Damian: It's like global equities because of policy decisions being enacted in those countries to improve economic growth higher than the trend rate before is actually making global equity markets competitive.
Jose: Hey, everyone. Welcome to the breadth of experience where we break down some interesting stories that may not be getting much of the headlines when it comes to the stock markets. And in this special three part series, I am joined by one of our regular guests, Global PM Damian Fernandez and James Hunter, a first time guest who's also one of our PMS managing a range of Canadian portfolios.
So from surprising sector shifts and the resurgence in Canadian equities through global competition, rising up and talk tariffs, stay tuned to find out more. Welcome, gentlemen. Damian Long time guest for that experience. But today we are also joined by James. Welcome, James. So the breadth of experience. So you and Damian, you're obviously intimately familiar with James. You've seen him blossom from a cat of a caterpillar, from a pupa all the way to a caterpillar, right?
Damian: I guess. Well, a butterfly or butterfly.
Jose: Oh, yeah. I'm getting my...
Damian: You're getting. That's my biology wrong. Yeah. For those that are listening like James is James and I bunch other for going I'm close to maybe two decades. He started off in a similar program I did at at a firm and we were you know brought into TD and I was actually I was involved in bringing James over because from a previous life, a previous life, I could see the butterfly wings slowly sprouting at the eye because in advance and it's been so and it's been a it's been a wonderful, wonderful addition to the team.
Jose: So what is James? Tell your story. He's obviously seen it, the origin story. I've said it as well, being part of this team.
James: Yeah, I guess it would date back probably 15 years. Is when I first met Damian at a at a previous employer and, and we had both gone through the, the rotational program in the investment division of an insurance company. And it was it was a good experience. There were a lot of young people there at that time and we all learned a lot got our Cephas and I found out at that time that Tim was building out the equity research function.
I met Damian and a number of our colleagues and yeah, it was a really, really good transition for me in 2014. Just as it turns out, just when a bull market in equities was starting. So it was, was good timing.
Jose: Yeah. And so what have you done since then at 20 fortunately them and you've now taken on some mandates so let's elaborate. Yeah.
James: Yeah. Well I guess at that time I joined as, as an analyst like I said in the research team and I was covering energy and we sort of joke on the team like when I started, oil prices were about $100 a barrel. They went straight down fear for a few years. So that was it was tough coverage. Then I was I moved over to pipelines, utilities, reeds.
Those were sort of out of favor for a few more years. And then I took over coverage of the banks and insurers of the top of the market 2020 to just before the US regional banking crisis. So I've seen I've had my fair share of seeing like how things can go bad and you learn a lot in those experiences.
So it's actually it's been really good for, for my development. And a couple of years ago I took over some of the income mandates. So I now lead all the preferred share institutional and retail portfolios. And just the end of last year took over the TD Monthly income fund. So some pretty big important mandates for the firm.
Jose: Yes. And so bull markets make you complacent, but bear markets teach you a lot in some sense, right? Yeah. So top.
Damian: Top talking markets just not the funds.
Jose: Well, are you, as you said, to take an over monthly income in late last year, But late last year was also the time I'd say the president new president comes in and it's been an interesting time for you the last six months taken over the strategy. And if you take an ordinary person and give them the S&P 500 at the end of last year, 5008 81 and the S&P 500 as of yesterday's close, June 3rd, 5009, 70, it almost feels like nothing could have happened, but it's actually pretty much the exact opposite.
We've roundtrips some, some serious lows. We've gone through some volatile times, kind of a mix of COVID, other tantrums. What are your thoughts? What is what are the takeaways of just looking at the last three or four months? It's been fairly eventful, to say the least. Damian I'll start out.
Damian: But yeah, the, the exciting thing actually is that you, Josue, you talked about S&P returns. Most people on this podcast listening in actually Canadian investors. And what's really interesting is that James and as representative all of our Canadian franchise is actually materially outperforming for our clients. Well, in an absolute sense, right. But the TSX is up, I don't know as of today, like we're filming this, it's and it's the TSX up like seven 8% year to date.
The S&P while you talked about numbers that were flat the S&P actually for our Canadian clients is down right here today because of the Canadian dollars up the way I think about this right if you look globally and you look at equity markets and I can talk about, you know, the S&P flat, the TSX up high single digits, if not close to double digits, Europe up double digits.
Japan, Hong Kong up high, single digit, double digits. I on the face of it, it feels like the the sentiment is much worse than reality. And if I if I had to summarize it, I think I think I would go with that like sentiment how people feel talking to our clients. It feels like everyone's looking around the corner for the recession.
They're like the recession is imminent. It is now and might.
Jose: Be the case for some time to.
Damian: Play right. And our team will take the other side of that, like because we're fundamentalists, not in the religious sense, right? Fundamentalists in like looking at an earnings like James in your coverage, earnings are growing like companies are cautious, but EPS is up, cash flow productions. I think that's what drives valuation. I'm not sort of like I'm not sure if you want to add to that.
James: Yeah, just to just to build on the points of if you reflect on, you know, the last three, five, ten years for, for Canada, like there's been I would say there's been a bit of a rough patch. Obviously there's been a lot of, you know, challenges with, with the pandemic and then coming out of the pandemic. But economic growth has slowed.
And I think the productivity challenge in Canada is well known. And so that's put a sort of a dampener on how people feel about the economy and their job prospects and even just like their day to day household finances, but that underneath all that has been a bit of a you might call it like a stealth rally and in Canadian stocks.
And I think what we're benefiting from is, you know, sort of low starting valuations, low expectations, but also this underlying tone of inflation in both Canada and in the U.S. It's it's good for a lot of the earnings power of the big Canadian stocks. And we've avoided a recession, which has been important and helpful for the financials.
Jose: To that point. James, let's unpack that a little bit. As you rightly said, the feelings of the general Canadian population may be a little subdued, but underneath the hood, the market is working. So if you're se what is the market sniffing out? Is it a sign that growth is coming back to Canada or is it a sign that we were really depressed?
And it's it's just kind of valuation, kind of getting a bit of a lift off? What is it?
James: Yeah, so it is probably a bit of both. I think the the primary factor is that we've exited this zero inflation, zero interest rate world, which was a key feature of the 20 tens and that really held back the profitability of of banks and life insurance companies and and other other parts of the market. So I think that underlying tone of inflation is coming down, but it's not going to drop back down to zero or 1%.
I think that's really important for the publicly traded companies in Canada. That's that's one factor. And I think, yeah, I do think the other factor is just that we've had some policy decisions that haven't been super business friendly. If you think about the the bank tax that we had a couple of years, the Canadian recovery dividend like there were big capital gains taxes, uncertainty around that like so there were policy decisions that weren't more business friendly but are now looks like we're tilting into a different direction as a country.
And so I think I think the market is getting more positive about some of those dynamics as well.
Damian: Yeah, I definitely agree. Like, I think it's setting in looking as we're global, but observing the Canadian marketplace, it's a it's an idea of that. You know, and we've talked about this before, Joe. It's like better than feared.
Jose: We've been saying that for two years.
Damian: Plus it keeps it keeps repeating itself the banks. So, for example, the biggest part of the Canadian, the TSX, is the Canadian banks. They just reported last week. And maybe, you know, James can summarize it, but people were expecting like people were really downbeat, expecting like significant loan losses and provision increases. Numbers were fine and outside of Royal, all the banks were up 2 to 5%.
James Is it just...
James: Expectations. Yeah, expectations coming into the quarter were definitely low. People are worried about provisioning going higher.
Jose: All the tariffs were supposed to really impact us here.
James: Are really supposed to flow through into the results and we haven't seen that wealth earnings up double digits capital markets earnings up double digits pretax pre-provision adds at at a bank level across across the big banks. I think it was over 10% growth year over year and provisions inched up quarter over quarter, but it wasn't a big move higher and importantly, it was more in the performing provisions rather than the impaired provisions.
So actual loan losses aren't really coming through. So there's that and there's also capital generation has been has been really good, like the the roads are improving, the banks are generating a lot of capital. So it's allowing also some some dividend hikes, which is good.
Jose: So whichever side of the spectrum you may be politically, everyone likes economic growth. And you said something about policies over there. Do you think the policy shift is sustainable and more more importantly, what is their ability to actually execute and what do you think about that? Like what is the what is the risk that the market may not be seeing?
James: But maybe I'll start with Canada. Damian can talk about the U.S. like I think if you think about the infrastructure backdrop in Canada, like yesterday we got an announcement that the Eglinton Crosstown LRT is finally going to finish this September after like 15 years and being billions of dollars over budget. Right. I'm really waiting for that one personally because it would help my commute to and from the office.
But but I think it's emblematic of a lot of the challenges we've had here. We have a lot of population growth in Canada and we're just not building an infrastructure that's an intentional choice that can be changed and I think it is going to get better. Maybe it's not going to be perfect, but it's going to get better in the next three, five years.
And that's something that investors will take take notice of. And that's just one small picture. But I also think like in terms of resources, more development of precious metals, rare earths, maybe less negativity around the oilpatch, I think that could be beneficial as well.
Jose: Damian You've said that if, if we start changing stuff, if we break down the inappropriate share barriers, if we, you know, make, it's almost like we should erect the statue of Trump because it's like he's forcing us to like.
Damian: What is your maybe, maybe erect a statue of Trump and like the, you know, it's like in the prairies in the farming country, like as a scarecrow, just to keep the the no, but just taking a step back and putting, you know, my, my Canadian patriotic hat on despite Trump's antagonism to our country, what's what's actually happened is that he's galvanized our nation to actually focus on what you said this at the start, Jose, what matters like growth rate growth lifts all boats.
And for the last few years we are in the wilderness to a certain degree of navel gazing, focused on priorities that didn't address what actually lifts people up, which is economic growth. And now I like, look, the six months ago the Liberals and I don't this is not a political statement I'm just calling and I says six months ago the Liberals didn't were lost in the war or.
Jose: Didn't have.
Damian: A chance. Exactly. And six weeks ago or you know, like two months ago, I couldn't there was really no discernible policy differences between the liberals and conservative platforms because they both focused on growth. They both talked about, you know, reducing talked about policies to improve economic growth. They talked about, you know, removing interprovincial trade barriers, the sacred cows and the liberal platform, like a carbon tax gone right, capital gains tax gone.
So I do think this and by the way, when we started this talking about returns globally, Trump has single handedly galvanized individual countries to take policy steps to improve seriously on the growth. You know, we talk about, you know, make make, you know, make America great again. It's like I'm saying about we should call it like, you know, big global equities.
James: A great.
Jose: Yeah.
Damian: All right. Because that global equities, because of policy decisions being enacted in those countries to improve economic growth higher than the trend rate before is actually making global equity markets competitive versus the U.S..
Jose: This is this is the question is, is it just all this returns you're seeing across the board and even the resurgence in Canadian equities? This is just a sign that countries are competing and and competition is generally better for risk assets as a as a whole.
James: They're getting relatively better.
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