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This episode, Stu Kedwell, Co-Head, North American Equities, shares key insights from RBC GAM’s Investment Strategy Committee. He discusses the outlook on the economic rebound, noting the vital role vaccines can play. Stu also explains his thoughts on the expected course of interest rates. [6 minutes, 14 seconds] (Recorded February 16 2021)


Hello and welcome to the Download. I'm your host, Dave Richardson, and it is (S)Tuesdays with Stu Kedwell, Co-Head of North American Equities at RBC Global Asset Management. Stu, welcome back.

Thanks for having me, Dave. Great as always.

Now, we missed last week because there was a very important meeting of the team that you work with; the Investment Strategy Committee met last week. A meeting of great minds from all around the world to talk about investments in the global economy. What were the key issues? Let us inside the room. What were the key issues that you and your colleagues were talking about last week?

Yes, it was a continuation of many of the things that I know you've been discussing with advisors and clients. First and foremost, we started off talking about the pandemic. It's pretty difficult not to have some thoughts in this day and age around the pandemic. And Eric [Lascelles] has covered that incredibly well. So, we spent some time on that and what it means for the economy and reopening. I think the economists definitely get very focused on the minutia of exactly when we’ll reopen and what that means for the forecast. I think the markets people are more in the mindset that, OK, but it's coming. That's what we should focus on. So, that was kind of how we settled out there, whether or not we're vaccinated in July, August or September, the means to get the economy through this period of time in place. The next two things that we talked about were the strength of the economic rebound and where it might come from. The United States might surprise people a little bit because, between the possibility of some herd immunity and vaccines, they may reopen faster than some originally thought and could be quite good. We talked a lot about valuation in the economy and what type of earnings capacity could be seen. On the one side, you sit there and say, well, valuation is elevated. On the other side, we all have to acknowledge that none of us had really seen how buoyant the economy might be. There's pent up demand. The Biden stimulus package is very strong. So, there are two things to talk about. There’s the economy which is strong enough and will it be pretty hot? What does that mean for markets? So, those were the broad discussion points. And then it dovetailed into valuations; we've talked about this in the past — they were elevated, absolute levels, but still reasonable relative to fixed income. While interest rates are moving up — and we expect them to move up — as the economy reopens, the yield curve should steepen and that should help certain parts of the market. It's unlikely that it derails the market. I think that's an important consideration. So, valuation is elevated, but relative to fixed income, still attractive. We talked the possibility of turbulence when the economy reopens and starts using some of the liquidity that has been washing around in markets. But we still tend to believe that will be more impactful to some of the speculative areas which we’re not overly exposed on. It was a great meeting. I don't want to use the word status quo, but it was kind of a continuation of the discussions that had been ongoing and will continue.

Yes, Stu. We talk about higher interest rates and we'll be back next week with our quarterly look at the Canadian banks and some thoughts on that. But any thoughts amongst you and your colleagues on how high rates can go before it becomes an issue? We look at the 10-year yield in Canada, up above 1%. Now US creeping around 1.25% rate. At what point do we start to get worried about those longer-term rates moving up?

Great questions. First off, sideline anyways, getting back to 1.5% on the 10-year is just undoing the pandemic. Not overly concerned until that level. Then the second thing is when we get to that level, the slope of the yield curve becomes very important. So, if short rates are pinned down by the Federal Reserve and there's good slope in the yield curve, that's indicative of an economy that's working at pace which is a good sign. The last time we were at 1.5% on the 10-year, we didn't have nearly the slope in the yield curve that we're going to if we get there again. So, it's sending a different message on a couple of fronts. It's saying the pandemic might be in the rearview and the economy might actually be functioning in a preferred manner than it was the last time interest rates were there.

And it is such a great reminder of how quickly things move. We're getting to Friday, the 19th, which was the peak for most equity markets around the world last year as the pandemic hit. As you say, when you talk about a 10-year yield at 1.5% in the U.S. -- that just gets us back to where we were. It's just a retracing. It's been a pretty remarkable year. And it’s always interesting to hear what you and your colleagues are talking about. Because that's the looking forward and the keys to laying the groundwork to building strong portfolio. So, Stu, always great to have you on. Thanks again.

Great. Thanks for having me, Dave.


Recorded: February 16, 2021

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