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Last week, America’s big banks kicked off the second-quarter earnings season. While the results were mixed, they could suggest that perhaps the worst of the pandemic is behind us. Will Canadian businesses share this same cautious optimism? Stu Kedwell, Co-Head, North American Equities, RBC Global Asset Management, returns to the podcast to share his thoughts on the results and what investors can expect to see in the weeks ahead. (Recorded July 21, 2020)


Hello and welcome to the Download. I’m your host, Dave Richardson, and I am joined for Stu’s days with our usual Stu, Stu Kedwell. Stu, welcome back. You finally had a chance to take a bit of a vacation.

Great. Thanks, Dave. Yes, it was a good time. And thanks for having me back.

And you got to be on your toes, Stu Morrow was on last week for Stu’s days and I think you know Stu, he was fantastic!

I got a little note from him that said You better bring your A game!

That’s right. And that’s what companies need to do right now. Maybe not this quarter as we look at earnings, but typically in an earnings season, we’re looking for companies to bring their A game to show that they’ve got strong results. This quarter is a little bit different. I know the big banks are out in the US with their earnings thus far. Anything we can cull out of that and anything you think we should be looking at, as we go into earnings season here in July?

Yes. So there were some good indicators. We’ve had a variety of businesses report last week - the big US financial companies like JP Morgan and Goldman Sachs and Bank of America and others. And in terms of looking at the Canadian businesses that mirror them, I think a couple of things stood out. The first was, their capital ratios were still quite robust relative to what people had worried about. In some of the loans that people took out during the midst of the crisis, some of the companies said, I don’t know what’s going on, I better draw my lines down. People paid those back, which is a good sign, because the businesses feel more comfortable with the environment so they can pay some of that emergency lending back. And that, ironically, helped some of the banks capital ratios. The capital markets businesses were unbelievably strong at the big banks, particularly JP Morgan, Goldman Sachs, and Morgan Stanley. It’s very clear that these businesses have bridges that everyone has to get across when it’s a busy time and they make a ton of money. And that was very helpful because the third thing was that the provisions for credit were also still pretty high. But they were able to use many of those trading gains to pay for their provisions for credit and still deliver reasonably good earnings. When they talked about the future, they were all, I would say, pretty realistic and pretty sanguine that this recovery is going to take time and there’s going to be some bumps and bruises along the way. But they thought their businesses were in quite good shape to get through this. We’ve seen that across a whole variety of industries. This morning, Coca-Cola reported. Again, it was definitely not Coca Cola’s best quarter. It wasn’t anything that was unexpected. You know, as you can tell, with restaurants closed and people not buying drinks at the football games and restaurants and things like this, their revenue is down quite a bit. But management also sounded cautiously optimistic that they’d seen the worst from a volume standpoint in all their geographies. So we’ve seen quite consistent messaging from a variety of big companies that would be in the funds. And the notion there is that, yes, while business isn’t great and everybody knows that, everything is buttoned down and the businesses in all likelihood are going to get through this period of time, which then allows investors to focus on what the future will look like on the other side of this. And that’s where we stand from the company standpoint. And the only other thing, it wasn’t necessarily earnings related but we have had some better news on the vaccine front in the last week. So when you marry that together, when you listen to the companies and you say, OK, I’m going to get through this, and then you get a little bit of positive news on the vaccine front, that creates enthusiasm in the stock market. And we saw that last week. Still a long row to hoe on the vaccine front, but again some promising data in that regard.

But you’re expecting, as you see, a lot of these reports come out similar to your comments on Coca-Cola that we’re going to have a lot of companies saying that the worst is behind them.

I think so. I think that’s the way it’s going to be. There are some businesses where, there’s more fundamental change. And we’ve talked about that. There are some pockets in commercial real estate where those businesses are going to have to be reengineered to some degree. And that’s going to take more time and it’s too early to tell. But the thing is, they’re not huge components of the stock market. So I would say, for the businesses that we own, many of them will be saying they’ve seen the worst.

Great. Well Stu, again, welcome back and thanks for joining us, as always. It’s always interesting to see the earnings season as we’re sitting recording this on Tuesday, July 21st. It’s quite amazing that we see the S&P 500 now is only down 4% from its all time high. Just incredible.

I know. It really is remarkable. It’s a good reminder that the stock market is a forward-looking indicator. As they say, the long nose of the stock market sniffs out what the future will look like in different regards.

Thank you again. And we’ll look forward to talking to you next week Stu.

Great. Thanks, Dave.


Recorded July 21, 2020

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