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In August, stocks in tech giants like Apple, Amazon and Microsoft soared. This month, however, has seen them return back down to earth. Stu Kedwell, Co-Head, North American Equities, RBC Global Asset Management, shares his thoughts on how these market corrections compare to the tech bubble of the early 2000s. Stu also highlights the importance of an investment process that considers all possible outcomes in any market environment. [8 minutes, 52 seconds] (Recorded September 22, 2020)


Hello and welcome to The Download. I’m your host, Dave Richardson, and I’m joined for (S)Tuesdays today with Stu Kedwell, the Co-Head of North American Equities at RBC Global Asset Management. Stu, great to have you back on Tuesday.

Thanks for having me, Dave, and thanks for everyone listening for their time.

So we’re going to have more of a wide-ranging discussion today. A lot of interesting things going on in markets. And maybe we’ll start with the action we’ve seen through September, which is almost a reversal of some of the action we were seeing in markets in August. Some of these big high-flying tech names really took off in August, away from the broader market and have kind of come back to earth. What are you seeing going on there, Stu?

I think that characterization is bang on. We’ve seen the likes of Apple and Amazon and a few of the other very dominant companies correct, in the last a couple of weeks. But they had moved very aggressively in the last two weeks of August, so I don’t really view those types of share prices coming under a bit of a correction as necessarily a big warning sign. There was a day when Apple split its share price and it opened very strongly on the share price split. We know, just from the math of it, if you have a pizza, and you make six slices instead of twelve slices, it’s still the same size pizza. But there was just so much enthusiasm in that last couple of weeks of August. So there’s been a bit of a correction there, but nothing that is untoward at this juncture. For investors — we’ve talked about this in the past and it’s accelerated in the last week — there’s some political uncertainty around the Democrats and the Republicans. What will happen in the election? Will they agree on some stimulus? What’s gone on in the U.S. judiciary system has only complicated matters. There’s not a lot of goodwill between the two sides here. And we have had Jay Powell, the Fed governor, the head of the Board of Governors, who came out and said that there’s no question that the stimulus checks that have arrived in the last three or four months were very important to the health of the economy. People have some concern about a stimulus package in the next couple of months around the election, so they’ve taken that uncertainty into markets a little bit. But, just because something hasn’t happened doesn’t mean it won’t happen. And that’s kind of what we’re evaluating going forward. The one thing I would note – and we can take a couple of directions -- while some of the strong stocks have corrected, the broader market hasn’t fared as badly in this correction as you might think. And we take that to be a bit of a better sign while we go through this.

Yes. You know, the last time I recall seeing a market that looked like this — and mind you, I don’t want to make the direct comparison in terms of the outcome —, but I recall back in the high days of the tech bubble back in late-1999 and 2000. You had a group of companies that ended up being very good companies, companies that are household names today. But [they] were newer companies and had incredibly high valuations, and were going higher. The broader market was just coasting along at a nice clip, but overshadowed by those high flyers. And then ultimately, those high flyers corrected. But the broader market from spring of 2000 to September 11 in 2001 actually fared pretty well. Is that, on a smaller scale, what we’re seeing going on, or is that just a silly comparison between two very different times?

No, I think it’s a pretty valid comparison. There are a lot of businesses whose valuations are quite reasonable in the grand scheme of things, where dividends are very strong. We were having a discussion yesterday with a company that yields north of 5%. And we’ve looked at what they’ve done to reshape their business for what they think is in store in the next couple of years. And you can see like a double-digit potential in their share price, plus the dividend. Not that the business has been left for dead, but it’s not as exciting as some of the businesses that are directly benefiting from what’s gone on in the COVID environment. Your analogy is a good one, because when I sit and think back to the period of, say, 2000, 2001, and 2002, a bunch of insurance companies became public in Canada, and they could barely get the deals done at book value. And while there were some companies that were struggling under the weight of very high expectations during that period of time, there was a new bull market starting with a bunch of companies that had very attractive valuations and were spinning off a lot of cash. And that’s the way the market works. Sometimes some things are too much in fad, and sometimes other things get left behind. That leaves the opportunity to rotate the money around to try and compound the total portfolio at a better rate over time. So, admittedly, right now, everything stands a near-term chance of being a little bumpier with the uncertainties that we’ve talked about on the economic, political, and health care fronts. But there are lots of businesses that are well-capitalized and prepared to do quite well once this environment settles down.

Yes, and I think it’s important for investors who may have been watching some of these high-flying stocks with the fear of missing out, and now watching the major indices come down a bit. But be aware of your own portfolio, because you could be doing very well. Would you say, Stu, that this is the kind of environment that you prefer as an investment manager? Or is it really the key for you to just be adaptable and manage through any type of circumstances?

Well, knock on wood, I feel that our investment process lends itself to a variety of environments, because we don’t spend a lot of time trying to predict exactly what will take place. We try to spend a lot of time thinking about what could take place, and what’s priced into different assets at different times. So you would rarely see someone on our team say, “I think this stock is going to double in three years.” What you would hear is: “These are the conditions required for it to double in the next three years.” And do we think that’s likely or possible? That’s the type of investment process that we run across the firm. So when you get into these environments, for some businesses, the range of outcomes required for their success are narrow right now because their share prices have gone up so high. And when you have an expensive stock — it can be a successful, a good company, it can still be a successful stock — but they need to thread a smaller and smaller needle in order for that to take place. There’s other businesses that get left behind and management is busy doing all these things on your behalf. And it’s just a matter of time before they’re recognized, and you get very good risk-adjusted returns in those types of situations. So, knock on wood, I don’t mind most environments, but yes, in this type of environment where volatility picks up a little bit and there’s lots of different uncertainty, there are lots of things for analysts to work on. And, you know, these times aren’t always as enjoyable for unit holders, but they’re usually pretty enjoyable for intermediate term investors. And we like that.

Excellent. Well I wasn’t expecting to go in this direction. But that was some interesting insight in terms of setting up processes. Having a disciplined process that is adaptable and flexible enough to work in a lot of different environments, so that you can benefit regardless of the direction markets go. Stu, that was fantastic. Thanks again.

Thanks, Dave.


Recorded September 22, 2020

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