Hello and welcome to The Download. I'm your host, Dave Richardson, and it's time to catch up with our old pal, Sarah Riopelle. Sarah, welcome. Sarah manages all of the portfolio solutions at RBC Global Asset Management. For those of you who have not joined us before, this is just terrible. You should join us every week because you never know when Sarah is going to make an appearance, and she's fantastic as you're about to find out. Sarah, how are you doing?

Good. A little jet lagged. I’ve been traveling around the world, visiting investment teams over the last couple of months or so. Just got back from the UK last week, and I was in Hong Kong two weeks ago, so I can't quite figure out what time zone I'm supposed to be on.

Yeah. I knew you were going to Hong Kong. I didn't know you were going back to the UK because we've been there together a couple of times this year. But anything important to report back from those visits, or is that what we're going to be discussing? You're going to have it all wrapped up into what we're going to discuss today?

Not quite, because we'll talk about markets and the economy today. I was more sitting down with the investment teams to better understand what's going on in their individual markets and asset classes and how they're navigating through some of the volatility that we've been seeing over the last couple of months.

And then that's critical because you have to understand what's going on in all of the underlying asset mandates. So when you're putting together the overall portfolios at different risk levels, balanced and conservative, you need to understand what's going on below the surface so that you've got the right asset mix at the top end, right?

Exactly. And then not all of the portfolios are performing as well at any given time. We have lots of good stuff going on, but there's always some challenge areas. That's why we have diversified portfolios in the first place, because they're not all going to be positive and working well at the same time. So just sitting down with some of those managers and then understanding where the areas of weakness in their particular strategies or asset classes are, and what they are focused on in terms of getting performance moving back in the right direction.

And that's important because diversification is one of the things that's going to help us with where we're going to start today, and that's volatility. A lot of volatility in markets. Diversification is one way you can mitigate that along with having a nice mix of assets to begin with but making sure that you're moving that portfolio where you need to when things get a little uncertain, as we've experienced now. So what have you been doing around that volatility?

It's important, as you said, you start with your neutral asset mix, which is a nice blend of different types of asset classes that move in different directions at different times. But then you can't just set it and forget it. You have to actually monitor that asset class over time and also look to take advantage of opportunities as you see them. And one of the worst mistakes that a lot of clients can make, in the face of the volatility that we've seen over the last couple of months, is that they panic. They can't take the pain. They don't want to lose any more money. And they actually make decisions on their asset mix in those periods of volatility that are not necessarily very well timed. So for example, in the month of April, the markets were down. I just have a chart beside me in case you're wondering what I'm looking at. By April 8th, the US equity market was down about 16%. And then on April 9th, the President in the United States announced a pause on his tariff plan. And then by the end of April, just a couple of weeks later, the S&P 500 in the US had made up all of those losses. And so it actually closed the month almost flat. That’s in a four-week period of time. We went down 16% and then back up to flat. Anybody who did panic in the face of that volatility at the beginning in those first eight days of April and actually changed their investment plan as a result of that, if they just were patient and waited for two more weeks, they wouldn't even notice it had happened. And if you look at it now, and year to date to the end of May, and look at returns now, and we actually have positive returns across most equity markets so far this year. And so it's almost like April didn't even happen. And so that's what it's really important to focus on a longer-term view and try to do your best not to panic in the face of volatility or make poorly timed decisions. Actually, what we do is we look at those periods of volatility as potentially an opportunity to buy stuff on sale. And so we actually bought stocks during that period at the end of March and early April because things had been selling off and they were cheaper than they had been a couple of weeks earlier. And so we thought it was a good opportunity for us to actually add to our equity positions at that time.

Yeah. And just to illustrate how quickly that can happen, I was in Ottawa. I had the coveted spot immediately following a gigantic buffet lunch, which is what I often get. That's what I always give you because you're such a great speaker. And so we're sitting there before lunch and I've got a whole thing in my mind of how I'm going to talk about these tariffs and how the market's grinding down and we're in a correction. And I look at my S&P 500 quote on my phone just before I walk up on stage, and all of a sudden the line is just going like «this». Okay, what did he say? He changed his mind on the tariffs and things reversed that quick. I think it was almost 2,000 points in the Dow, and it was almost 1,000 or 500 points in the S&P. A massive turnaround within one day. And that's how quickly things can turn on you, which is why you've got to have that long-term focus. And what I like about diversification and having a diversified portfolio is you don't feel the full brunt of one of those downward moves so that you don't react as emotionally and make that call at exactly the wrong time and hurt yourself long term.

Right. It's been a very fluid environment. And as painful as the last couple of months have been for our clients, actually, it's a very interesting case study on why you should not overly focus on short-term volatility or movements in markets, because, as I said, you fast forward to today, and a lot of the stuff around tariffs and market movements that happened in March and April is actually no longer valid. So things have shifted very rapidly. And so now we're left with, we start from here and look forward. And it's a very different picture now than it was two months ago when the initial threats of tariffs actually came. And we're talking about the US taking over Canada as a new state in the Republic and stuff like that. It's a very different narrative today than it was two months ago. So that's why you can't get overly focused on near-term, short-term markets, volatility, headlines, and all that news, because it can change rapidly.

And that's why you want to be here for every one of Sarah's appearances. If you haven't already, subscribe where you get your podcast. We're on YouTube, so you get to see us now. Good and bad news there. I'd be the bad news. I think you can figure out who's the good news.

Am I the good news part?

Yeah, just looking at the screen, they can figure that out, Sarah. They don't even need your incredible analytical ability to figure that out. And give us a «like» and give us a five-star review. We'd appreciate that. So, Sarah, beyond that then, all the volatility, is your fundamental view on what's going on with stocks and bonds, has that changed in any way through the early part, through the first half? We're almost the first half of this year.

So we expect the economy to be slow but positive growth over the remainder of 2025. We think the odds of recession, while they're not trivial, they have probably diminished quite a bit now that we've seen Trump's willingness to dial back some of those extreme tariff threats. There's some other risks that are worth keeping in mind. Government debt loads are something that investors are focused on, and obviously, geopolitical risk continues to be something that we have to monitor. But that being said, we think that many central banks have lowered interest rates somewhat over the last couple of months. But we think further rate relief from here might be limited because we have to watch the impact on inflation from some of these tariff conversations. And so that's going to be something that we have to watch very closely. We expect three 25-basis point cuts, just three cuts from the Fed over the next year, but that's probably going to be back-end loaded. So not something that's going to happen over the next few months, but probably the second half of the next 12 months, if that makes sense. Sovereign bond yields have fluctuated in quite a bit of a range over the last couple of months being weighed by growth, inflation, and fiscal concerns. But we think looking ahead, sovereign bonds they have decent return potential with modest valuation risk. So we're sitting on a neutral position in bonds right now. Large Cap US stocks, they sold off quite a bit in April, but they have since regained some of that. And so we still have some valuation concerns in the Large Cap US equity space. And so we think there's better value in regions outside of the United States. And so we have an equity overweight, but that equity overweight is more tilted towards European, Asian and emerging market equities versus North American equities.

Yeah. Actually, we just started a new YouTube video series, which is called InvestED. Invest, capital E-D. And if you want to go check that out. And what I was talking about—other than I found my favorite Turkish pastry in Woodbridge, north of Toronto, and it's fantastic. It's about 2,000 calories a ring. It's like a super drench sugary donut, but crispy like a churro and soft. It's beautiful. But talking about how there's so many great things from all around the world to eat, lots of great things all around the world to invest in. Where we got to at earlier this year to the tail end of last year, is we just got to a point where the US was expensive compared to everything else. Again, it doesn't mean that it can't go higher, but you're getting better value elsewhere. And that's what you've been taking advantage at in terms of where you've made shifts in the portfolio ?

Yeah. We're not divesting of the US by any means because we do still think that there's return potential there. But when you look at it on a relative basis, relative to where we see opportunities in other areas of the market, we do see better value in Europe and Asia. And also we have a view on the US dollar that is pushing us towards non-US dollar denominated assets as well. So it's not just about the valuations and the opportunity in the markets themselves, but it's about the currency-adjusted potential in those markets as well. So that's why, as I said, we're underweight. North America is our biggest underweight. Slightly underweight Canada because of some concerns about how closely our economy is tied to the US economy and some of those tariff threats, and then overweight Europe, Asia, and emerging markets.

And that currency piece is so important, and we've talked about it before, but maybe we should dig into it a little bit more because say I want to go buy, there are some great companies in the United States. And so much now, because these companies aren't just great American companies, they're great global companies. So you can take some of these enormous US companies, sometimes 70 or 75% of their revenue, the business they're doing, is actually outside of the US. But you want to own those stocks. But if you buy those stocks in US dollars and the US dollar depreciates, not just against the Canadian dollar, but against any other currency, then that hurts your return. So you need to be able to manage currency within your portfolio, and you do that in your portfolio, correct?

Yeah. There's so many investors who miss the currency piece when they're investing in the equity market. And so when they see the end result of their return, they can't figure out, well, I thought the stock market was up 10%, but my return is only up 5%. And that's because they missed the currency piece, because it actually can be a drag on the end result that they achieve within their portfolios. And so, since January, the US dollar index has actually declined 10%. That's the opposite of what you would expect to happen in an extreme financial market volatility, because the US dollar usually acts as a safe haven asset, and usually in a lot of volatility, that is a tailwind for the US dollar. So the fact that it's actually sold off 10% so far this year is actually notable. It's very expensive. It's well above our valuation bands. We think that we probably have several years of US dollar bear markets in front of us. So even though we've already sold off 10%, we still think there's probably quite a bit more weakness there. And so, as you said, if you expect the US dollar to fall relative to the Canadian dollar, you want to hedge out your US dollar exposure to protect your returns from any movement in the US. So we do that in many of our portfolios, have a hedging position on the top because our largest currency exposure in these multi-asset portfolios is the US dollar. So we want to make sure that we're protecting ourselves against that potential sell-off. So we do hedge out that US dollar exposure within the portfolios.

Yeah. And that's so important because most of the investors in these portfolios—although I know we have US listeners, we're generally talking about the Canadian markets here and we're focusing on Canadian investors—and so that's important for them because at some point you're going to be bringing those dollars home. And in many cases, people are going to be converting them back into Canadian dollars. So that exchange rate is important. Now, correct me if I'm wrong here, but over long periods of time, it's not as important because things even out, they go in cycles. But in shorter periods of time, it can make a huge difference in terms of your returns.

Yeah, absolutely. The US dollar moves generally in seven-to-nine-year cycles. And so we're at the end and just have just rolled over on, I'm guessing a little bit, but I think it's about a nine-year bull market in the US dollar, and that has rolled over now. And we've got to extreme overvalued situation with the US dollar. That's starting to roll over now. And so that's where we expect a bear market, and we expect that bear market to last for several years because the average cycle in the US dollar is around seven years. So they do last for quite a long time. So you're right. It generally tends to smooth itself out over very long periods of time, but over short-term periods of time, it's going to be much more volatile. And so if you're trying to move Canadian or US dollars back and forth in terms of investing over the short term, it's going to have an impact on your performance and your returns.

In my lifetime, the Canadian dollar has been somewhere between 62 cents and 1.10$ US. That's just in my lifetime, and I'm a young man. But there's been—what is it?—three different or two different points at parity and three different points now in the 60-cent range. So you get these long-extended cycles. And that's why in the short term, when you have a professional investor like yourself or Dagmara Fijalkowski, who we've had on the podcast before, who's an expert on currencies, you can position your portfolios in the short term to not be hurt by those big currencies swings because currencies, when they start to move, the swings can be quite dramatic. You want to back that out of the investment decision that you're making.

Yeah, it's about protecting the alpha or protecting the return by not having an unmanaged risk in the portfolios.

All right. So if we look at where we go from here, what would you want to leave our listeners with in terms of the positioning of their portfolios right now ?

Well, we've talked about it quite a bit here today and in past podcast as well, is just keep reinforcing the «ignore the short-term noise, focus on long-term investment plans» message that we've talked about in the past. I just think it's so important. I think the environment that we've seen over the last couple of months really reinforces that. The first half of 2025 has been a challenge to navigate, even for us professional investors. Lots to talk about in all of our macro meetings, lots of changes in the forecast along the way. But you got to flip the narrative to looking at volatility as an opportunity versus as a cause for concern. And so we look at it as, can we buy some stuff on sale or for a cheaper price than we could have a couple of months ago? April was the seventh most volatile month in the last 75 years for the US equity market. And that list has some notable periods like COVID, Black Monday, and the global financial crisis on there. And so that's just putting into context what we experience through the month of April. As I said earlier, it's the first time since 1950 that the S&P 500 fell 10% in a single month and then recovered that entire amount before the end of the month. That's just an example of how volatile it was. And so the key here is understanding that markets are volatile. Markets go up and down. There's always going to be uncertainty. It's how you react or respond to that uncertainty that's going to make or break your investment performance, your investment portfolio. So you just got to make sure that you have resilient portfolios that are built to withstand all possible range of outcomes. And that's going to help lead to smoother, more consistent returns over the long term and keep our investors invested as opposed to panicking in the face of that volatility. I just think that's a really important message to continue to reinforce whenever we have the opportunity.

Yeah. If you're watching markets daily, and you're thinking that you've been seeing more volatility than normal, you are correct. And Sarah just confirmed that. It has been an unusual year. If you go back and listen to what we were talking about last year when we had Sarah on, we were talking about the potential set-up for more volatility as we moved into 2025. And that was particularly around the US equity markets. Sure enough, they have delivered. And you never know exactly what's going to trigger that. But generally, when markets are expensive, then you come into a new political arena, so to speak, that can be a trigger. And that's what we've seen, that volatility. This is the amazing thing sometimes about markets, if I'm just checking markets once a month, and I checked markets at the end of March, and I went, okay, that seems okay. Then I just woke up and checked markets on the first of May, you might not have thought a whole lot happened if you weren't watching every day. This is the whole idea that over the long term, those things smooth out. And that's why we always talk about the long term. It's not just something that an investment manager says to get you to not pay attention to what's going on day to day. But to say that you get that consistency over the long term. And that's what you're really looking for as you're putting together a financial investment plan. And that's how you end up being successful with that patience and focusing on that long-term plan.

And then just put a few numbers around it. There's a 50/50 chance that the stock market will be up or down in a given day. If you stretch that time to one year, there's a 79% chance that you're going to get a positive return over a one-year basis. If you stretch that out to five years, there's a 100% chance you're going to have a positive return over five years. And so extending that time horizon increases the likelihood that you're going to get a positive return out of a portfolio or out of the market. And so that's why you got to ignore the short-term noise. I know I sound like a broken record, but I just think it's important.

Yeah. But that's why we have you on. You've always got interesting insights in terms of what's going on right now, but at the core, there's some fundamental things that you need to do. And again, when my wife listens to me doing videos or speeches or podcasts, she says, oh, you never say anything different. You sound like a broken record. But those fundamental basics, those principles are generally the things that are going to make you successful over the long haul that will make you feel like you don't know what you're doing in the short term sometimes, but if you just stick with those fundamentals, you're generally going to be successful and not panic and not overreact. And that may not be great for an exciting podcast—although I still think we're fairly interesting—but it's better for good investing, and that's ultimately what we want.

Yeah. And then speaking of my own portfolio—we talked about this a little earlier—I'm forced to look at my own investment performance once a year because the financial planner makes me sit down across from her and go through it in detail. But if it wasn't for those meetings, I probably wouldn't ever look at it, because with my current age and stage in career and life, I still probably have 20 to 30 years left before I really need to worry about it. So with that length of time horizon, I don't really care what it does today or tomorrow or next month or next quarter, so I don't even look at it.

Okay, well, promise us not to look at it until next month when we have you back. Sarah, always great to catch up. Thanks for everything. And we'll check in with you soon.

Great. Thank you.