Jose
Hey, thanks for tuning in so far. Now let's jump into the final part of our discussion. This is happening broadly to like you've seen you're a global investor. Now Japan is interesting in that sense where after 30 years, Japanese yields are rising again. The German bond the yields are rising. Is this a global sign? What is driving this global rise in yields across the world?
Like we're just there was an era of low rates. And with its regime change what's what are your thoughts here?
Damian
Well, easy thing is I'm curious. Like I'll just have one answer for this. It's just like the insane amount of deficits, I think. Right. You like if you're an investor, a bond investor, you want a higher compensation for, offer you more money. That's exactly like James. I don't have what, one.
James
Other thought, which, you know, I'm not in tune enough with the population characteristics of the other. Like big G7 countries. But I do know that the millennial cohort in the US is a huge cohort. I think it's 70 or 80 million people, sort of between born between 1980 and 1999. Midpoint of that is 1990. So those people are sort of 35.
What do you do when you're 35? You buy a house, you get married, you have a kid, you buy a car and a bunch of furniture. And that is, I think, juicing demand in the economy. It's in the.
Jose
Real world.
James
Economy, the real-world economy. And I'm sure that's playing out in the US and to some extent in Canada. I it's probably not a factor in Japan, but, you know, there could be, you know, pockets of the globe where that's also going on. So, it's, it's more of like an underlying cycle that's playing out. And, you know, 1990 is sort of the, the midpoint.
We're probably past the midpoint, a little bit of the millennial cohort. But like there's probably a still a few more years of like upward pressure on economic activity. That's one of the potential, theories that I've heard as well.
Jose
This fits in line with the industrial super cycle, too, right? You need more real world. You need more.
Damian
And the other thing, too, just you know, we talked to like, the James is talking about, you know, just big demographic shifts, you know, supporting the other more technical shift is like, no, no, no central banks doing QE anymore. If you take you've taken a buyer like just plainly speaking, you've taken you've taken a.
Jose
Massive buyer price.
Damian
Insensitive, price insensitive buyer out of the marketplace. And if all is left is us, as in, I've talked about active participants who want to be compensated for the risk. People want higher yields.
Jose
Yeah, yeah. In some sense that is also forcing governments to be more disciplined at some sense.
Damian
but no, it is not yet but we can it will.
Jose
It will right where you pushed us to the extreme and.
I do its so many things going on. And another narrative, that seems to have made the round trip, with particularly with the new US equities and maybe even globally is a team of like data centers in, in January, February. It was basically DeepSeek has ended the story. And next thing you know there's a resurgence in US tech, large cap tech and the narrative again.
So, what are your big picture thoughts? Is it bounce back from the lows or has the thesis changed since just a few months back?
I think DPC has Democrats sized the idea that everyone is going to have transformational AI at their fingertips, like a pretty. And it will be transformational. I, I compare AI to, our smartphones. Right. And let me just take a like just a little step back. Right. Apple had the smartphone in like 2007 at that point we were all walking around James and I and you had BlackBerry, and we thought BlackBerry.
Damian
We were the.
Jose
Kind of things.
Damian
And you asked us, why do we like our Blackberries? Because people said, I can send emails. That was exciting because it be the keyboard. Yeah. And Steve Jobs at the time said, I don't think people want to sell rebels. I think people want to have the access to the internet at their fingertips. And the idea of apps and on your phone that we all take for granted right now with your banking app, your travel app, the app I used to spy on my kids in the cameras in their rooms, like those weren't even thought of when the iPhone first came out.
And then we built a full program of, like the Play Store, the Apple Store, which all these apps which have completely, significantly improve productivity. Why am I telling you this is because we're in 20, 25, 17, 18 years ago, I couldn't have even imagined how transformational the smartphone would be to my daily life. Right? As it gets socialized through the system as people.
And I think we're at the we're at the nascent infancy stage of AI, and we've been I've been using it now for a few years, and I cannot imagine I'm being very well by humble when I say this. I cannot imagine how transformative it's going to be on our lives and just more on productivity. and I'll end on this, right.
like, right now, the most profitable companies in the, in the world are U.S tech companies. When you look at their free cash flow margins, when you look at their EBITDA margins, etc., the biggest cost item on their balance, on their income statement is salaries, right? Because these aren't they're not drilling for oil. They're paying people. Right.
That's how they produce output. But if you and you know, Joe, you had this great chart. You look at the, you look at job openings for computer programmers. They're collapsing. Why? Because now you can just add.
Jose
The best programmers can do the work.
Damian
Right? Because they're more productive. Because now you have a digital assistant that allows you to write code at a fraction of the cost. So, I just like the bullish cases. What happens if the most profitable companies on the planet through and they're the furthest along in implementing AI in their in their systems actually increases the margins and profitability?
Like you, I can easily beat a scenario where you're like, oh my God. Like, you know, like meta, which.
Jose
Is already insanely profitable.
Damian
At 50%. You know, EBITDA margins can be even more profitable. And it's growing its top line at double digits. Like the compounding just becomes quite transferred. So, I think people are slowly waking up to this idea that, yes, there is a huge Capex build to get this out there, but there's a full transformational aspect to and improving margins and productivity and profiles.
Jose
Also, it seems that demand may have been underestimated with all these deals being signed in the Middle East. The true global demand of like water for chips and for computing seems to have been overly, pessimistic in some sense. Like, any thoughts? James, what are your thoughts here?
James
So, I'm the manager of our real estate ETF, Global Real Estate ETF. And one of the biggest, real estate companies in the world is in Australia. And it's a company called Goodman Group. It's been a developer for many decades of industrial real estate. And I think it was about two years ago they announced that I think it was a third of their backlog is now data centers.
And the stock went up a lot. And I just bring that up to highlight that even in some of the infrastructure space that we know. Well, whether it's, some real estate companies that are transitioning to developing data centers or pipeline companies that have had, you know, for the last 5 or 10 years, not a lot of growth, but all of a sudden you need a.
Jose
Demand for.
James
For power, natural gas to feed the data centers, like we are seeing the theme play out in different parts of the market, not just semiconductors and the big the big tech companies. So, I think that there's some insight to be gained. from how it's, it's showing up in, in different sectors. And, and for us, it, it gives us an opportunity to, you know, buy, buy some stocks that are somewhat exposed to the theme, but like benefit from contracted cash flows.
And, you know, delivery.
Damian
Yeah. The like the James talked about this right. It's the day this is really bullish for Canada too right. Because we are by definition long energy where long energy we don't. And so if we can export this like the numbers are up like I have, I had stuffed the top of my head in the US you know like terawatt hours for like the total grid right now is sitting at like 280 or something like data demand just incrementally is expected to move that to between 4 and 600.
So, you're looking at like you know, doubling the demand sorry U.S data center right now is sitting at 280. We're looking at doubling that in the next two years to between 4 and 600. Let's take the midpoint 500 terawatt hours. That's the output of France, the energy demand of France. Right. Like that's.
Jose
A country.
Damian
Or adding yeah, that's a country. You're adding in compute energy intensity. So hey, if our Canadian oil and gas, if our Canadian pipeline can companies or Canadian IPPs, independent power producers can help alleviate some of that. You know that that that that demand by providing, you know, cheap, renewable, sustainable energy to it. This is we profit.
Jose
A lot of things. We've discussed a lot of things to tie up in some sense of volatility has been a theme. how have you managed what are the opportunities that were interesting? Big picture thematically. And looking ahead, we're entering some generally lighter summer trading seasons. What is your thought process to approaching the markets for the rest of the year?
Jose
Yeah.
Damian
James, you to go first. It gives me time to think.
James
Yeah, sure. I, I was I was going to answer that by, by saying one of the things I think we do really well, TDM is an equity team is a focus on portfolio construction. And, when I took over the t monthly income fund, you know, you don't want to, change something that's worked really well for our clients for a long time, but with an emphasis on portfolio construction.
Go through the portfolio and just think about the risk hotspots and what opportunities were maybe not taking full advantage of. And so, my headspace coming into the year was, boy, you know, things are, really hot. The market is frothy. And so, if there were any areas where there's more defensive businesses that seem like they've been forgotten about, we added a few of those to the portfolio.
And then as the market sold off, we shifted from, bonds to equities a little bit and took on a little bit of risk. Unfortunately, not right at the very bottom. You know, you buy as it goes down because you don't know when it's going to stop. So, the head space has been to take advantage of opportunities both when things are, you know, too frothy and when things are oversold.
And so, I sort of will carry forward that mentality over the next six, 12 months. We're optimistic that equity markets are going to continue to climb the wall of worry, but we're watching the policy developments and we'll, you know, stay really focused on, you know, what does the portfolio really need so that we can hit our objectives and give clients, you know, what they sign up for.
Jose
Yeah. Damien. That's exactly yeah. That's fantastic.
Damian
Yeah. Just like, you know, if I could just summarize what just, you know, James said, because that's what he was talking about is the philosophy we have across all our portfolios and the idea that, you know, I keep saying it right, like keep calm and compound on is that we here at TDs measured our portfolios that James runs, that I manage along with Ben.
It's it is it's like high quality compounding. We're not flash in the pan. Are alpha up. You know our outperforms isn't episodic. It's like you know just like hey let's exploit these locations when they're there. For example, you know being aggressive when the VIX is above 60 because it's pricing in 4% up and down moves next 30 days which never happy.
It's just yeah. So, you know but right now if you know like if we're talking six weeks ago said yes, the market is still on balance. People are still on the, on the world is ending side of the of the boat. And we should take the other side of it right now it feels pretty like there's no exploitable niches in the market that I can see.
Which means to James, what right do we want to be balanced in our exposures? We still want to keep focused on you know, the quality companies tied to cyclical growth. We talked about, you know, data center spends. That's still I that's still something we're excited about. But overall, you're not getting to balance. And you you're not getting paid to you know get out on any ledges.
You're really not you're not getting compensated for that. If I was going to look, I think I agree. I think our quality portfolios in uncertain environments will continue to deliver alpha. But the one thing I want to leave people on which I'm focused on is that, you know, we're looking for signs. And whether we go from, you know, little from trend economic growth to, you know, to like much below trend and at risk of recession because like, what's been the policy has been positioned they could you know, they could upend the apple cart.
I just don't know. So, I'm trying to think about looking for actual evidence, not sentiment. Hard data that shows that, you know, like, oh, because like that will requires like if you ask me what we'll do that will require us to get more defensive. We're just not seeing it there. But I do want to put it out there in the space that it's not like where I think markets are fine and they're there, but there's no exploitable opportunities right now.
Damian
There's no real big dislocation. So, I think our quality compounding bias in our portfolios that James talked about being balanced, not taking big risks will continue to deliver. But we're on the lookout for, you know, for if this could if this could slow.
Jose
Yeah, that's the thing. There is an element of uncertainty still at the end of the and you have to balance out that that, that risk. And that's generally speaking, what would just to wrap it up, what would be a blue-sky scenario, for the rest of the year for equity markets to keep performing?
Damian
Have you heard of, like, the, like, you know, Trump and tariffs and the term taco?
Jose
I, I heard that recently. Right.
Damian
Like trouble and trouble out of Trump always chickens out. the,
Jose
Taco.
Damian
Taco tariffs. look, if tariffs if tariffs at the you know, like we'll end up with tariffs because they have to be used to pay for some of the extension of tax credits. But if tariffs come to something much more reasonable like 1,012%. Right. And we do have, you know, some changes at the margin. And people are focused on reducing.
And there are some like right now the bills being passed through the Senate. I'm talking about the US here specifically. If we do have some, you know, claw backs and reducing some of the most egregious items and to help redress the deficit. And then that actually paints a very good scenario for markets. That would be my blue sky. And I think that will actually lift most global equity markets, because by the way, global equity markets have already taken measures.
We talked about this. Trump is incentivizing change and individual countries. I think if that continues, I think we could be setting ourselves up for, you know, like a really nice run, a really nice run here. Right. Like actually improvements in economic growth supported by earnings growth, supported by less tail risks of tariffs. I think that that's my blue-sky scenario.
Jose
And for Canada, James, that's.
James
I think that's right. If we can de-escalate the, the tariff talk and then push forward with infrastructure build out in Canada and deregulation in the US, I think that will give us, you know, the reasonable, optimistic, you know, case for the for the balance of the year.
Jose
Now, that's a fascinating conversation. Last question, the rapid-fire question for James on the joy of being, and joy and excitement of being a multi-billion PM. Which is scarier, having your baby or managing the portfolio?
James
Having a baby is very scary. And it's been the best experience. I have a daughter that's, almost a year old and congrats.
Jose
yeah.
James
all happen at the same time, you know, get married, buy a house, have a daughter, take over portfolios. It's been a crazy couple of years for me. And nothing. Nothing competes with having a human who depends on you screaming in the room next to you. It's.
Jose
It's not while managing your vast trillion-dollar portfolio.
Damian
Can I. Can I ask a question? A follow up to James. So what? How's risk management and portfolio silver to risk management and, and raising, you know, a little child.
James
I have no idea. I had that question. not at all.
Jose
Is, is learning the, as we go? Yeah, yeah, yeah.
James
I think that's how we, how we all avoid sharp.
Damian
Avoid sharp objects is right. Definitely.
Jose
Well, gentlemen, thank you so much for the conversation. This has been a pleasure. And, looking forward to the next time you're on here as well.
James
Yeah. So great to be here. Thanks, Joe.
Damian
Nice. Joe's always great.
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