Hello and welcome to The Download. I'm your host, Dave Richardson, and it is Stu's Day today. We have Stu Kedwell, head of global equity at RBC Global Asset Management. And Stu, there's a little bit of a chill in the air. The days are getting shorter. I know what gets you excited. I know I’ve had a couple of leaves come down. Maybe a handful of leaves that I can rake up. But you're pretty excited about the leaf raking season. And I know it's still a few weeks away, the real peak of it, but you're almost like the stock market, right? You're looking out in advance. You're looking at the leaves that are going to fall. You know you're going to get right on that tree. That one is coming first. Just like the market looks ahead and is looking for where the profits are going to be a year out, you're right there on the leaves.

Yeah, well, like a lot of things, it's the rate of change of the temperature decline. It's not just the decline itself. So this year we might get earlier leaves because it's been so hot so that when it cools relatively quickly, if it persists, but as it cools, the rate of change has been big, so the leaves might fall early. We'll see.

Yeah, it should be a pretty good year for wine, too, across Europe. No US wine here in Ontario. But we've had, like you say, that big cool spring, big spiky hot summer. And if we have a cool early fall, then that's perfect for your grapes.

100%.

But I'm not a winemaker.

You're just a wine drinker.

Well, I'm not sure we're allowed to say that on the podcast. But yeah, I'm a lover, not a fighter. I'm not a producer. We'll just leave it blank and leave it open for interpretation. So, Stu, the other thing I know you get excited about. Most people have Christmas or a day in the year, maybe it's their birthday, Thanksgiving, that they celebrate, the excitement of a big family event, whatever it may be. But you get excited four times a year because there's four quarters of bank earnings. And we're out with Canadian bank earnings starting today. It was the first bank earnings?

Yeah, we had two banks this morning. And then bang, bang, bang. All six banks go in the next three days, and some of the smaller ones as well. And so far, so good. The earnings were strong. I would say, when you look at a bank's income statement, you have non-interest revenue and net-interest revenue and what have you. And one line is called pre-tax, pre-provision. It's like the earnings that the business generated before they paid tax and before they provided for credit. So far, those numbers have been not a whole lot better, but a little bit better. But what has been a pleasant surprise is that the provisions for credit are lower than what people were thinking. We've talked a lot about provisions for credit over time. When the market gets focused on those things, you tend to try and think about how it might look like on the other side. The old saying, you can't lose money on the same loan twice. So when banks set provisions for credit, they have provisions for what they call impaired loans, and they have provisions for performing. And even though the economy is sputtering, they have been putting away provisions for performing loans, and some of those dropped, maybe meaning that the bank's reserves are getting to a pretty good spot. We'll see how the rest of the week plays out. But this idea that provisions for credit were going to likely hit their zenith sometime in the back half of this year. So this is the third quarter, and in fact, it might be a bit of a tailwind as we move into '26 and '27. And by a tailwind, I mean they're just lower than they used to be, so they actually end up generating some earnings growth. So the stocks are strong, valuations have improved. But I think the case around the slope of the yield curve, some changes in provisioning for credit, are these the numbers that you run out to buy? I'm not sure. Maybe not. But they're also not numbers that are worth selling. So in the absence of no selling, you tend to get prices rising. That's where we're at here. Four more banks to go, but when we look through mortgage delinquency, all sorts of things, I wouldn't say it's gold stars or anything on that front but it’s not really getting worse the way that some people might have thought.

Yeah. We'll get into talking about banking overall because we've had some other guests talking about banking in Europe and in emerging markets, different guests on the podcast. But the Canadian banks offer something that is pretty interesting. We should qualify here that we both work for a Canadian bank, and we're not making any specific investment recommendations on this podcast. We never do. We talk in general terms about big blocks or big areas of the market that you might want to consider and big issues across the market and across the global economy that you might want to consider. But Canadian banks and Canadian dividend stocks, as we've talked a lot about on this podcast over the years, but banks in particular, solid franchises, great dividends, or at least very good dividends, stable dividends that tend to grow over time. Then you get into a cycle when the wind is at their back because of changes in the loan loss provisions. The market has sniffed out a bit of this, I imagine, as you'd always talk about—the long nose of the market. But this is an area of the market where when we talk about all the excitement around technology and AI and quantum computing and nuclear power and all these other things that have gone crazy this year, the Magnificent Seven, the banks just chug along and do a pretty good job for investors.

Yeah. I think that's bang on in terms of maybe hitting a little bit of the peak on the credit loss side. Then the other two things which play out over time, again, is like that slope of the yield curve and then the banks have enormous expense bases which could be assisted by artificial intelligence as revenues grow. You've heard different banks try and quantify it in dollar terms. You've had other ones say, we can grow our revenues this much faster than our costs. But all of that shakes out pretty good for the intermediate term shareholder. And the other thing, too, about a bank is, even when they're not growing, they're generating capital every quarter. And if they're not growing, then they can use it for share buyback, which helps you keep earnings going on a per share basis. So there's ups and downs. And we've had credit worries. They've dissipated. They'll be back one day again. I've been at it for 20 years and I should probably keep track of how many times we've had credit worries. And they do come and go, and they weigh on the stocks from time to time because people wonder if they'll get worse. But the earnings are very generative, and the ability to deal with the challenges is greatly assisted by that earnings component.

Now, we've talked in previous quarterly earnings periods around the Canadian banks and made the link—sometimes you can make the link as an investor between what's happening with the Canadian banks because let's face it, they're big and a handful of them are operating across the entire economy in Canada—so we can make some links between what's happening out of the bank earnings and what's happening in the broader economy across Canada. So is there anything that you're pulling out of these? I know this is just the first two and there's more to come. But do you interpret anything out of the earnings this morning in terms of what it says about what's going on in the broader economy?

Yeah, well, two things. First, the activity levels in the broader economy are still pretty low. So when you look at loan growth, whether or not it's commercial or consumer, it's pretty benign. And so I think the hope would be we get some certainty on the trade front into next year. Right now I think that's probably the other interesting thing is that tariffs are not really affecting the broad economy the way some people are worried, because if you're USMCA compliant, you're still good. We may have to deal with a negotiation of that in the next year, and I'm sure that's to some degree what the government's busy working on. But if you have a consumer who is in the process of delevering, you have commercial loans where some pockets may be a little bit affected, but generally speaking, it's just uncertainty that's holding things back. If we had some certainty on the tariff front, at least the framework that people knew how they could operate, and maybe some larger infrastructure projects coming from across the country, then those would be two conditions that would restart loan growth. Unemployment is not in great shape in this country. We need to get at that. I wouldn't say that there's anything in these reports that suggests the economy is about to meaningfully accelerate, but it's also just stable blah. I don't know what the right word is. There's pockets of growth, but pockets of stagnation and that might be with us for a little bit more.

Yeah. So, Stu, for those who have followed your career as I have—some people follow celebrities, their movie careers, some people follow sports stars and their careers as they come up through the minor leagues, become superstars, and go to the Hall of Fame in that—I, of course, track you and other portfolio managers. I'm odd that way, but I know there are other people out there like me, so they know that you are Canadian Equities, and North American equities. Now, when we talk to you, you're head of global equities. That's big. Global. I always laugh with my mom. I tell my mom, I work for global asset manager, not just an asset manager. That's big. That's the whole world, right? Having spent all the time and becoming as big an expert as you're going to find around Canadian banks, and then you went to US banks— and there are nuances between Canadian and US banks—but big economy. Now you're operating with Europe and Latin America and emerging markets and Asia. Have you seen anything in the fairly early days as talking to your colleagues around what's going on with banks around the world? And again, then what that says about the economy in those areas of the world?

Well, interestingly, the malaise we just talked about for the Canadian economy, Canadian banks have been pretty good stocks, in line with the TSX, some modest signs of initial outperformance, but globally, they've been left behind. Globally, banks have been very strong. And we've talked to the strength in the US banks around the potential for deregulation, a stronger yield curve, capital markets activity, more immediate loan growth. And globally, really where the big global banks benefit is from that yield curve. The move higher in interest rates that rippled around the world has been pretty positive for European financials as well. And when you think about the move in European indices, financials have a very large weighting in those indices. US banks, for as big as they are in absolute terms, are not as big in the S&P 500 because of the size of technology. Versus when you leave the S&P 500, and you look at the TSX or you look at Europe, the financial stocks are much larger weighting, and they've been very good performers. We've talked about adding in more global exposure relative to the United States. That's a function of three things. In the last 10 years, the S&P 500 has roughly doubled relative to the world, and that gave rise to the American exceptionalism. I don't think we're at the point where we're calling for the end of American exceptionalism, but we've looked at the three components of that, roughly 500 to 700 basis points of performance a year. One-third was currency, one-third was valuation change, and one-third was earnings growth. It's not as likely that the currency is the same tailwind, possibly a headwind. It's not likely that valuation is the same tailwind. On the earnings front, you still have a tremendous amount of earnings growth coming from some of the tech sectors, but if the financial services sector globally kicks into gear, all of a sudden you have a bit more of an equalization around earnings growth as well. That's the case for some non-US equities in the portfolio. The banking sector, whether or not it's in Japan, whether or not it's in Europe, certainly plays a role in that.

We've talked about what's exciting about global equities, equities outside of the US from a valuation standpoint, quite a bit. But I think what we often miss—and I'm guilty of this, I think way too much about valuation, and I think long term, that's a healthy way to think that I'd rather buy something cheaper than more expensive—but as I've seen you write recently, valuation is not a particularly great timing mechanism. What you've just shared is more of a rationale for why the move would be now versus later around that relative performance.

Yeah, that's right. Everyone always wants a catalyst. Things that are in motion tend to stay in motion until there's a reason to change. So far this year, we've seen some changes in currency, we've seen some changes in fixed income markets, and these are some of the things that might be that reason.

Yeah, I think one of the biggest things I've learned from talking to you this year on the podcast is about currencies. Just how when you get into something like the tariffs, in particular this year, how quickly currencies move and become that first mechanism to create a new equilibrium or rebalance things that are happening. Currencies have been huge movers this year with all of the disruption we've seen. Markets have still been okay. We had the correction earlier in the year, but on the whole, markets have been good. But we've seen huge moves in currency, which is reflective of how somewhat chaotic—or uncertain may be a better word—the economic background has been given the tariff thing coming out of the US.

Yeah, I think they're massive markets. Anyone who's in the equity market thinks the equity market's big, but currency and fixed income dwarf those. The price reaction tends to be quick. They're broad, so they send a very strong signal. We definitely pay attention to this.

Yeah, don't worry. I've got Dagmara Fijalkowski's rookie card as well. Dagmar is often on the podcast, too, because I'm a big fan of those fixed income investment managers as well. So, Stu, the other big thing that happened since we last spoke was we had Jerome Powell. They've got their little off-site in a very nice place, by the way, Jackson Hole. And he came out and made some comments on Friday. We're in the dog days of summer. I don't know what the official dog days of summer is, but in the market, the dog days of summer are August and into September. It's typically a period of an underperformance or it's just a lot of people are away. The volumes are light. It's summertime and you're in between big earnings announcements and such. The market's just drifting and actually looking directionless. Then Powell comes out on Friday and said something that people really interpret it as being, okay, we got it, we're going to be lowering rates now. We just saw a big pop on Friday. Things have been okay this week. But is there anything in what he said or anything that investors should be thinking about or watching as we go from what he talked about and what he said to where they actually are making decisions in? I think September 17th is the next Fed rate decision that people should have on their mind or that you have on your mind managing.

Yeah, I think the nuance of Fed policy and the drama around what's going on is there's a number of levels to discuss on that, probably like a podcast in and of itself, Fed independence, what have you. I think in general, and this is something that we had flagged as the positive option in the market, is that I think what he said was if there's some things going on in the labor market that are different and maybe slowing. On the inflation front, we have potentially higher inflation on the goods front due to tariffs, and we don't know how long that will last. But then on the services front, maybe that inflation might slow. The net of that, coupled with the labor market, might provide the foundation to cut interest rates. The markets are not a bad indicator of what might happen. And notwithstanding the drama around the membership of the Fed, the markets have been leaning that way, that there might be the case for a Fed cut. So when it comes to September, I think the payroll numbers will be very important. They come before the Fed. There'll be a bunch of other things that they'll get to apply on. But in some respects, I think he said, we're going to balance all the things as we normally would balance them. Maybe it wasn't quite what people anticipated going in or what have you. But as you say, in a quieter time that was ripe for the possibility of interest rate cut. I think the other thing that was interesting was that we had very broad market move. It gives you a snapshot of what might happen on the context of interest rates. The broad market did quite well. Tech and what have you, didn't do quite as well. It would be like, could we have a series of interest rate cuts in response to a slowing economy that then allows earnings growth to broaden and some of the other companies to pick up the ball and drive the market to some degree. That's the definition of a soft landing. In a soft landing, value stocks do quite well and what have you. Then when you couple that with the drama around the Fed, I think it comes with the yield curve slope. It stays quite healthy. That has the implications that we've talked about for financial stocks as well.

We had Kristy Akullian on from BlackRock last week. Her line was like, the Fed looks like they may relent and start to lower rates. That takes you to a little soft patch, but then you look a year out and things are growing again because rates are lower and earnings are up. So don't overthink it. It seems pretty toppy, but as you said, once the momentum is going, it tends to follow through until something bad happens. That's always out there, we got to think, but don't overthink it. The markets are saying that in terms of the way that they've been moving since early April.

Don't forget as well, if you look at the average stock, while financials have been quite good, industrials have been quite good, technology has been quite good, there's been other parts of the market that haven't really been that good. There's not a huge representation of them in Canada, but some of the consumer staples, health care, real estate, these sectors have not really participated and might benefit if there was some rate cuts.

Yeah. Then just a comment for those of you who haven't subscribed to the podcast, where you download your podcast or subscribe on YouTube and always leave us a comment and a rating. We love to hear what you have to say. We will have Eric Lascelles on next week around that critical jobs report, which will likely be the final word on what's going to happen with the rate cuts or not when the Fed meets later on September. So subscribe so you get that boom right into where you get your podcast so you can listen right away. And of course, you want to subscribe for first Stu’s days as well, because as we've already teed up, you're going to want an update weekly—because we're on pretty much weekly with Stu—on what's going on with leaves and raking in Toronto because we always like to keep up on what Stu is doing in his backyard.

That's right. That's about as exciting as the weather channel, but we'll take it.

Well, it is an investment podcast, an economic podcast. So you're likely not going to tell your grandchildren about a specific moment on a specific episode. But if you follow and listen, you're going to do better investing, and your grandchildren will benefit from that. Slow and steady wins the race, I believe. And that was pretty exciting when that tortoise won. I can only imagine if I'd been there for that one.

All right. Thanks very much, Dave.

All right. Thanks, Stu. We'll see you next week.