Hello and welcome to The Download. I'm your host, Dave Richardson, and it is a somewhat fully recovered Stu's days. Let me explain, Stu. Well, Stu knows the backdrop. Maybe he doesn't know how bad it was, but we've been away for a couple of weeks. So I want to apologize to the listeners. You can probably hear in my voice, I'm still not 100%. We were traveling with Stu. We were over in London and somehow, I picked up a cold which went down into my lungs and gave me my annual bout with pneumonia. And now that I'm an elderly person, the pneumonia wins. I used to fight through it, but now the pneumonia wins and the recovery's tough. But I found my way down to Florida because I had to attend a conference and the warm weather is helping. So we're back on the air with the global chief investment officer of RBC Global Asset Management, our old favorite, Stu Kedwell. How are you doing? You look like you're doing great.

I'm in an okay shape. As my mom would say, I'm in good shape for the shape I'm in.

Oh, very well. Another Stu-ism. So we're going to get some of that today. But Stu and I have actually ended up on the road together talking to different groups of advisors. And I think we're out west in Western Canada next week, which will be nice. It always gives us a great feel for what advisors are talking to their customers about. Listeners, investors, what are your concerns? And that always helps us tailor the content and what we talk about here. We always love to hear back from you in terms of what you like and don't like about the podcast. And we do have in the shop all kinds of alternative hosts, so you can complain about me and Stu will still be here. So that's an easy one. I can live with that. But we really do appreciate hearing some of the stories of different listeners who have found the podcast some way or another and enjoy it. So thanks to everyone. Stu, I think this is something you really enjoy doing.

I do. I could talk to you all day, Dave, and the fact that people get to listen to it, all the better. It's great to hear what's on your mind and what's on our unitholders' minds and just your perspective on things and to talk through things.

Wow. No, I mean, really, we want to hear your perspective and that's what people come for. But again, what we're doing as always is we just want to help investors in any way we can in terms of seeing through. There's so much noise, and I guess that's what we're going to talk about to kick things off, Stu. So much noise which just creates a lot of movement, or at least a lot of gyrations in markets and some real movement as well. And it's so unsettling for Canadian investors. Of course, what's going on politically in the US, the Middle East crisis and conflict. These are all things that are making it hard. We were talking this morning with realtors. We do a lot of work obviously as a Canadian bank in the mortgage and home-buying space. And just the challenge for a first-time home buyer in the housing market in general with everything that's going on. You throw in AI, which I think we're going to talk about a little bit today too, Stu. And there's just so many reasons that would cause someone to just stop and pause instead of moving forward. But then you look at the markets. We were down 10% at one point. And you look up today, Stu, and we're back above where we were on February 28th when the conflict in Iran started. So since we haven't talked to you for a couple of weeks, what do you make of that?

Well, there's a lot going on for sure, and we'll do our best to cover it off. When you’re in the midst of a decline—and we've talked about this before—not every seller is selling because they want to. Some of them have forced reasons, leverage, a structure, all sorts of things. Declines tend to be quite quick, and as soon as they find their footing, they can often come back up like a beach ball that's been held underneath the water. This one has been quite brief. I think we were up 12 or 13 straight days. It’s another reminder. The way markets work is, once you get rid of the selling of the people who worried about the negative issue, the buyers during that process are basically saying this negative issue will eventually pass. So you're falling from one set of hands to a different set of hands, and then as that issue starts to find, I wouldn't say it's past us, but as maybe it got through some of the worst parts of it, those hands just don't give it up super easily. So you get this kind of bounce back the same way. We went into this worried about the price of oil. The price of oil is one thing, but it's really the price of all the products, diesel, jet engine fuel, fertilizer, helium for semiconductors. We were talking about that the last time. Will that put a pinch point on economic growth? I think there's been a lot of discussions that there's going to be some impacts. We've started to see some companies come out and try and frame that impact. But you also have a bunch of investors that say, well, how long will that impact last? And as long as it's not too long, then we're not going to change the value of the business a number of months and years from now just because of this pinch point. Now, that was a major factor in the recovery. A couple of other things that have also happened along the way. One was the release of Mythos, a model from Anthropic, even though that hasn't gone to everyone. While we have concerns around the impact on certain parts of the economy and certain companies that come from elevated energy prices, you also have the sands of time on progress marching along. It had been happening a little bit before the war started, but the cost of compute, which you can measure on a graph, had started to accelerate. And when you get a new model, it just reminds people that these models are going to be pretty good and they're going to use a lot of compute. So we've seen semiconductors really lead the charge. And memory. And that has transitioned from—I don't want to get too technical here—but GPUs were really important for training a model, and then CPUs are also quite important for the inference part where the model is doing maybe a little bit more specific tasks, going back and forth. So you've seen companies like Intel and AMD and other semiconductor companies really start to add or join the party. It started with graphics processing, then it went to the inference, then it went to memory, and then it went to CPU. The semiconductor industry has led the charge off the bottom, even while the rest of the market hasn't quite participated in as robust a manner. Geographically, the US and Canada are viewed as more insulated, not surprisingly, from some of these shortages that might take place in certain product markets. Those markets have done better than say, Europe. Japan has been, I would say, okay. And EM has actually been stronger than you might think. On the one hand, you could say, well, parts of EM are real energy users. Other parts like Latin America that is going to generate commodities, generate crops, generate all sorts of things. A little bit more of a balanced bag there. And then there's a lot of technology inside of the emerging markets, most notably through Taiwan Semiconductor, which is the big manufacturer for everything. We got this period where I wouldn't say markets were cheap, but some valuations had fallen to levels. The earnings estimates, which I think people thought would roll over in response, have been very strong. We had a discussion this morning on our team. Just because you see very strong earnings estimates, unfortunately, it hasn't been as broad-based as we might like. Almost half of the ongoing strength in earnings in the S&P 500 has come from the memory sector. These are traditionally more cyclical businesses. We've been left with a market that has generally bounced back, some sectors more than others, left us in a bit of a situation where if it emerged that the conflict was going to last for an extended period of time than we are at right now—I think the view that's in markets is more along the lines of there'll be some type of ceasefire eventually, notwithstanding all the back and forth—and eventually, products will start to flow. To the extent that that was extended or conflict renewed, then maybe in the very short term, markets are a little bit more vulnerable to that. But all things considering, economic growth forecasts have been trimmed a little bit in Europe and areas where, again, the energy intensity is a little bit higher. But the big areas of the market, the US, Canada—not that it's that large—but those economies have been a little bit more persistent.

Yeah. I'm going to skip over the emerging market piece because we're going to get Phil Langham on over the next couple of weeks and go deep in there. I think one of the big things that you highlighted with respect to emerging markets and that a lot of people miss is how many different countries make up emerging markets and how those economies are different and how they perform when different things are favored versus not. And so being in the right spot in emerging markets is as important as being in emerging markets. It's a little bit more refined than that, but Phil's better than anyone, as you know, Stu. So we'll get him to talk about that. But the conflict in the Middle East is just one of these ones that confounds me because—I think it's a great lesson and you've talked about this over so many different episodes in the 5 years we've been doing this—but it's such a great lesson in terms of where the market's thinking is. Whereas you say, the long nose of the market that's sniffing out in front. I'm looking and reading the news and I'm sure most of the listeners are reading the news—they're online, they're watching reports, videos of everything that's happening, the analysis from both sides of the aisle in the US, which tends to differ in the way they position it—but I don't get a sense that this thing is over anytime soon, or it's dragging on longer than you would've hoped. But the market is trading or reacting in a way as if, like you said, they know at some point we're going to get a resolution. It's looking beyond that. And I think that’s such a great lesson. If I drew a normal distribution curve—I've been doing this when I've been talking to advisors—you've got these big outlier situations. The one that everything ends quickly: the oil's flowing all over the place and more oil than ever and oil drops down to $40 a barrel and everything's resolved and it's a happy, peaceful world, even Ukraine and Russia settle. And that was like 5% or 2.5% chance of that happening. Well, that's way off the table now. But then the worst-case scenario that the thing drags on for years and oil goes to $200 a barrel. That was out there, but that's kind of off the table. So you're kind of where we expected, somewhere in the middle, but it still doesn't seem resolved, but the market seems to have resolved it. Or am I off in my thinking there?

Well, what the market always tries to do—it always feels a little bit weird talking like the market's a person—but they try and put an issue in a box and determine whether or not it's like a fatal issue. And once you can decide that it's a challenge but not fatal—we've talked a lot about «bad and getting better»—it's still not necessarily great, but «bad and getting better» in the market's eyes is an improvement. And I think an analogy that probably works for most of our Canadian listeners anyways is, the Canadian housing market is still struggling. That concern probably hit investors' radar screens 3, 4 or 5 years ago, multiple times. But the market was able to put that in a box and was able to say, okay, the banks have lots of capital. The banks have this earnings power that can fill up the capital box if necessary so that the worst-case outcome can be dealt with. And then they can go on and think about new things. So, sometimes you'll sit there and you'll say, well, why isn't the market worried about this? And it's a very valid worry, but it only takes it to get a little bit less worried for that to be positive to stock markets. So we have to always be considering that. And we've had a pretty big rally here. And if something came out that looked like it was going to really delay Hormuz, I don't think the market is as priced for that as it would've been 10% ago.

Yeah, well, Johnny Market was the top student in my grade 13 high school class. So I'm not surprised that he's got lots of thoughts. And let's talk about Sally Raleigh. She was also in my high school class. We talk about the rally as a person too. And this is a bit of a thin rally, isn't it, Stu? It's not as healthy a rally and broader rally as we would've loved to see.

That's right. It hasn't had quite the number of stocks participating that we had in the past, although even within that you're always trying to sift through and say, hey, that's interesting. This week we did have a big announcement where Shell has come back to Canada. They've been in Canada, but they have announced the acquisition of one of the big gas companies in Calgary. And this is interesting on a number of fronts because Shell had left the country from a production standpoint on the oil sands. So to come back is interesting. They're one of the big players in our LNG facilities where the first train is going. And it just sends one of those messages while we also have the government out talking about—and the details are a little sparse on what the sovereign wealth fund might look like—but the major projects office. There's a variety of things going on from the government, and to see a company come in and put their chips down on the table and say we want to be a bigger part of what's maybe going to go on here. Then you can think through, okay, so maybe a little bit more LNG, maybe a little bit more facilities around the oil sands and around natural gas. Different chemicals. Even in a period where you get a narrow market and everyone's been very focused on semiconductors and memory and what have you, there's always another sprinkling of news underneath the surface where you need to say, why is that company doing that? And particularly on the M&A front that's normally the result of a very long and well-thought-out strategic process. So that's something that's also been highlighted. That's a combination. Of course, we would like to see a broader rally off the lows to say that would be kind of the all-clear that the oil price isn't going to impact as many businesses as perhaps initially concerned with, but there's been lots of pockets of strength around different things. We've had some exposure to them and really tried to pay attention to what's going on.

And your comments about AI earlier were an important thing to highlight. You can tell me if I'm wrong because you're closer to it than I am but I'm at conferences hearing different speakers talk about it, the idea that AI is starting to get into businesses in a way that you're starting to very clearly see the benefit it's going to have to the bottom line. You have the idea of AI and what it could do, which comes to a point where, okay, we've actually got something, a model that works and we can use in different ways. But then to actually see it embraced and implemented inside of businesses and that it's actually being used to reduce costs, increase efficiencies and ultimately improve the bottom line. That really seems to be a bridge we've really clearly gotten over it. But is that the way you see it from an investment perspective?

In the first quarter, not just the discussion around AI, but I think almost a quarter of S&P 500 businesses have specific targets on AI efficiency. I think the second thing that's also coming out as the models get better and within 6 to 12 months, at some point the models will almost start training themselves. When we get to that level, you have the efficiency component, but then you also have the reimagining of business. There's a couple of things. There was a story in the New York Times about a guy and his brother who built a very successful drug-selling business. They were selling the weight loss drugs online and the marketing and the operations had been done by AI. So on the one hand, we have people who have concerns over the level of employment in some areas and those are valid and we're going to have to work through them, but we're also starting to see some of the opportunities that also might present themselves. This was selling weight loss drugs but there's been all sorts of stories about the marvels that might come to healthcare and other areas. So, what I would really say about AI is that there's going to be impacts in certain areas, and we have to think through those impacts very carefully on both employment and some businesses that may struggle in the new domain. There's going to be other businesses that reap a lot of efficiencies. And there's going to be a host of brand-new businesses that emerge and could be quite dynamic. And as I say, I think it's going to touch every business in one way or the other.

Just as you say that, something comes to mind. We've obviously got analysts who are forecasting earnings in aggregate. And then you and investment managers are trying to see where there may be some inconsistencies in that. As AI created a wider range of outcomes where the firms that really embrace it could have outsized wins from it, that may be hard to see coming. And on the other side, firms that for whatever reason just botched the integration of AI, that they have outcomes that are really bad. An outsized bad result. And again, it's a hard one for you to see. Does that create that risk at all?

The risks are a couple of fold. The first is that revenue just starts slipping away to competitors. Even watching how long it took someone to get the internet and Internet Explorer and Chrome and all these types of things relative to the speed with which people were downloading OpenAI and Claude and Gemini. The speed with which a business can change is obviously elevated just in terms of how your consumers can move around quickly. The second thing is reworking your business. Where the vulnerability exists is in how wide your margins are. So you could have a business that could remain still quite successful, but the revenue growth might be a little bit different, and the margins might be a little bit lower, and you could have still a successful business, but you may not have a very good stock. So that's the testing things that the portfolio managers and the analysts are spending all their day on. What does your revenue line look like? Could it be better? Could it be the same? Could it be worse? How does your margin profile change in this? Where is it exposed? Where could it expand? If you have efficiencies and it expands, will you get to keep them or will you have to pass it on to the customers? There'll surely be a bit of both. And then as you have these new revenue outcomes and you have new margin outcomes, then you have to make some calculation on what you think the cash flow is then worth. If you thought it is less sustainable, then you're going to put a lower multiple on it. If you think it's more sustainable, you're going to put a higher multiple on it. It's kind of a 3x3 matrix of revenue, margin, and valuation. That has likely widened the outcomes on some things. But if you're willing to think about it in those dimensions, it still provides you lots of opportunity within the market itself.

If I've been listening to you carefully enough over the years, widened outcomes is something that you and your team actually like, right? Because you're more likely to be able to identify the winners and losers more so than the average investor can do it.

Some people look at the volatility in the market and say that doesn't make any sense. We say the volatility does make sense. The volatility is the share price ricocheting between these different outcomes. Then you embrace the volatility that you see rather than being perturbed by it. And that has provided opportunity over time.

Yeah, so we've got the Bank of Canada this week, I believe, likely just hold rates flat. It doesn't look like rates are going to be moving down here in the US at all. You've seen the 10-year tick up a little bit over the last few days. Anything dramatic that's concerning you or anyone?

Well, you have any kind of easing that was in store has likely been taken away. Central banks have different mandates around the world. For some central banks, it's a dual mandate of inflation and unemployment. Others are more focused on inflation. So you might see some tightening out of the eurozone or something like that, where it's more inflation-focused. The issue with that is, as you tighten in response to a supply-side shock, you inevitably will likely lower demand on the other side. The reason you've seen some movement in short-term rates, but not as much movement in the longer-term rates is, if you have higher short-term rates, then the odds of having lower short-term rates down the road goes up. That's the relationship why you don't see 5s and 10s really moving as much.

And, and then the other thing that's big on the docket this week is, the biggest companies in the S&P 500, or a few of the Magnificent Seven, are reporting. Of course, this was big news if you go back over the 2024, 2025. So first quarter, people kind of moved away from the Magnificent Seven, but these are still important earnings in terms of evolving our thinking about what's going on more broadly across markets, correct?

Yeah, I think the biggest focus is on the level of CapEx, and then the outright growth at the hyperscalers because it's a bit of self-fulfilling. If you have strong growth at the hyperscalers, that means the demand for compute is high. If the demand for compute is high, then that justifies more capital expenditure. I think we're likely in a period of time where we're going to go through that debate a couple of times a year of sometimes the compute seems ahead of the demand because the model that's currently in place and then we get a new model and then the compute short and we'll kind of go back and forth on that. But the people that get into these new models, you can see their token usage really start to skyrocket. So we probably have blown through our tokens, Dave, on this podcast, I would think. Our compute's pretty high to keep these two engines going, I would think.

Yeah, well, I'm going to go in and recharge my compute power with a walk on a soft white sandy beach with warm ocean waves coming in and hitting my ankles and just relaxing. But I'd actually rather do what you're doing, which is you're going to go and manage a few hundred billion dollars. That actually is more exciting to me than what I'm going to do. But given my state, I should probably try and get healthy. But Stu, great catching up with you. We covered a lot there today. That was pretty good.

As of where you are, we covered the waterfront. So we'll see you soon, Dave. Thanks so much.

Thanks, Stu. You got me choking right at the end.