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About this podcast

This episode, Stu Kedwell, Co-Head of North American Equities, discusses the market response to ongoing geopolitical tensions, with a particular focus on the impact to energy prices. Stu also discusses how he is positioning portfolios for long-term success in light of recent market headwinds. [10 minutes, 06 seconds] (Recorded February 15, 2022)

Transcript

Hello and welcome to The Download. I'm your host, Dave Richardson. And it is, once again, everyone's favorite day of the week, (S)Tuesday! Do you know any place that gives away a happy hour on (S)Tuesdays? Is that a thing in the neighborhood?

Well, I would be happy to accommodate. I suppose I could go out and serve some ice cream and things like that, if anyone wants to stop by.

You're thinking ice cream? I was thinking maybe something else. But it is a family podcast, so we'll stick with ice cream. On that happy note, let's shift to today's topic, which is geopolitical strife or conflict. We certainly got that in the news right now. Your thoughts on how a typical investor should think about conflict happening somewhere in the world and how it impacts their portfolio? Is this something you think about a lot, or is it something that’s just there, short term? How do you think about it when you're looking at the portfolios you manage?

Well, it's a little bit of all of those things combined. From a longer-term standpoint, we tend not to focus too much on it because we're sitting here a month from the old highs on the S&P 500, and there's been plenty of conflict over time. We don't want conflict to get in the way of a long-term plan because quite frankly, it really hasn't in the past. All that said, that doesn't mean it doesn't receive a fair amount of discussion. The two things, when you go into a situation like we're in right now, is just where do we start from? When we think back to the last twelve months, the market has dealt with a variety of different headwinds. Some of the extraordinary growth stocks or the meme stocks correcting, the beginnings of Fed tightening, the list is a handful of things, none of which on their own interrupt a strong market. But when the list starts to get longer, it can have a little bit of impact on volatility, and that's what we've seen. When you have a geopolitical event and you're adding it to that list during that time, that's when it can be more impactful in the short term. That's how we've been thinking about it. I don't really expect it to have too much impact on a long-term investor. On an intermediate-term investor, in all likelihood, it's already had some form of impact. Just like anything, the stock market is a discounting mechanism, so it's always trying to sniff out. If you tell me that interest rates are going to go up, if we already have six or seven tightenings priced into the stock market, then they have to go up more than that. Same thing, we've seen some moves in some commodity that may have been accentuated by this conflict, most notably in European gas and in the crude oil market. There were some pretty good underpinnings to those moves that began before the geopolitical uncertainty. It's hard to totally decipher which is which. But within the last eight to 10 days, there's no question that some impact on crude oil has come from this uncertainty. We're always trying to figure out what's priced in and what's not. We've certainly priced in a short-term hiccup in the last couple of weeks. You can see today that when the tensions begin to alleviate a little bit at the margin, you get a more positive reaction in the stock market because it was braced for something. That's not to say it won't happen, but it's not happening right now. Things have a bit of a better tone. When it comes to this particular conflict, I think what we think about really is, from an inflation standpoint, we know that a chunk of inflation has come from supply chain constraints. Could this aggravate or prolong that, that's unique to this circumstance. We know that a chunk of inflation has come from higher-energy prices. This could certainly prolong that. Those are the two things. Then in Canada, there's been higher fertilizer prices, which has been a benefit to Nutrien and some other stocks; that also could persist. You're sitting there saying, well, boy, I got to really think through the impact of the conflict, but I might have to think through how quickly will inflation start to normalize because of this. That's probably the main thing that we're thinking about. That might be a little long winded.

What's shaking the market right now to begin with is inflation, the potential for higher interest rates, that inflation is somewhat related to energy. This particular conflict has all kinds of potential to impact energy prices and the energy market around the world, which then just leads to the potential for longer and higher inflation, which is what everyone is nervous about. Like you say, it exacerbates something that was already in place.

That's right. But the important thing is, there's two types of inflation. There's one caused by demand, and there's one caused by supply. Supply-oriented inflation can alleviate itself when the supply resumes. Demand-oriented inflation is what really needs to be settled down by tighter monetary policy.

One other question; say you're sitting there and you've been looking at this conflict building over the last few months, is this something that you might even position your portfolio, if it plays out the way you expect? For example, oil jump three to four dollars a barrel late last week when it looked like the conflict was really escalating. Is that something you'd ever set up for, or is that just not the way that you want to play with a portfolio?

In this case, I would rarely buy something exposed to the event on the arrival of the event. The stock market often has a sell-the-news-type mentality. Waking up and saying the day that crude oil jumps, because of the conflict, is the day that I'm going to buy crude oil after having not done it for a very long time, that would be something that we would do our best to avoid. When you think of those commodity markets, you're looking to get involved in those stocks when prices are low, there's demand concerns, there's a lot of supply around. In crude oil, a lot of those things had already begun to reverse; demand was recovering, supply was not coming online at the pace that people were hoping for, inventories were dropping. And then you put this on top, which caused a strong surge. If anything, we may have trimmed some positions into strength, because as I say, it can persist, but the stock market is a discounting mechanism. If you polish the bullet, that means that a lot of news is in the stock or the market. And the best time to act in the stock market is when there's uncertainty, because you don't know if you're quite at either the top or the bottom, but you know that you're waiting into something where there's a conversation, and that's normally when things play out for long-term investors.

Really interesting, Stu, as always. I think that's some pretty good guidelines around how to think about something like this as it's happening. As you say, whether it's a potential global conflict or many other issues in the market, you've got to take in all the information and see if there's any actionable item, but in a lot of cases, there's really not. Or if you try to be too active in it, you run the risk of shooting yourself in the foot, I guess.

I think that's right. There's an old axiom: news starts on the back page of the Wall Street Journal, and it travels its way to the front. And by the time it's on the front page of the Wall Street Journal, it's harder to make money off of it.

Absolutely. Well, that, to me, wraps this up and I think it's time for ice cream. So let's get our Stu’s days soft-served. Maybe chocolate dip?

Chocolate dip will be the code for the beverage you're looking for, Dave.

Excellent. Another great (S)Tuesday, Stu. We'll see you next week.

Great. Thanks, Dave.

Disclosure

Recorded: Feb 16, 2022

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