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In the midst of this pandemic, headlines have been dominated with constant bad news. Yet despite all the negativity, markets remain resilient. With more bad news expected to come, could market reaction take a turn? Stu Kedwell, Senior Vice President & Senior Portfolio Manager, Co-Head, North American Equities, RBC Global Asset Management, shares his thoughts, and discusses how liquidity plays a key role.


Hello and welcome to the download. I’m your host, Dave Richardson, and I’m joined again on Tuesdays, — Stu’s days, we’re calling them! — with Stu Kedwell from RBC Global Asset Management. And one of the interesting things that have been happening as we continue to move through this Covid-19 health crisis and something that I know investors wonder about — and I even see it being a challenge in the news media that covers the markets and the global economy —, is how can we continue to have somewhat bad news around what’s going on with the virus? Although things have improved, we’re still seeing lots of new cases and lots of fatalities. We’re also starting to see some of the bad news in terms of economic figures. Yet the market just continues to chug along. It has recovered more than half of its losses from its initial decline through March. And Stu I thought I would get your perspective on how can markets just look through this? Why does this happen? How can we understand that?

That’s a great question, Dave. The markets are very forward looking and they’re very long term in nature. So when there’s a liquidity issue, everyone’s time horizon really shortens in. And when liquidity is more plentiful, then people will look towards better days. And right now, what we’ve been living through in the last six or seven weeks has been a plethora of liquidity in the financial markets and the real economy is not really functioning, it’s not using that liquidity. So it keeps roaming around in the financial markets and keeps valuations at I wouldn’t say stretch levels, but at pretty healthy levels, relative to some of the discussion that you’ve heard from Eric and things like that, about when the actual economic recovery might take place. And we’ve seen it time and time again as companies have started to report. Last night we had Canadian National Railway. This morning we had PepsiCo. The results were not bad from the first quarter and they withdrew their guidance. And it’s not really surprising to people. I think most stocks are up a little bit today. Not that companies are getting an outright free pass, but unless something is coming up that says the longer term might be different than we thought, market reaction has been pretty benign, and that’s because there is a fair amount of liquidity out there.

And so, are you concerned at all that at some point in the current news flow it gets to a point where markets do get unnerved and start to react more to bad news that’s coming out on a day-to-day basis?

Well, in the near term companies are getting a little bit of a free pass. As we get farther into the second quarter, today people are enthused when governments come out and say: « we’re going to reopen the economy » or « it’s going to be these three stages to reopening the economy ». And we can look globally and say: in other spots, maybe in Asia, where there has been some movement towards getting things going again, the first 60 % of the economy comes back pretty quickly, but the last 40 % takes a bit more time. And where that will present a bit of a challenge for markets perhaps, as the summer moves on and North America gradually reopens — by baby steps, followed by a more concrete action —, if the economy doesn’t kick into gear the way that some of the current share prices might suggest, that’s where we’ll run into a little bit more of a problem. And that’s something that we’re very watchful for. When we think about the stock market over a long period of time, we sit down with the likes of Eric and others, and say: when do we think the economy will get back to that more fuller capacity? And most people still think that’s a late 2021, early 2022 event. So as long as the return potential for stock markets is reasonable against that type of a backdrop, that’s what we’re focused on, not necessarily what’s taking place today or tomorrow. Back to the earlier part of the question, liquidity has clouded some of these arguments a little bit because if you’ve taken investment grade bonds or you take a long-term government bond and you invert it — what that means is you take the price you pay and you divide it by the coupon — the multiple on bonds is very high. And that presents a bit of a challenge for the equity investor because the notion that stocks will bottom at twelve or thirteen times earnings, it’s just not likely to take place when there’s that much liquidity in the system.

Lots of liquidity, no great alternatives. Kind of an understanding that the news is going to be bad, and that markets are generally looking ahead anyways. And you’re left with, as you say, healthy valuations.

Yes, that’s right.

Great. Well thanks again, Stu. And we’ll look forward to tracking this almost real time every Tuesday on the podcast, on the download. So thanks for joining us again today.

Thanks very much for having me.


Recorded April 28, 2020

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