Monica: Finance 101 is to diversify your portfolio, right? And it's not to say that the U.S. is not still a great market. It is probably needed. Just a correction. But I think it's prudent for any investor out there to be diversified across markets, whether it's the U.S. global or Canada.
Ingrid: Welcome to TDAM Talks. I'm Ingrid MacIntosh. And if you've been saying what's going on with these markets. Yes, the chaos is real volatility. I news every day. But what if there is an opportunity here. What if there's a silver lining. Joining me today Justin Flowerday and Monica Yeung to talk about what all of this means for Canada for our economy and specifically for the opportunities in our markets.
Ingrid: Justin, Monica, welcome.
Justin: Thank you for having us on.
Monica: Great to be here.
Ingrid: Good times.
Justin: Yeah, lots of fun. Lots of fun.
Ingrid: Maybe we'll start with you. We're recording this podcast in the middle of April. Today, the Bank of Canada paused on their rate decisions. We've had some other news, but maybe, Justin, you know, as head of equities here at TDA Asset Management, can you paint a picture for the market landscape to kick us off.
Justin: Yeah. So, you used the word chaos I think that's appropriate. Challenging is in other word. Yeah. It's been a challenge.
Ingrid: It's adjective full.
Justin: Part me.
Ingrid: Adjective full.
Justin: Yes. Yes. No. We can use lots of adjectives to describe. But it's been it's been tough for investors. Obviously, it's been tough for businesses who are dealing with, you know changing the rules. And really any time you have a, a change in the, in the rules that dictate the economic profit that a company is going to earn, it can create bad decisions, it can create delays.
Justin: And so that's what we're going through right now. But, you know, I would say the Canadian markets in general have actually held in quite nicely. Like they you know, they're not they're not tearing it up, but they're probably outperforming the US on a year to day basis. And couple sectors of held in quite nice gold is obviously up.
I think it's a function of a few things. Number one is you have probably a new home that certain foreign investors are looking for. And so, we've seen a bit of an inflow there. And look, Canada's a really stable society, stable economy, right. Solid financial institutions, world class resource assets. So, lots of reasons to come to Canada.
And I think that that's been one of the things. But look, it's been volatile and challenging and tough.
Ingrid: And if I don't playbook.
Justin: And there's no playbook. Yeah. You know, but we're hanging.
Ingrid: In there as we go through this conversation, I'm going to dig a little bit deeper on things like the upcoming election and tariffs. And so maybe this is as a starting point because we are going to focus this discussion on the Canadian landscape. Maybe. Can you take a look at, you know, what sectors are starting to look real appealing.
Like whom are the winners and the losers from a sector perspective? When we look at Canada right now.
Monica: I mean, I'll take a stab at that. in terms of sectors that are interesting, you could think of ones that are perhaps less tariff impacted. And one of the great things about Canada is we do have a lot of these domestic champions in sectors like grocery, discount retailers, for example. Those are kind of inwardly focused. So don't rely a lot on exports aren't as impacted by tariffs.
And then they also have a defensive tilt. So, we do think or are concerned that the economy might be slowing down. Well typically people might eat less but they'll still shop for groceries. They might trade down in terms of going to a discount retailer instead. the other area that's performed quite well and 10% of the TSX now is gold, and it's really performed like that risk off defensive asset that you would have expected.
I think one thing that's interesting, what Canadian gold companies right now versus times Past is they have very healthy free cash flows. And on top of that load debt. So, cycles past you would have seen their balance sheets much more levered up. That's not the case today. They're in much better positions that I wore in times past. And then we've seen the commodity price really, react as well to the geopolitical uncertainty, the market uncertainty.
Ingrid: That's the good news story. Are there sectors of the Canadian economy that are most exposed, to the volatility and the chaos and the lack of a sort of clarity that we have right now?
Monica: I can think of three and they are sectors that we like medium term, longer term, but right now are going through a bit more uncertainty, turmoil. And they are a little bit more cyclically oriented. So, the first being energy. So, if you think global growth is slowing down you seen oil prices take a hit. WTI is right now at 60 bucks.
These are great companies great free cash flow good balance sheets. But at the end of the day the stocks will follow the commodity price stocks, energy producers in particular. The other two would be banks again a sector that we quite like because healthy balance sheets good dividend payers as well. Good dividend growers. But the story for 2025 was really one of leveling off of loan loss provisions.
If again we're seeing tariffs prolong in terms of the duration will likely happen, is that banks will start to take provisions on to their balance sheet. So that would be a headwind in terms of earnings growth going forward. And the last would be the Canadian rails. And they're really right in the mix of all the trade war is not directly impacted, but they facilitate trade flows.
So, if tariffs an outcome of that is that trade slows down cross-border and auto industry absorb that. Obviously in the thick of all of that, that would probably be I'd been for. But can rails as well.
Ingrid: When we think about all of the trade in the tariff noise and the overall U.S. Canada relationship, which feels like is fundamentally changed, or the things that we've always held true for so long, suddenly not so much, or we can't rely on. But when you think about what's happening, how do we think about the positive outcome from this?
Ingrid: Like, what are the types of pressures that that it's forcing Canadian companies or governments really to look at? And how do we think about what we might be doing differently that in the long run, could be a positive?
Justin: Yeah, maybe I'll take a stab at that. You know, this is obviously a really tough time. But if we look at three, 4 or 5 years, we have a window to make some changes in the face of, you know, what's looking like a little bit of protectionism in the US. This has opened a window for us, and we need to take advantage of it.
Justin: And so, you know, we've got obviously an election coming up and we're going to have a leader who will have a new mandate to move forward with some changes. And these changes are going to have to be, I think, quiet, significant. We're going to need to see changes in policy in terms of tax. We're going to see need to see investment in infrastructure.
Justin: We're going to need to see cutting of red tape. We're going to need to see just a faster overall, movement in terms of allowing foreign capital to come in and, and drive some of the productivity gains that this country has needed for a long, long time. And we now have a window to achieve that. And it's an it's that's the silver lining, challenging times in, in in the short term, but potential for long term gains that can advance the productivity that, you know, this country has been lacking for so long.
Monica: I think it has a silver lining, because it's a wake up call for all of us when one could really argue, perhaps you've been a little complacent, comfortable, comfortable. I mean, the economy's been chugging along the last decade or so, and I think sometimes you have to face road bumps, really look inwards, something as simple as energy. I think in the face of tariffs or the threat of tariffs, it's really emerged how dependent we are in terms of exporting to one country and that does it really lend to a resilient economy, a resilient sector.
Ingrid: Without predicting an outcome? We do have a federal election coming up in, a little under two weeks. In the time that we're recording this podcast, I might the threat of tariffs drive some of the policy changes that could benefit the Canadian market in the long run. Like what are the if you're an incoming leader, what would be those top things?
Ingrid: And I think you've touched on this a little bit, just over the top things you'd be focused on. And then I could ask you a follow up question in terms of, you know, as investors, what should we be watching for as the big policy are?
Justin: So yeah. And look, I think the good news is that, both leaders, both potential candidates will come through with a pro-growth agenda and something that is going to, move economy for the Canadian economy forward in a positive way. They'll do it a little bit differently, though. I think if you look at, and Polly have I think were probably, you know, tax cuts are going to be at the front of his agenda.
Justin: Deregulation is going to be a big part of his platform. So some really positive things there. I think, you know, Carney brings forward this kind of, you know, global international presence where he's connected to a whole bunch of leaders around the world. And so we could see some policies that are garnered towards attracting foreign capital from from someone like Carney.
So, but either way, I think, decision making around projects gets, shorter. I think, red tape does get reduced under both. And so I'm quite excited to, you know, move forward to that next chapter. And I think, you know, Canada will be in a good place, once we get through some of the short term noise.
Ingrid: I know we're focused on Canada, but when we were prepping for this conversation, one of the things I'm really uniquely interested in, because it does play into, asset allocators with the noise in the US and the uncertainty, you know, for a long time, the U.S. has really enjoyed quite a risk premia around multiples, etc.. But how is that changing?
Ingrid: And when you look at relative valuation across asset classes and, and not asset classes or really geographies, how is that shifting and what does that mean for maybe Canada versus U.S from an asset allocator perspective?
Monica: I think the last few weeks, something that's been quite evident is that this market leadership that we've had for the last decade or so, which has been concentrated in US large cap tech primarily had had real kind of run quite far. It was very narrow. It was very concentrated. last year the theme was really this US exceptionalism would be well, and there was almost like nothing else to buy out there other than large cap us.
Monica: And markets are mean reverting. You kind of can only go so far before you get checked back into place. And I think that's exactly what we saw every decade, if you look back in time, has its own market leadership. Rarely does. Is it the case that that leadership continues into the next decade? So you can look at Nifty 50s in the 60s, energy in the 70s, Japan in the 80s, tech in the 90s.
Monica: We had China and commodities and the 2000 and most recently US tech. And I think this was just kind of a wake up call to say, hey, you know what else is out there? Finance 1 to 1 is to diversify your portfolio. Right? And it's not to say that the US is not still a great market. It is probably needed.
Just a correction. But I think it's prudent for any investor out there to be diversified across markets, whether it's the US global or Canada.
Ingrid: That's a great segue. Way back to the next topic I want to cover, which is when we then come back to Canada. What are some of those things that are uniquely Canadian? What are those core advantages that we have that we would really want to shine a light on from an investing perspective?
Monica: Top down couple things that make Canada unique. And I think a very attractive market. One is that we're energy food, water independent. So when you think about geopolitical risk, market uncertainty, to live in an economy where we're not dependent on other trade partners for our core necessities really makes us resilient, I think through and through over a long period of time, we have low geopolitical, political risk.
Monica: We live in a pretty stable political environment here. And then I think we can get back to what I mentioned earlier. We have these really great kind of local champions, in key sectors. So things like the rails or within consumer, the banks, for example, even utility company.
Ingrid: From where we're sitting today. And as a relative sector opportunity, how are you feeling about financials.
Monica: So we broadly in our funds have really favored the financials because the way that we invest, or at least the dividend funds that we invest in, we look for dividend growth. Right. So they've had a great track record of growing their dividend. Do you mean through we tend to see that stock prices follow their earnings. cash and dividends is one measure of them growing their earnings.
Monica: And I think the Canadian banks and financials insurance companies as well, have been able to do that over long time horizon. You know, where they're trading now, Canadian banks. It would be kind of fair in their valuation. But again, acknowledging some of the uncertainties that we have might be some short term hiccups around loan loss provisions, tear ups.
Monica: But over the long term, I think, dividends will be sustained. They'll get cash flow to cover it and not.
Ingrid: And that also helps manage the volatility of that exposure in your portfolio. You've got that consistent dividend yield.
Justin: It's really interesting when you think about Canada I mean Monica mentioned earlier some of the cyclical nature of a lot of the parts of the economy in parts of the, market. And we're talking about financials, but we can almost lump in some commodities in there as well, where, you know, if we're in an environment that is, let's say, higher inflation for longer, and we're not gonna use the word stagflation, but, you know, a higher inflationary environment, a lot of these sectors are actually poised to perform fairly well.
Justin: And you think, okay, well, you know how to financials perform well in a, in an inflationary environment which could be low growth. And you worry about the PCL and you worry about credit being it being an issue. Canadian banks have done incredibly well with credit and adjudicating credit over the years. And so any rise in credit I think will be manageable.
Justin: But then there's this this kind of inflationary hedge, as I mentioned, where the value of the loans and the value of the balance sheet goes up. and, and it goes up with inflation. So the revenues get adjusted for inflation. The same with commodity prices. There's an inflation hedge embedded in the commodity prices. So you know cyclical. However a bit of you know, counterintuitive inflationary hedge, through through a different lens.
Ingrid: It's a great way to think about it. We were talking about, you know, the sort of the break in the relationship of the US, which has been our number one trading partner. But then we look at globally what Canada has to bring to the rest of the world. Can you talk a little bit about the sectors but are rare Earth or minerals etc.?
Ingrid: And again, you know, the purpose of this podcast, I'm hoping, is to leave investors with this great feeling about just the tremendous opportunities in Canada. Okay, we dig a little bit down in terms of who our next great trading partners will be and what what we have to bring to the rest of the world.
Justin: Well, the hot off the press. Just before I got here, I did notice that we are selling, a lot more oil to China. And I think in, in it's gone up to something like 37 million barrels in March. And I think that was the number. But I could be wrong. And it's because China's dependance on US oil has they've started to question it and they've started to bring that down.
Justin: So we now have a pipeline that goes to the West Coast that can be used to transport more oil, and has been used since, I think last May, to transport more world to Asia. That'll only accelerate from here. What we could also see, along with a lot of the changes we talked about earlier, was an acceleration in permits in terms of extracting more minerals that were more rare earths, more projects that can unlock some of the value hidden in, you know, the Canadian geography.
Justin: And I think, I think we're poised to do that.
Ingrid: So when we think about, what what, you know, I'm going to pivot back to the conversation about what else inside our country. Right? So, as you were coming in, we were talking about some announcements that were happening at the provincial level, the way the premiers are working together. Can you talk about what we might be able to unlock if we start to knock down some of those walls within our own house?
Justin: Yeah. So the the inter-provincial trade is the big one that obviously has a lot of focus right now from, politicians as well as, economists and, and the market and, there's been a whole bunch of, I think, different ways of trying to measure the, let's call it the tariff within Canada that gets placed on trading with your provincial partners.
Justin: Some people I think I've seen, you know, 7.9%, I think there was one, report that said it was in the teens. Anyways, there is friction between doing business with your neighbor. Ontario came out just before this call, and, announced that they are removing any interprovincial barriers and we can talk about what that means. And there's a whole host of things, but they're the first province, province to come out and say they will do that, but they need other provinces to step up as well.
Justin: And go along. You know, you can't just have one province. You need all the provinces to kind of act, and harmoniously to move this agenda forward. But I think if they get it right, this could be a big boost to, you know, growth and again, productivity.
Ingrid: And getting out of our own way. Any more thoughts on that one? Monica, the, currency market had. Right. So there's a lot of volatility around that, outlook for that, but just a general outlook. And then, you know, other sectors of the Canadian economy that that really benefits us. Yeah.
Justin: So yeah, maybe I'll just I'll just start, really quickly. It is it is really difficult to come out with a strong projection for where the currency is going. Right now. Obviously it was really weak versus the US dollar for several, several months in, the last couple weeks it's gotten stronger. We need to understand the rules of the game.
Justin: Once we understand the rules that are being placed on, businesses in the economy, I think we'll have a better sense of, you know, what is a natural currency level that makes sense for international trade and international investment? until then, I, you know, I if I were to have a guess, I think we're rangebound between, you know, 135 and 145.
Justin: And right now I think we're in the probably lower end of that range, meaning the Canadian dollar is a little stronger. But until we have the rules of the game, it's going to be very difficult to make a fundamental call on the currency.
Ingrid: And I think, you know, as you were talking about the the rules of the game, I imagine going into my game cupboard of the cottage and pulling an old game out, and there is no rulebook in there anymore. Right? So you gotta like look it up online is like, that's kind of where we are.
Justin: That's exactly where we are. And, you know, we'll take a step further. I mean, that's play monopoly. We know that monopoly, you pass go, you get $200, you can go to jail I can't remember, I haven't played in a while, but there's a jail like.
Ingrid: That certainly seems to be an option.
Justin: That's used to be an offering now. And I, you know, I don't know if I want to own the railroads. I don't know if I want to own, you know, Connecticut. I used to love Park Place the way I want on that anymore. I mean.
Ingrid: Do you want beauty, real estate or do you want a utility?
Justin: That's right. And so, I think that's a great analogy. And I, you know, it's it's not to say investing is a game, but it's just to say, look, this is really challenging to make informed decisions when we just we we just need certainty. Once we have certainty, things will be better.
Ingrid: We're a research based organization with a focus on quality and understanding fundamentals. And somebody has taken, you know, a kaboom to that. And but is it fair to say that, you know, we started with big chaos and then as each day week goes on, we're starting to see the responsiveness to the market volatility. We're seeing the off ramps that get, put in place to decisions.
Do you feel like, you know, as we're sitting here in April, that the frequency wave is maybe going to get smaller and smaller going forward in terms of the volatility or, or could we back where we were three weeks ago?
Monica: I think it's so unpredictable where we sit right now. But what I do want to say is that for us on the research team, our analysts, our portfolio managers who've been prepared for this within thinking about it since the summer when it became very likely that Trump would be in office, we started having conversations around what are these key policies, what are the impact of tariffs?
You looked at every single holding that we own. Understanding the upside, the downside. And so while it may feel very unsettling where we are right now, like the thing that I'd want to remind everyone is that it's also a period of opportunity. So volatility you know you can manage volatility. And that's been what we've been doing bringing in risk in our portfolios where we can't.
But it's also an opportunity to pick up excellent high quality companies at prices that we haven't seen for many, many years now. And that's really where we're leaning in in our portfolios today.
Ingrid: And I do think it's so important is you know, we invest in companies, we don't invest in the market. And the market price on any given day is just what it is. And it's not always a reflection of the fundamentals. And and this will come itself out. Obviously we've be talking to advisors to clients a lot lately. And there's this one question that came up and we were asked if we could bring it to you.
Ingrid: And the question is we're calling it the magic pen scenario. So, imagine that, you had a magic pen and you could immediately create a policy or a law to make Canada more attractive for investments in businesses. What would that lobby? What would you.
Justin: Do? yeah, I know exactly what I do. I don't know what I need the law. but it would be around moving quicker. let's call it the National Permitting Act. Okay. That's the name.
Ingrid: NPA. We're going to call it in the NPA.
Justin: And what it is, is it's a set of rules. and guidelines around moving new projects, and, you know, new permits quickly through the system. And really, it's a guarantee. And it's 12 months. It's 12 months if we will give you an answer in 12 months. yes or no? No, no, it's six months, actually. Okay. It's six months.
Justin: We're going to say yes or no, and there's going to be a set of criteria. And, we're going to move quickly. And it's called the National Pruning Act. It's the NPA.
Monica: I love it.
Ingrid: Come on.
Monica: Come up with your own money. So for me, I think it would be a set of policies that makes it easy to start a business in Canada.
Ingrid: Clever. The great minds, the great resources, the great natural benefits that we have in our back pocket.
Monica: There's no silver bullet here, but I would say we have such excellent centers of excellence in our academic institutions. You can think of Geoffrey Hinton at the University of Toronto, or some of that great machine learning work out of the Université de Muriel. And there's no reason that research can't be commercialized in Canada, but we need the appropriate federal grants.
Monica: We need fast permitting to start a new business. We need tax policy to incent risk taking in our country. We need immigration to support the human capital necessary. I think it's a whole bunch of different things, but building businesses, creating national champions, that's what really leads to economic growth, job creation. and at the end of the day, I think a better economy for all.
Justin: And what it's called is the NCI and company.
Monica: A new company at.
Ingrid: The NCAA in the NPR. You heard it here first from our podcast to our policymakers, I love that. Any last thoughts? You know, for our listeners who are looking at their asset allocation, looking at their investments, because this is an undoubtably positive tone conversation. When we look at the Canadian market, anything I've missed, anything I haven't thought about?
Justin: No, just just stay calm. Don't panic. Don't change the plan. The plan was made for a reason with goals in sight. and this madness will pass.
so I want to leave this podcast, with a parting note. Like in every market twist lies an opportunity to be seized. so stay informed, stay resilient. As you said, stick to the plan because calmer days are ahead. Thanks all.
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