Hello and welcome to the Download. I'm your host, Dave Richardson. Always an exciting day when we connect with our old friend Habib Subjally, who is the managing director and head of global equity at RBC Global Asset Management. And Habib gets to look all around the world, him and his team — and I'm sure we'll get into some of that — and so he brings a really interesting set of insights in terms of looking at markets. And as we sit at all-time highs in Canada and the US, and just some stocks that are going up a lot — I don't know if we want to say crazy, Habib. But anyways, we kicked it off. We did our little pre discussion and I had some ideas of the direction we were going to go, but our producer said that Habib looks very handsome today. And so that got him all cocky and he's got a whole bunch of ideas. And actually, he's the smart guy. He's got better ideas for which way we can take the direction. Anyways, Habib, how are you doing?

Very good. Thank you very much for having me on the show again.

We've been dabbling with YouTube, Habib. We posted a couple of the podcasts in video as well as audio, and it's a shame that we're not going to be able to do this one — this is audio only — because they'd see your big smile, which is your trademark. And I think we're going to feel that as we go around the world, from our quick chat before we started taping, maybe things are starting to look okay. And that's not surprising. If the stock market's going up, it's usually telling you that something down the road is not too bad. And again, that's particularly in a small set of stocks or a concentrated set of stocks in the US. But there's some reason for optimism in other places. Some reasons for caution as well. Right, Habib? But always an interesting look around. We do a lot of focus on Canada and the US, but it's always great to get some of our friends from the UK who work in other parts of the world primarily to share what's going on there. So Habib, again, welcome. One of the comments you made earlier to me was we've been focused on interest rates and when interest rates are going to stop going up and start going down and how much are going to go up, how much they're going to go down, and when inflation is going to get down to 2% or whatever. But are we missing the point here, really? Or have we settled in a spot that we should probably start to be getting fairly comfortable with?

Yeah, I think we've spent the last two years obsessing about inflation. Last time we had high and volatile inflation, persistently high inflation, was in the 70s and 80s. And since then, inflation has ever been falling and interest rates have been following inflation. And then, two years ago, we had this extreme double-digit inflation again. And that took center stage in everything to do with financial markets. Now that, thankfully, has begun to level. Over the last six months or so, it's become clearer that interest rates aren't going up a whole lot more. The question now is: at what rate do they start coming down and where do they settle? But the range of possible outcomes that we had twelve months ago is now much narrow. The future is much more predictable. At least that's how it feels right now. So I think that is a good thing. And financial markets, obviously, hate uncertainty. So that level of uncertainty has reduced dramatically. And, yeah, the cost of capital is such an important input. Whether it's valuations for people like us in financial markets or investment decisions in the real world with corporates and so on. So I think the world is in a much better place from that perspective. But also, this year, a big percentage of the world is having elections, and that does create a whole new set of risks that are coming down. And again, financial markets are not particularly good at factoring in and pricing political risk, whether that's geopolitics or regulatory risks or policy risks that follow the change in politics. That's certainly something to look out for.

Yeah, a lot of the world goes to the polls this year, including the US and the UK, but India as well. And I think it's somewhere along the lines of two and a half billion people will be eligible to vote this year.

India, Pakistan, Indonesia.

The list goes on and on. And obviously, interesting things happen during election years. Is there anything that you're looking at in particular around those elections that you think you need to keep in mind of as an investor looking around the world?

Yeah, it's regulation. How things change. Donald Trump has been very vocal about what he plans to do with energy policy, tax policy, import policy, support Ukrainians and so on. This has ripple effects. And when you have policy shifts, there are always winners and losers. And as investors, we have to identify the winners and losers, and any one company is going to have bits of their business that benefit and bits that don't. And they have to adapt and pivot and be quite nimble in that environment. So this is where good managements come in. There are certain things that are predictable. There are a lot that isn't predictable. So it's something, again, you have to be on top of all the time.

Is that a fairly regular conversation that you're having, particularly in a year like this? Say you're working with a US company; is that a big part of the conversation that you're having with them right now? If Biden wins, he’s expected to do this. If Trump wins, he’s expected to do this. How does this affect you, company x, in terms of your businesses? And that just creates a different way for you and your team to evaluate that company.

Yeah, well, it's certainly a part of the conversation, and it's a bigger part of the conversations with some companies than others. So there's some companies that are big beneficiaries of the CHIPS Act or the IRA Act and things like that. So there's a big push. There's some big subsidies and some policy priorities embedded in the IRA Act. Now, if those go away or are just going to be modified, you have to think, okay, now, without the IRA Act, how does your business model stack up? And what's the growth prospects and cash flow prospects? If you are committed to doing something, and then the incentives change? So there's a whole bunch of issues. They don't apply to all companies, but they're certainly very important to some companies, like semiconductors, anyone to do with electricity, energy and the industrial automation area. These are big issues in the US.

Looking around in other parts of the world, is there anything on tap from a policy perspective that is particularly interesting or maybe even a potential negative for some of the companies that you scan?

The big one really is China. Everyone was expecting China to come out of the pandemic and really roar ahead. I'm not sure how to put this, but there's a lack of confidence ever since Deng Xiaoping. What really surprised the world is that the Chinese really knew how to do capitalism well. They did the human capital bit really well. They educated their people. They have an enormous number of engineers and qualified people. They have great infrastructure in terms of ports, roads, airports, railway, etc. And they allow these great businesses to flourish, from Alibaba, Tencent, Baidu and so on. That list goes on into electric cars and chemicals and steel and so on. And more recently, there's a real lack of confidence in the authority's willingness to allow that entrepreneurial activity and that capitalism and the role of markets within their society. It's not just western business leaders that are worried about investing in China, it's about their local business leaders who seem to be worried about investing and starting new businesses. And that's a real concern. That undermines a very basic aspect of investment. These guys became the rock star CEOs. The number of new businesses that were created. The Baidus and Tencents and Alibabas. These guys started a while ago, but a whole new generation and several generations of wannabe entrepreneurs came up. And now that's being questioned. That's a real worry. Now that's one argument that the foundations of capitalism are being questioned, and that's not good. But then on the other hand, you'd say China is a population of 1.2 to 1.4 billion people, highly educated, very aspirational, and they have a taste for improving their standard of living. And the only way you're going to keep them happy is by allowing them to prosper and to get wealthier and to acquire all the things that we in the west have and so on. And that's a good thing for wealth creation. So China is a really interesting debate at the moment.

Well, it's funny, I remember going out and doing speeches almost 20 years ago now and we would have the questions come up about China. And at that point, China was still really on that surge that came out of the 80s and 90s, into the last 20 years where they've produced a lot of the excess economic growth around the world. And then people would look across and say, well, then there's India there too, which now has more people than China and it lags behind. And at the time, again, this is almost 20 years ago, you could read literature that would say, well, this directed approach that the Chinese have, in that kind of political structure. I can direct resources where they need to go immediately. I can manage the whole country almost like a company. And as you say, human resource management, energy management, commodities, ports, infrastructure, everything. I can direct drive it. I have my hands on the wheel completely. And that accelerates your development with 1.4 billion people. But as you say, it also creates higher expectations which have to continue to be met. Once you raise those expectations, people aspire, as you would say, to get more. And eventually that creates a struggle in that economy, because it fundamentally is a communist country. And it's the India that has the same human resources that trods along a little slower as you go through the complexities of a democracy, but ultimately proves over time to win out. And it's almost like that's starting to play out right in front of our eyes. It's quite amazing. There's a lot of smart people who figure these things out many, many years before they happen, isn't it?

Yeah. And it's also while they're happening, You can see India has made so much progress. India is on a roll right now. Human capital was always very strong, but they lacked the infrastructure and they lacked some of the regulation. You had to get the regulatory approvals in each state, and it took for ages, and then there wasn't a common regulation. So if you are a foreign multinational, you operate in one state, and then you try to move into another state. And the road and the rail and the infrastructure. A lot of that is getting better. And now you're getting Indian multinationals and conglomerates coming up. So there's a lot of activity going on in India. To a certain extent, India is not as big as China. It's going to take a while for India to have the same kind of impact at the global level as China did. But China's still a big economy and the world needs it to start growing again. There are all sorts of financial and economic issues, but there's going to be social and geopolitical issues that come out of that.

As we talk about elections this year, I saw a poll — and I don't know how accurate it was in terms of the sourcing — but Modi’s favorable rating is as high as Trump and Biden combined. Basically, he's around 80% favorability rating, and Trump and Biden are 40% apiece. So it's quite something as things move on there. So, Habib, why don't we talk about another thing? Just reading or doing my scan of articles this morning, I came across a very detailed article on CNBC that talks about deflation and prices going down. And you had some thoughts on prices falling now. Maybe we don't get back to 2% inflation immediately, but we are seeing just some areas of the economy where prices are falling and the impact that that has. We talk about some of the negative potential social consequences of a China that's not growing, but this is one that has a potential positive impact on individuals and the economy.

Absolutely. Again, we spent a couple of years really dealing with not just inflation, but one of the key drivers of inflation was supply chains and food and energy. And this, unfortunately — food, energy, higher interest rates, which feeds into higher rents — impacts the poorest sections of our communities, the greatest. And it really has a big impact on disposable incomes. So now as you start to see food prices start to fall a bit, energy prices stable, that takes time to filter through. Interest rates more stable. Again, that takes time to filter through. Supply chains improving. We should start to see some of that basic inflation of the staples that everyone has to spend on every day start coming down. That creates some room in disposable incomes and people have a bit more cash left over in their wallets to spend on other things. And again, now this is going to be a really interesting thing, how we came out of the pandemic and how that marginal dollar is spent. In the pandemic we spent a lot on goods. We all upgraded our laptops and our TVs and our mobile phones and we bought fancy bourbons and tequilas and all sorts of stuff and wine and so on. And now people are spending more on travel and on restaurants and on holidays and things like that. So it's going to be interesting to see where that settles and how consumer preferences change. I think that's really going to be very interesting. And again, companies that serve our consumers are going to have to be quite nimble and adapt to consumer preferences.

I take it that you and the team are looking at that across companies. Obviously, you're not going to share that globally right now, but you have a sense of the direction of where retail is going and where consumer preferences are going, and that's going to drive some of your investment decisions?

Yeah, it's really interesting that over the last couple of years, because the lowest section of the income threshold of our communities were so badly impacted, the high end, the luxury ended really well. We were sitting at home and we didn't have anything else to spend on. So people spent on luxury goods, whether it's wine, spirits, beer, food, handbags, clothes, whatever. A lot of those luxury spirits and Burberry, Pernod Ricard, Diageo, a lot of them have missed their numbers. And you're seeing the shift taking place. And even you look at the Rolex watch index, or the secondhand market for Rolex watches, and that's rolling over and you're scratching your head like, wow, why is that happening? And sometimes you don't know why it's happening, but you know that this is happening. And there's a bunch of data points that are stacking up here, and you need to get worried. It could just be a preference that people would prefer to spend that money rather than buy a new Rolex, to go sit on a beach in Bali or Hawaii or whatever with their family. And that is more valuable to them than that Rolex. It’s very hard to draw causality, but as investors, you've got to be picking up on these changes in trend.

I know the listeners would like my next question to be about the high-end bourbon, tequila, wines and beers that you recommend from your clean tastings during the pandemic. But we'll actually go in a different direction, which is much more relevant to investing. And we've talked to all our guests. Really, no matter what part of the world they're investing, whatever their investment style is, they are all thinking about two particular huge investment themes, one being artificial intelligence, and the other being this battle against diabetes and weight and just overall health. So what are your thoughts, first, on artificial intelligence? Maybe how it's going to affect the world more broadly, but then how do you think this plays out in markets?

Yeah. So this is a huge new technology. You can see just the market cap, how the market has grabbed hold of the potential of this. And I have no doubt that this will have a major impact in 20 years' time. We’ll look back and think, wow, we underestimated what artificial intelligence could do. You and I were of the right vintage that we can remember what was being said in 1998-99, and 2000 in the dotcom bubble. And I have to say, when I look back to those years, 25 odd years later, all those promises that were made then have been more than exceeded. Even the visionaries then didn't have the imagination to think of machine learning, artificial intelligence, quantum computing and so on. I have no doubt that artificial intelligence will exceed our expectations. But at the same time, the stock market has the ability to get ahead of itself. Like the dotcom bubble. And I have no doubt that the same thing will happen again. The question is «when». Timing is really important. And right now, what is happening with artificial intelligence is that each quarter we are being positively surprised by the impact that this thing can have. Today, the poster child of AI is Nvidia. They make the chips and some software that underpins this thing. And everyone is loading up on this hardware because they want to learn how to use AI to transform their business. Now, whether you're a lawyer, a doctor, an architect, a pharmaceutical company, an engineering firm, a financial services industry, you need to figure this out, because if you don't and your competitor does, you're toast. So there is this arms race going on. Everyone realizes Nvidia is a bottleneck and it's queuing up to buy their chips. But if artificial intelligence is going to be that successful at some stage, Nvidia chips are going to be a commodity. They have to become commoditized. We don't know whether that's three months out or 30 years out. Intel got commoditized. So we had to look up and down that value chain. At what stage does that happen? At what stage do we say, right, okay, now it's got big enough, and now let's just execute on this and see what this thing does. Because the hardware is at the bottom of the value chain. Then all of this learning and testing, developing a model, is taking place at essentially three places: Amazon Web Services, Microsoft Azure, and Google Compute. So you've got to be there. And they're also growing great guns. They're benefiting a lot from all of this. But ultimately, what we have to see is that artificial intelligence has got to change the lives of consumers — people like you and me — and it's got to change the lives of businesses. So it's got to allow businesses to say, I don't need 50 people in my call center, I need 5. I don't need 20 people in my R&D department. I can do it with 3. Or with the same 20 people, instead of finding 5 new products a year, I can do 20 new products. So companies have got to be able to do that. And us as consumers, we got to say, I no longer have to go to an accountant to do my tax return. I can just power up a bit of software. And even if I have some complex transactions, I've sold an investment property and a share portfolio and taken out a new pension or whatever, all that complex stuff is going to be done by an algorithm. And my medical stuff, I no longer had to wait four or five days to see a doctor. This thing can be done immediately. We need to start seeing some of that to keep this cycle fueling. And right now, I would say the market is very obsessed with just the bottom of that, the absolute bottleneck. And it's ignoring all of this other stuff that's taking place at the top. But at the top is where you get the asymmetric returns. That no one's pricing in the benefits of AI. And I just think this is still that same ho-hum business. But if these guys get AI right, they can be really interesting. So that's something we're spending quite some time thinking about.

Yeah. Again, we go back, and as you say, we're of the vintage. That’s the way of positioning it. We do remember the 90s and the dotcom. The Internet comes and everyone's, hey, this is pretty amazing, but what's it going to be when it grows up? And there were some early winners in stocks. And you saw it back then. An IPO, a new company would issue their stock and they'd put a habib.com, and it's an Internet stock, and the stock would shoot through the roof. But then there wasn't anything there, at least in terms of creating long term value. And you saw that collapse. I'm running a grocery store or a pet food company or anything, gasoline, whatever it is, I talk about AI when I release my quarterly report and people get excited about it. And when you see that, you think there's a little bit of froth in the market behind. You say the market gets ahead of it. But ultimately, some of those businesses, like Amazon, which was an online bookseller, have become so much more. And obviously the Internet affects our lives in ways, as you say, we could have never imagined. And AI will ultimately do the same. But where the big investments are going to come out or where you want to have your money is not exactly clear at this point.

Yeah, it's evolving, and we have to see who executes better and how the whole AI value chain delivers value for businesses and consumers. That's the real test. The Internet has delivered real value for us because we find it cheaper, better, faster to gather our information, do our shopping, book our flights, travel, all of that via the Internet. And that's incredibly valuable. And that value is valuable not just to us as consumers, but to advertisers and the people who supply stuff to us. And they've been winners and losers. AI is going to do the same thing, and it's going to take us a while to figure out how quickly that happens and who the winners and losers are.

Really interesting take on that, Habib. Particularly looking beyond just one stock. And again, the foundation of AI, but nevertheless, something that down the road, as you say, may be commoditized as generally chips have in the past. Let's get to something else that's of interest to investors, and then we'll wrap it up. Again, we've talked about this with a lot of investment managers, the weight loss drugs or drugs that are designed to fight diabetes and other illnesses but ended up being a way for people to lose weight and just creates a much broader market for the use of these drugs and the influence that that's having on some companies and society in general. I know, for me, I've always struggled a little bit with my weight. Right now, I'm struggling with McRib, Habib. Have you ever heard of a McRib?

No, I haven't.

I'll tell you about it. The listeners know very well about McRib and my fascination with McRib. But these drugs have really taken on in terms of demand. And then the stocks of the companies that develop them, they’ve really taken on a life of their own. So what are your thoughts in that area?

Okay, so again, they're a bit of a game changer. So they started off just as diabetes drugs to give to diabetes patients before they actually went on injected insulin. And then they found out almost by accident that it has this big weight loss profile. And then, of course, all these celebrities jumped on it and basically did this free advertising even before the companies were able to test and publish data to say that this is safe for nondiabetics to take. So that was a big level of uncertainty. And now that data has been published and those studies have been done, and these genuinely appear to be a wonder drug. So they work for diabetes, they work for weight loss. Not only that, but this is when you start to realize that the number of other symptoms and diseases that are associated with weight loss and diabetes. So blood pressure is often related to weight. When you lose weight, your blood pressure improves. I know a ton of people who are on blood pressure medication. The same thing with heart disease. A lot of heart disease is associated with weight. A lot of people take statins and a whole bunch of other medication to reduce the risk of cardiac issues. Again, you reduce weight. So again, there's winners and losers. Now, the odd thing that you're starting to see is hips and knees. Again, surprisingly associated with weight, because if you're carrying more weight, you tend to have issues and you need more knee replacements, hip replacements, back issues and things like that. Shat starts improving. Sleep apnea. Again, very correlated with weight loss. And what you've seen is, as these studies, slowly people are beginning to figure it out. Those companies that sell sleep apnea machines, artificial hips and knees, blood pressure tablets, statins, all of that, those companies are saying, well, okay, now we might have an issue in the future. As the weight loss drugs, these GLP-1s, come and take over, and you have more and more indications. So you can just see that. And you can just see if you're like one of these cosmetic surgeons that does gastric band surgery. Who is going to go under the knife if there's a pill available? First you got to try the tablet, right? And if that doesn't work, then maybe you'll get there. So these guys are in trouble. So again, there's winners and losers that you have to watch. So I think these GLP-1s are in short supply. There's a lot of supply coming on. There's a race to generate more supply. They have strong pricing power right now. That's great. Now you look forward a few years and supply is going to improve. But if these drugs are half as good as we think they're going to be, then there's other issues, because there's going to be a whole bunch of people who can't afford to pay for these drugs that could benefit from them. And this could be in the developing world, even in the western world. So how do you price this? How do you scale this? Is this something that 2 to 3 billion people on the planet need to take these things? Quite possibly. So there's some big socio-ethical issues around this. And then there's another issue around this, which again, I think is really interesting. People who take these weight loss drugs, it changes their preferences, their taste, their palate. They no longer crave, they no longer enjoy eating sugar, salt and fat. So their consumption, whether it's fast food, cookies, salty snacks, whatnot, changes dramatically. Of course, less than 1% of the population in the US are taking these things and these are just studies. But if you are Coca Cola or Pepsi or McDonald's, and you are asked: have you seen any impact of GLP-1 on your sales? And what are they going to say? Nothing yet. But it's the «yet» that's the problem. This is unprovable issue for them. So this is going to be hanging around for a while and we're going to see this debate. Again, there are going to be concerns. If you get 2 billion people on the planet on these tablets, then what is it going to do to consumption of pizza and burgers and chips and all of that, and beer, all of those things. So again, as investors, we never forget that the value of a business is really associated with what impact and what value they create to society. And when that changes, the value of businesses changes. It can take decades sometimes to adjust. But this is something you had to be very conscious of.

I've had the good fortune to sit in with you and your team when you've had these discussions and the depth and the long-range view that you attempt to create and thus how you allocate the assets inside your investment portfolios is really amazing to watch. And again, it's always great to catch up with you, to hear what you and the group are thinking of right now. And again, just different ways of thinking about these. I've talked to a lot of people about artificial intelligence and these drugs, and you have, as usual, a unique take on the impact that that can have long term for investors. So it's always great to catch up with you. I don't know if you know, I'm heading to the UK next week, so I'm going to see you and I owe you at least one high-end bourbon. I'm a fairly humble and poor servant, so at least a decent bourbon. And I'll look forward to continuing this conversation with you around the bar.

I look forward to that, Dave. I'm going to hold you to that.

Excellent. Thanks, Habib.

It's a pleasure.