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From the latest developments in U.S. politics, to the outlook on Canadian banks – a new week means a new cycle of headlines. This episode, Stu Kedwell, Co-Head, North American Equities, joins Dave to share his thoughts on a roundup of key topics that may be top of mind for investors. [9 minutes, 29 seconds] (Recorded October 7, 2020)


Hello and welcome to The Download. I’m your host, Dave Richardson, and we are joined by Stu Kedwell, the Co-Head of North American Equities at RBC Global Asset Management for (S)Tuesdays on (S)Wednesdays again. More technical issues Stu! You’d think we have this COVID thing down by now, but we’re still working out some of the kinks. But welcome back. And before we go into this week’s podcast topics — and we’ve got a wide range of topics to cover today — I just wanted to refer people back to the podcast we taped last Wednesday that talks about how investors, both professional and retail investors, should think about headlines and news and everything that’s going to come out. Particularly around the US election. And, wow, we couldn’t have been more prescient in terms of a topic or a podcast, given the craziness of last week, which now rolled into this week. Yesterday, markets up, coasting along. All of a sudden, a tweet from President Trump, and the Dow Jones index dropped about 500 points in a few minutes. It was related to the next stimulus package that’s being negotiated in the U.S. between Congress and the president and all the different parts of U.S. government. Clearly the markets think this stimulus is critical. From your perspective as an investment manager, how do you think about that stimulus and where those negotiations are going?

Yes, it is an important element in the near term. From a negotiation standpoint, the definition of volatility being: more things can happen than will happen. So we have a month to go, give or take, until the US election is decided. And then perhaps we’ll have a lengthy period after that before it’s finalized. So the final month is going to bring a variety of twists and turns. There’s a lot of things being negotiated in the U.S. right now. The Supreme Court justice, the stimulus and the desire for some players to use tweets, and some of those things as leverage is quite high. Given what’s at stake, I would expect it to continue. The reason stimulus is important: it’s like you’re driving down the road, you have good tire pressure, and you’ve got lots of suspension and all sorts of things. And there’s a road crew out in front filling in potholes. And you think: if we do hit a pothole, we’ve got different things to protect us, but I might prefer not to. So when we think about stimulus, the governments have the capacity for it, and generally speaking, the willingness to see the consumers with a bit more cushion up until either some type of antibody or vaccine. Yet it is still a very politically-charged circumstance and likely to remain so. So the president tweeted that the stimulus talks were off, and if the stimulus doesn’t come, it will have a short-term impact on the economy. Not necessarily something that can’t be managed over time, but you probably prefer not to see it, just because a number of businesses are on tenterhooks, relatively speaking.

Yes, I’ve heard many wise analysts say through the course of this year the old adage: in an election year, everything’s about the election. So that fits. Politics are at their height and completely in focus. So we’re going to see those things. And again, I point back to the podcast from last week, which is right here on the podcast listing. However you join this podcast, you can download that one and listen to it. Stu, let’s just move on to a couple of other interesting topics. One is, you heard from the Canadian bank CEOs recently. And what did they have to say that is interesting for investors in Canada and around the world?

First with the CEOs earlier in the month, then last Thursday, one of our analysts spent the day with the five CFOs and the message was quite consistent to what it had been before. The banks have taken a lot of provisions for credit so you will see loans go bad on the headlines in the next three or six months as deferral programs come to an end and what have you. But the banks have already taken a large amount of provisions for some of those loans already. Have they entirely been accounted for? We’ll see, but it certainly still seems quite manageable. The second discussion point, the other thing that’s been weighing on the banks, has been low-interest rates and the impact on net-interest margin. And again, the language there was very consistent. Capital ratios seemed quite robust. And so the story is kind of as it was. You have a situation where the banks are well capitalised. They have the earnings capacity to deal with this environment, but it probably might still be six or nine months before they start to see the other side of some of the things that are challenging them. In the meantime, we’re collecting a very nice dividend. And that’s a very consistent story there. Through the month of October, we have lunches with each of the banks CEOs, so we’ll have more to say on that to leading up to Halloween.

And I take it those are probably virtual lunches?

They are virtual, that’s for sure.

Lower calorie than the normal lunches. Again, in referring to previous episodes of this podcast, what’s interesting is, if you go back through the spring and summer, on a couple of occasions when we talked to Stu about the banks, Stu was proven to be quite accurate in terms of his view, particularly around loan loss provisions and risks around banks. So, again, if you haven’t listened to those previous episodes, there’s some really interesting stuff there. What I really like about it, if you go back and listen to things, you can follow along and get into the mind of a professional investment manager and see how he thinks about risk and various outcomes and range of outcomes. And that’s really what an excellent job Stu is doing on all the podcasts. Let’s just finish off with another subject that we’ve talked a lot about over the last six months, and that’s the narrowness of the market. We’ve seen a nice recovery in markets, back to all-time highs, at different points in time, particularly in the US. But it was a fairly narrow market with a small number — particularly technology names and companies, that were somewhat beneficiaries of the work-at-home environment and the shop-at-home environment — that were the big winners in this. But you’re seeing things change a little bit and that creates some reason for optimism Stu.

A couple of things, and you’ve likely seen it in some of the other publication: interest rates haven’t gone to high levels, but they have backed up ever so slightly in the last couple of weeks, which has put some slope in the yield curve, which is the bond markets way of telling you that things might be getting a little bit better. And then when we look through the equity market, going back again to the car analogy, you like to have it firing on lots of cylinders rather than just one. And in the last week or so, there has been a broadening of the market. Some of the industrial stocks and some of the other participants have started to kick into gear a little bit, which is a little bit counterintuitive to everything you’re seeing on the surface from a headline standpoint to see some of these stocks start to do better. We’ve seen it in some consumer discretionary area, some industrials, some basic material. And that also has been an interesting feature in the last little while.

Great. Well, we squeezed a lot into a little over eight minutes today. And again, a reminder that all of these episodes are housed on whatever carrier you use to listen to your podcasts. There’s been a lot of interesting discussions and they’re all about five to ten minutes long, so not a long listen. A lot of valuable information and insights throughout this pandemic. And we’ll be back every week, or most weeks Stu, usually on Tuesdays. Or Wednesdays or Thursdays, Thurston days, whatever we were calling those. But Stu, great to have you on again today and we look forward to your next appearance.

Thanks very much, Dave.


Recorded October 7, 2020

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