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This episode, Stu Kedwell, Co-Head of North American Equities, looks at the strong first quarter results from America’s top banks and what they could signal for Canadian investors. Stu also discusses the current holding period of recovery we’re in, and the ‘sparks’ – from vaccine success to robust infrastructure programs – needed to reignite economic activity. [7 minutes, 36 seconds] (Recorded April 15, 2021)


Hello and welcome to the Download. I'm your host, Dave Richardson. And it's my fault if (S)Tuesdays is on Wednesday this week. Stu Kedwell, Co-Head of North American Equities at RBC Global Asset Management, sorry to delay you. I know you've got a lot on your mind.

Dave, I think it's actually Thursday.

Wow, that's why I'm next in line for my Covid shot. Apparently, they came down to that age group where you start to lose track of days. And that's going to get me hopefully protected with the vaccine. So, yes, a lot has happened in the subsequent two days, particularly around bank reporting in the U.S. Which is always a nice signal of what's going on in the broader economy, how we're recovering right now from Covid and what's going on in the U.S. and ultimately Canadian economy as well. What were your thoughts on U.S. bank earnings and what you saw out of those reports?

Sure. Well, just to close the loop on your intro there, the most exciting day of the week, regardless of what day it is, is always the day I get to talk to you. That's definitely a lockdown favorite for me. The U.S. banks have reported this week and the results, certainly from a headline standpoint, were quite robust. Trading was very strong. Investment banking was very strong. Some of the things that have nagged the banks, loan growth and net interest margins, continue to be a bit of a headwind. The bank stocks, depending on the bank, have been plus or minus a couple of percent from where they were going into the bank reporting season. And I think that, given the strong performance we've seen here, it's going to take some views around loan growth in the back half of the year to refocus investors a little bit in the near term on these stocks. And hopefully that will come with a better economy as we get through the vaccination period in some of the government facilities and what have you.

Yes. And that brings up something that I've been thinking about as we look at governments all around the world, but the biggest headlines are around the U.S. and somewhat in Canada. Some of these big spending programs, and particularly the one that's being talked about right now in the U.S. could be as much as two or three trillion dollars spending on infrastructure. And as an investment manager, how does that play into your thinking about how you position your portfolio now? Was this something that you were looking at, say, as soon as Biden was elected several months ago? Is that when you start to think about more broadly the impact it's going to have on markets overall, but then specifically on companies that you might want to take a look at as key beneficiaries of that spending? How does that play out in the mind of an investment manager when you're hearing talk about these enormous programs?

Well, it's a good question. And it's certainly been top of mind for a couple of months now. We like to use the analogy which we've used in the past: the long nose of the stock market is always trying to sniff out the future. And infrastructure was a pretty important part of the Biden proposal. When we look at the economy, there's all this dry tinder waiting to be lit for a very strong economic recovery in the back half of this year. There's a tremendous amount of savings, a tremendous amount of liquidity, corporate deposits. There's money all over the place that is ready to go. There's pent-up demand which is ready to go. And there's also this big transition going on in the economy towards decarbonization. So, there's lots of sources for a very strong economic recovery. And the thing that you're then looking for is what is the spark? And that spark is often confidence. And confidence will come through successful vaccination. But it'll also be aided by the government's infrastructure program because there will be incentives all over the place that will affect behavior. That will be pretty helpful in the latter half of 2021 and into 2022. And the reason confidence is so important is it impacts not just sectors directly impacted by the infrastructure bills, but all over the place. Consumers right now are sitting on a fair amount of cash. Their savings are high. Getting that into the economy, getting that spent, having the confidence to go out and make some plans, spend some money, take on some credit card balances. Those are very important accelerators to economic growth. The same for companies: building inventory, putting in new facilities. Some of the pressures that they're feeling right now around input costs, some transportation costs, spending money to try and ease some of those pressures over time. All of that comes with confidence. The economy certainly has the resources; they've been provided by the central banks. That confidence could go a long way. And that's what the government is trying to do with some of their proposals.

And, of course, we saw some blow of retail sales numbers out of the U.S. this week. How do you think this plays out? Obviously, in Canada, which still does around 75% of its trade with the U.S., I'm sure we're going to have different programs of our own in terms of spending to stimulate the economy and likely oriented towards infrastructure as well. How do you think this plays out on our side of the border?

Well, I think it'll be quite favorable just because it'll raise economic activity all over North America. I think the markets have taken a bit of a wait-and-see. We've seen some very strong results on payrolls, retail sales and a lot of prognostication about strong economic growth to come. After a big move in a very short period of time in interest rates in pockets of the market, they're kind of digesting that news. I'm not saying it's the end of act one, but people are looking forward to, where does that act two start and what does it look like? We think act two is going to be fairly vibrant for the economy as well. But we're just in this holding period as the vaccinations kick into gear. So, it's really forecasting what it's going to look like, but there's not a lot of evidence that act two has started yet, even though we can say with a reasonable degree of confidence that it will be fairly robust for the economy as well.

Well, Stu, I'm looking forward to getting my jab next Thursday and my wife is going with me. So I won't get the days wrong. I'll show up on time and do my part to fight Covid. Hopefully you’re on tap soon too. You’re quite a bit younger, so you're probably not up for a bit.

Not for a bit, that's correct.

Yes. Thanks as always for a great synopsis. Could be some really exciting times around the growth in the economy over the next year or so. So very interesting. And thanks as always.

Great. Thanks, Dave.


Recorded: April 15, 2021

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