valuation. And if I'm paying a valuation that's in the top right of the chart and the margin is in the top right of the chart, that can persist, but if every stock I own is in that camp, then I'm playing with fire because I'm betting on the margin never reverting to its mean nor its valuation. If I find stocks in the middle of those bands, then the volatility just becomes my friend because I'm a buyer of that volatility. That's the discussion point that we have around all that we look at.

Yeah. You got to remember, if you want to ride successfully in the Italian Alps, you got to spend hours and hours, disciplined every day, on that exercise bike in the Equinox class or whatever place, your Peloton or whatever you're doing that gets you in shape and gives you that experience and stamina to ride through the Alps with all the ups and downs. And that's what you just did. And there's a reward in both, right?

Yeah, that's 100% true. And you need to work with good people.

Yes. And as I said, I've just been working with a bunch of your colleagues over the last couple of weeks, and there are some really, really phenomenal people in your group. So, Stu, welcome back. Again, happy anniversary. I think that was the basis of your trip. And we'll check in with you next week.

Great. Thanks, Dave.

A fantastic Stute of the Nation. Take it to the bank.