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Earnings season kicked off on Tuesday, with Scotiabank reporting their results for the second quarter. Not surprisingly, the results speak to how heavily hit the Canadian financial industry has been during this pandemic. Globally, certain sectors are rebounding faster than others. For investors focused only at home, this may lead to missed opportunities. Stu Kedwell, Co-Head, North American Equities, shares how earnings season results highlight the importance of a well-diversified portfolio in this period of uneven recovery. Recorded May 26, 2020


Hello and welcome to the Download. I’m your host, Dave Richardson. And I’m joined again on Tuesday by Stu Kedwell, the co head of North American Equities at RBC Global Asset Management. Stu, welcome to the broadcast today.

Hi, Dave. Thanks for having me.

And I guess the big news out this morning — and we’ve touched on this on some previous broadcasts —, Canadian banks are starting to announce their results for this quarter. And the first one out of the gate here is Bank of Nova Scotia. Anything interesting in the Bank of Nova Scotia results from your perspective, Stu?

Yes, I think there was a lot that was interesting. First and foremost, there had been a lot of concern around the level of provisions for credit. And we’ve discussed this before. And they were high. They were high, and they’ll likely remain elevated for the remainder of the year and maybe a similar number in the third quarter with a little bit of improvement in the fourth quarter. The things that were interesting, we got our first glimpse on how much of different loans are on deferral. Around 20 % of their mortgages are on deferral. But they also made the point that when those mortgages come off deferral, the average payment would be up around 60 $ a month. So it seems somewhat manageable. I thought from where the banks sit today, — and we’ve discussed how their share prices have been compressed — capital was strong and looks to remain strong through the remainder of the year. Asset quality is not bad and the liquidity of the bank is very strong. And if I expect to see this as a theme to the other banks, I expect to see high provisions prepared for kind of an uneven recovery, but not in a bad spot.

And so, Stu, let me just touch on that last point that you made around an uneven recovery. I think an element of the report today had the global earnings for Bank of Nova Scotia challenged. But if we look at an uneven recovery and the impact that you see in Canada, or the message it sends to investors about where they should be investing or how to invest in this new environment, what do you take away from that?

Well, it’s a great point. We’ve already seen it to some degree, uneven. In the last six weeks, some businesses have been quite depressed, but if you have an online business, you’ve been booming. So there will be parts of the economy that come online, or come back online, rather, at different times in the next twelve to eighteen months. And, when we think about global investing, when we look at U.S. markets and other areas, there are so many more cylinders in those economies to still benefit your portfolio even during an uneven recovery. So in the last six weeks our portfolios have benefited from some U.S. exposure where we’ve had the likes of Microsoft and Google and Facebook. And there’ll be other areas of the world that come on in different streams in the global portfolios and will benefit, as those economies recover. Versus in Canada, where we’ll also maybe have a little bit of an uneven recovery. Maybe Ontario first, then some delays in the energy areas. We’ll see. But Canada has a narrower focus because of our exposure to financial stocks and to the energy stocks.

And that limitation of the Canadian market, particularly in an environment like this where, as you say, energy, financial services and Shopify, — which is a whole other topic that we should get to one day —, in terms of the composition of the Canadian equity market, that’s going to be a challenge for investors. If you’re limited to Canada, then you’re limited in your exposure to the types of industries that are going to go through this choppy recovery.

I think that’s exactly right. Many of you will see in that chart that we use, it has the long-term earnings growth of the S&P 500, growing around 6,5 to 7 % over a very long period of time. And you think about how that composition has changed in the S&P 500 over time. During certain periods, it’s health care businesses that are driving the earnings, other times technology, other times financials. There’s such a breadth of companies in those big indices to drive that long term compounding in your portfolio, relative, unfortunately, to Canada, where we’re a little bit more limited to what has to do the heavy lifting.

Stu, that’s a great tee up for the bank earnings season and some things that people can watch as the other banks release their earnings over the remainder of the week. And a good tap on the shoulder to remind Canadians — although we love Canada and we want to support companies in our own country —, that the limitations of Canada mean that for many Canadian investors they’ve got to look elsewhere and that diversification is critically important. Stu thank you very much for your time again today.

Great. Thank you, Dave, and thanks everyone who is listening.


Recorded May 26, 2020

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