Hello, and welcome to The Download. I'm your host, Dave Richardson, and it is (S)Tuesday. That means we're joined by Stu Kedwell, Co-Head of North American Equities at RBC Global Asset Management. Stu, how are you doing?
Good, Dave. How are you doing?
I'm great. Now, the rumor that's floated around the office over the years is that your nickname in high school was Omicron. Is there any truth to that?
No truth to that one. That has escaped me. But that would be quite a nickname, quite a handle.
And it's tough to pronounce, too. You never know exactly whether you're saying it the right way. But no matter what you're saying, it certainly caused stir in markets over the last days. What's your take on this and how investors should think about another variant, and I'm sure more to come down the road?
I think the Omicron itself is maybe in the too-early-to-tell camp. Trying to sort out, how effective are tests? How effective are the current vaccines? How effective are some of the antivirals? If we needed a new vaccine, how long would it take? These are all going to be subject to lots of debate and lots of discussion in the next couple of weeks. Are the symptoms milder? and what have you… I'm not going to get into the depths of Omicron views per se, but I thought it's probably worthwhile revisiting where we sat, say last Wednesday, which seems like a while ago, in market terms. But this notion that the long-term investing climate was at earnings growth of 6 to 7%, one or two points in dividend, and then how valuation might change over the long term. Those are the three ingredients that a long-term investor deals with. In a long-term investment, you're going to have Omicron. You're going to have all sorts of things that haven't been considered as of yet. From that standpoint, not a whole lot has changed. But what we also know is that when valuations are elevated in the short term, the market is not that well prepared for the possibility of a contraction. Whether or not Omicron will lead to that, as I say, I think it's too early to tell, but the market is a discounting mechanism, so it needs to factor in that potential to some degree. Even though we know how we were feeling last week, even on Wednesday, that eventually Omicron and Covid will pass and the stock market will immediately pull forward the new, more optimistic future. But right now, it's this kind of uncertainty that's been presented to itself at a time when markets were a little bit elevated in the short term. We talked in the past about some speculative activity that has to get unwound just a little bit here in the last couple of days. That's where we sit right now. So, we're monitoring things and rerunning a variety of scenarios and having lots of discussions around the impact on the economy. And so far, we've seen probably the two most notable things: more economically sensitive businesses have seen their share prices drop— and certainly anything related to travel, and what have you—, the yield curve has flattened, which is the bond market's way of handicapping the likelihood of lower growth going forward.
Yes. I reached out and got the gas tank filled up at the lower price per liter; even put the super in this time. Zipping around in the car right now. But Stu, one of my favorite things that I've learned from you over the years— we've covered it before on this podcast, but it bears repeating because I think it's so important for long-term investors to have this mindset coming into any investment or in their portfolio—, is this idea that you say, look, I'm going to be investing for sixty years, I'm going to see a dozen recessions, I'm going to see a handful of things that happen that are completely unexpected. I'm going to see viruses, I'm going to see military conflicts. These things are going to happen. But overall, you're going to grow over time and you're going to build wealth. This is why we invest. You've got to take the bad with the good.
No question. Volatility is the price of higher returns. That will always be the way. We put money to work in a regular fashion. When things get volatile, we just stick to that path because it is during those bouts of volatility that better long-term returns are available. And yes, it's like we say, more things can happen than will happen. When there's a negative series of events, there's almost always a reaction from a positive standpoint going on in the boardrooms of the companies that we own, and management teams are making adjustments to their plans, and governments are making adjustments and monetary policies are making adjustments. Anytime there's a bit of volatility, we always know that there are people working hard to address the cause of that. And yes, as a long-term investor, you sit there and say, I know I'm going to experience it, but I know that the long-term outcome is not as volatile as some of the days feel.
Just briefly to close up, we'll get back next week and be able to look back on the whole range of reports from Canadian banks who have started their reporting season this morning with Bank of Nova Scotia. Anything out of there that surprises you? Or is this sort of what we've talked about? A lot of expected stuff? The reaction in the market is tough to figure out because we're in the midst of the Omicron which is more of the focus, and what's going on with the virus, than any individual earnings report?
A couple of things were interesting in that report. Two things. First, the dividend increase was slightly larger than we had anticipated. When a board sets a dividend policy, they don't do it based on a current quarter's earnings. They do it based on the earnings power of the bank over the intermediate term. That would take into consideration plenty of things we just discussed, good times, bad times, all sorts of things. So that was an interesting development. It was a little bit higher, which speaks to the kind of intermediate-term confidence. The second thing, along the same lines, was that the guidance going forward on the provisions for credit which people anticipate to normalize, which means there'll be more provisions for credit in the future. The guidance around that was that the path to normalization will be a little bit better or a little bit longer than may have been expected. And again, if you're the chief risk officer of any financial institution, when you're setting reserves, you're taking into account all sorts of scenarios, whether or not it was Omicron per se— I think I just messed it up— whether or not it was a new variant per se, you would have been thinking about what could go better and what could go worse when you set these reserves. Those were two interesting things. For the rest of it, the business is performing in a reasonable manner, and the stock market is dealing in the same way it's dealing with money of the financials today, which is to say there's a little bit more near-term uncertainty, but nothing undue for the longer-term investor.
Excellent. Stu, thanks as always for the update. We'll look forward to catching up with you next week in what's always an interesting week, particularly in Canadian equity markets. But great to talk to you on Stu’s day. We'll see you next week.
Great. Thanks for having me, Dave. And thanks for everyone who's listening.