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When it comes to investing, the only certainty is uncertainty. Last week, we saw a return to some of the volatility of earlier this year. Could it be that these continual highs and lows will be a permanent feature of our post-COVID future? Stu Kedwell, Co-Head, North American Equities, RBC Global Asset Management, talks to Dave about the factors causing this volatility at this time – from businesses restructuring to rapid government policy changes. He also explains how short-term volatility can sometimes help serve up long-term opportunities. (Recorded June 16, 2020)


Hello and welcome to the Download, I’m your host, Dave Richardson. And I’m joined on Tuesday again for Stu’s days with Stu Kedwell, the co head of North American Equity with RBC Global Asset Management. Stu welcome back again.

Hi, Dave. Thanks for having me, as always.

One of the things that we’ve been watching, particularly over the last week, is a little bit more of a return to the volatility that we were seeing in February and March. And not that it ever really went away. We’ve seen continued volatility in markets. But this is something that perhaps investors are going to have to get used to, as we continue to work through all the challenges that the Covid crisis has created. From your perspective, is this volatility that we’re seeing right now something you think is going to persist for some time, or is this something that’s going to fade out as we move through the year?

Unfortunately, I think it could persist for some time. And you definitely raise a lot of good points about why there’s volatility. We always think about volatility as the notion that more things can happen than will happen. And on any given day, the stock market is reacting to changing probabilities. A couple of things that I think are important there. The first is, sometimes we’ll worry about something and then we’ll go talk to the company, and the company is worried about it, too. And they’re adjusting their business. So there are a lot of things that naturally tamper down on that volatility over time. Companies readjust their businesses, governments make shifts on the fly. Last week, people would maybe have worried will the CERB be extended somehow? And then yesterday, the prime minister came out and said in the next couple of days, they’ll have some ideas on that front. So, when you’re in a period of time where the future is uncertain, you get volatility because small changes and how that future may unfold have more dramatic impact in the price of the asset, the stocks that we own. It doesn’t necessarily impact the long term. But I think what we have to always remember is that a security is kind of like a two-legged stool. One leg is the earnings and the cash flow that the business generates and the other leg is the multiple that we pay for those earnings and cash flow. And in this environment, as for the earnings and cash flow, people are a little bit at unease about how that will play out. Will the economy reopen? Will there be a vaccine? Will there be something that cures Covid? Can they turn it into more of a common cold? So you have health care dynamics. You have the speed of the reopenings. That’s impacting the earnings and the cash flow. And then the multiple is heavily influenced by the central banks and what they’ve done with interest rates. So, you have two dynamics here that create more near-term volatility and that’s likely to persist until we get through some of this uncertainty. But just because there’s volatility doesn’t mean that the long term doesn’t turn out the way that it has in the past. And we’ve seen lots of volatile periods before.

So from an investor perspective — and let’s break investors down into two buckets: one, the professional investor like yourself and two, the investors who might be listening to this broadcast who have some expertise in investing, but it’s not how they make their living —, is volatility something that you can use as a tool to benefit from or to drive returns in your portfolio? Or is it something that you think of, again, as a short-term noise and you’re looking down the road and try to invest in good businesses for the long term, which is generally what is recommended to most investors?

Well, it’s a bit of both. We’re always thinking about how the business will evolve over time. But, ironically, sometimes you welcome the short-term volatility because it serves up some of those longer-term opportunities on a platter. And I think we think about the market as a whole. But when we go and look inside individual businesses, —whether or not it’s a Nike or a T-Mobile or a BlackRock or, you name the business that we might own over time, and there’s lots of good ones in Canada as well —, you have this idea about how the cash flow will unfold in two or three years, and you sit there and say, well, I think this cash flow could be up 50 % in three or four years and the stock price will march along with it. So if on a given day the stock market wants to market down 5 %, then that’s really just adding to your return potential. In another cases, we have businesses with maybe a full evaluation and the stock market marks it up even more. So it offers the opportunity to switch from one opportunity to another. So volatility is something that our process has been built or designed to deal with for a very long period of time. You kind of go to work each day knowing that it’s likely to exist. And as a result, it’s not as concerning to us as unfortunately it is for many of our unit holders.

Excellent Stu. Well, that’s a great explanation. And I like really your core explanation of what causes so much volatility in a time like this and particularly this time. So, Stu, thanks again for joining us. And we’ll look forward to our discussion next week.

Great. Thanks, Dave. And thanks again for everyone’s time.


Recorded June 16, 2020

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