ANNOUNCER: TD Asset Management welcomes you to this week's podcast. As a reminder, this podcast cannot be distributed without the prior written consent of TD Asset Management.
INGRID MACINTOSH: Hello and welcome to this week's edition of TDAM Talks I'm your host, Ingrid McIntosh, here at TD Asset Management and today we are talking equities. We've got a great discussion planned in a packed house. So not only am I joined by Justin Flowerday, head of equities here at TD Asset Management, also our co-heads of Equity Research, Vitali Mossounov and Michael Brown.
Today we're going to be talking about some changes within the equity team, but more importantly, the outlook for markets. What we're seeing in some of the key inflection points that may be ahead. So with that, welcome, Justin, Vitali and Michael.
JUSTIN FLOWERDAY: Great to be here.
MICHAEL BROWN: Great to be here.
INGRID MACINTOSH: So before we go to deep on the markets, I just want to frame up a little bit of the conversation and specifically for our listeners, remind us of the size and scale of the equity franchise we have here at TD Asset Management. We have grown and continue to grow over the years. Many folks for a long time thought of us as a fixed income passive shop, but in fact we manage over $200 billion in equities for individual and institutional investors. We have over 150 equity professionals managing those assets, and I think we've most recently made some adjustments, as we always do, to continue to scale for the growth that we're seeing in our business. So Justin, can you talk a little bit to kick us off about some of the changes you recently made within the equity team?
JUSTIN FLOWERDAY: Sure thing, Ingrid. And again, thanks for having us on. Great to be here. As you know, investment excellence is at the core of everything we do, and we're constantly looking for ways and evaluating ways to improve what we do, whether it's team structure or processes or people and a whole bunch of changes that we make on a on a constant basis.
You know, they're incremental and they don't get press releases in a whether it's in relation to our screening process that the equity team uses or whether it's in relation to portfolio construction or some of the changes we make to industry frameworks. It's it's an evolution. As you mentioned, we made some changes recently and I would just frame that up as evolutionary as well as opposed to revolutionary as folks may remember, about five years ago, we purchased a company called Greystone Asset Management, and Greystone had a very capable equity team that has been operating mostly independently.
And with this most recent change, we saw an opportunity to scale up our equity research team and we looked at two teams that operated mostly independently but had very, very similar processes, very similar philosophies. And we created one larger equity research team that will have two Co-heads Vitaly Mossounov of and Michael Brown. And really it is about scale and it is about creating a team that has more resources to look around the world and discover opportunities in the global equity markets.
Very, very, very excited to have both Vitaly and Michael as part of the leadership team and they're both extremely capable and have done phenomenal work and looking forward to moving forward.
INGRID MACINTOSH: And I think that really speaks to the scale and the depth and the breadth of the resource that he asset management brings to the investment of assets to our clients. So I'm going to start with you, Michael. So you joined back in 2010 and joined Greystone back in 2010. Can you talk a little bit about your background and more importantly, maybe you know what you are excited about when it comes to some of these changes on the team?
MICHAEL BROWN: Well, firstly, I am still excited by markets after doing this for nearly 20 years or over 20 years through some pretty turbulent times. I still enjoy it. I joined Greystone in 2010 and shortly after the launch of their international funds and we became part of TDAM in 2018. Over my career, I've covered most sectors at various different firms.
But while I've been most recently covering global financials and have been co-lead of the international portfolios for the last three years. In terms of this new path, I am most excited about being involved, bringing two successful teams together, the sharing of best practices and the potential benefits for the clients. I mean that could be very significant and positive with our breadth and team of experience.
I think the opportunities are massive and I'm excited to play a part in that. So looking forward to it.
INGRID MACINTOSH: Yeah, hold that thought. And global financials are going to be coming back to you later that one. Vitali, over to you. Same question. What's exciting you the most about working at your team generally? But you know, we're in the new structure.
VITALI MOSSOUNOV: Thanks, Ingrid. We've known each other for a long time. I'm now in my ninth year here, so I've had many times to reflect on what it is that keeps me at the organization. I think it boils down to two things. The first is world class people. The track record of performance of TD Asset Management and the ability, given the scale to retain the best people in every region that we operate is very special.
We don't only get the best people, we also make them and help them thrive. We invest in those people and create opportunities for advancement. So number one, it's the people. Number two, it's the culture. And I would describe that culture as a meritocracy, where investment excellence, as Justin said, is the North Star here. And so working in that culture for around nine years, every week, every year, there's a renewed excitement about coming into the job.
JUSTIN FLOWERDAY: And as I get to know Michael more, as I get to know the entire team that he's bringing along, I'm seeing so many similarities about how they treat these pillars of investment excellence that have made us successful and also made them very successful. So a union of two great teams.
INGRID MACINTOSH: Yeah, this is if you're not in this industry, it's not a job. It's a calling. It's it's in your blood. I want to go back to you just since you've been on the podcast a number of times for sitting here just past the midpoint of the year, what can you tell me about what we've seen in the markets?
You know, for Canada, we're kind of flat on the year. We've had a bit of a good run on the U.S. side of the House. But what are you looking at for the back half of the year? And then maybe what are the what are you seeing or what are you thinking about that others maybe aren't so much?
JUSTIN FLOWERDAY: Right. So, you know, when I think about the the first half of the year, there's a name that comes to mind and it's going to kind of shock you, I think. And it's Charles Dickens. And my mother....
INGRID MACINTOSH: A Tale of Two Markets?
JUSTIN FLOWERDAY: A Tale of Two Cities, exactly. My mom was a huge Charles Dickens fan - two of her books were A Tale of Two Cities and Great Expectations. But the opening line of A Tale of Two Cities was mentioned in my household many, many times, and it stuck in my head. And it was I might get this wrong, but it was something like it was the best of times, it was the worst of times.
It was the age of wisdom. It was the age of foolishness, Something about the spring, something about the winter. But for ... this was the market. It was the best of times. If you were invested in seven or eight stocks, large cap technology stocks that generated 50% returns on average, you were feeling really wise and doing really well if you were in other areas of the market, not so much.
And so, you know, it brings us to the second half of the year, what we are looking for. I would say the biggest challenge right now for the markets is we've seen moves higher based on multiple expansion. And in order to continue that multiple expansion, you're going to need another catalyst and I'm not sure where that catalyst comes from.
We've already seen sentiment move from really negative to really positive. The catalyst is going to have to be something like earnings, but I'm not sure we're at the point where earnings are going to inflect higher significantly. And so, you know, that's, you know, thoughts for the short term in terms of what we're thinking about that others aren't.
I think I would point to margins, overall margin profiles across industries. The team has done a bunch of work and they have reached some really meaningful conclusions in terms of what's driven this margin expansion over the last decade or two, where we've we've essentially moved from 6% net margins for the broader market to 13 and a half. So a massive increase in margins and a lot of it's related to a few factors that probably aren't super well-known.
But what I'm struggling with and what I'm really trying to understand is over the next one to 2 to 3 years, how are the different factors that have driven margins hire going to evolve and what does the margin profile look like 2 to 3 years out? And, you know, whether it's related to taxes or interest rates or the technology sector, there's a lot of moving dynamics that I feel like people haven't fully wrapped their head around in terms of changes that could come in.
INGRID MACINTOSH: You're you're bringing me back to a podcast that we recently did, Vitali and I, along with Julien (Nono-Womdim) and Juliana Faircloth, where we talked about A.I. and the intersection of artificial intelligence and capital markets and some of those impacts for our listeners. If you haven't listened to that one, it's a great listen. Vitali, how do you reconcile your views on A.I. with what Justin saying?
We sort of tie some of those pieces together because we look at sort of investment themes. This is the big one.
VITALI MOSSOUNOV: And this is a big one. And at an index level, I think it's important to keep in mind we just said that concept of timelines is as we look out, six months, 12 months, two years out, A.I. and what it can do for corporate margins is not going to be a significant factor. So let's just start with that, Ingrid.
Longer term, this is a big deal and that's a lot of what we got into two weeks ago. But if we just take a step back, first principles, AI, let's just call it regular speech, automation, you're either going to allow companies to invent new products or services that they can then sell and make more money, and that'll be accretive as long as they do that at a sufficient return on invested capital, or it will allow companies to spend less money to maintain their current state of business.
Now let's focus on the latter, since we're talking about margins, especially, you know, as I pointed out last time we spoke that I'm in the camp that believes, I think it's out of consensus, that longer term in the five, ten plus year horizon, this will be the first human technological invention that is actually going to be destructive for the labour force and not accretive won't create jobs. In that sense,
there will be companies that come out of this as very large winners. They'll effectively be able to shrink their workforce and increase the labor productivity of everyone remaining. The margins will go up a lot. And at an index level, we just don't know. And we don't know because the moment you begin to eliminate labor, you are handicapping the largest growth engine of the economy and that is of course, the consumer.
And so we get into questions of public policy and universal basic income and a bunch of things that are impossible to predict this far out. But those are the kind of thoughts that we have going through our heads at the moment.
INGRID MACINTOSH: It's fascinating. Maybe for another podcast, the social impact on all of that. You know what? What would have to be true for people to be able to pull back some of that productivity in their lives and put some more balance. And but that's an entirely separate conversation. That's not how it's going to play out. Again, great conversation.
We got to keep going down that path. I want to take the the narrative back to something that I think is on the mind of all of our listeners, and that is around monetary policy and what we can expect going forward. Michael, I can put this question to you first. Are we expecting a monetary policy U-turn in 2024? And if so, what does that mean for the market?
MICHAEL BROWN: Yeah, I mean, looking at monetary policy right now, basically probabilities are split between whether it's going to continue raising pause in the near term. But I mean, the clear, clear takeaway, looking at monetary policy, the focus is on the data, assuming inflation continues to slow and there is further evidence that the tightening is working on the economy, ideally it slows the inflation without putting us over the top.
But with that and more rates are right now, it would be a logical step that as inflation slows, they could pivot to monetary easing to stimulate growth, which would be very positive, particularly with rates where they are currently ... (a) reduction in monetary and cost of capital could be significantly beneficial for the economy. But yeah, it's clearly data driven. So but I'd say we're closer to the end.
INGRID MACINTOSH: What you have Italy, what do you think?
VITALI MOSSOUNOV: I'll take a bit of a different angle on it. You know, I think back to the period of the 2010’s and especially late in the decade, one of the factors that we had, the structural factors in the economy and that led us to a period of low rates and relatively low growth and it's the aging demographics, it's the relatively high indebtedness of the Western world.
It's the income inequality that was emerging and to some degree already technological disruption. To me, for all the changes that we've seen as a society over the course of COVID, I don't actually think the structural factors that determined that mutual interest rate for the economy have changed all that much. So I'm certainly not going to be the person that points the quarter for a pivot.
But I think we need to go lower and it's just we need to play through these lagged effects of the current stance of the Federal Reserve and other central banks.
INGRID MACINTOSH: And that almost comes back to your comments earlier on just in around what's the catalyst, Right. What's going to be the catalyst for that continued margin expansion potentially? Okay. Let's go a little bit to the lightning round and I'm going to give you one each here. Questions that we hear from our listeners. Want to get your read on.
It's going to start with you, Justin. First question on the lightning round. “China reopening.”
JUSTIN FLOWERDAY: It's been underwhelming. And when you think about what's happened in terms of the consumption of of goods versus services over the last six, nine, 12 months in the world, there's been a shift from goods to services. And China is the manufacturing engine of the world. And there's been a part of that economy just hasn't come back as quickly as you would expect.
And so you look there in a place where think they're going to need to do something a little bit different to get that acceleration. And I would argue that some fiscal, a nice healthy dose of fiscal stimulus, is in the cards probably in the nearest future.
INGRID MACINTOSH: Michael, earlier on, we talked about your background and the sectors that you covered. My lightning round question for you, “global financial health.”
MICHAEL BROWN: Okay. Well, looking at global banks, I mean, the most important - this is the financial analyst in me is the most important thing would be capital. And capital levels are high, allowing for meaningful, whether it be dividends or buybacks to continue. In terms of credit, they're well provisioned. Provisions are very high relative to a pretty conservative credit outlook, which is positive.
Yes, loan growth is slowing, but with the higher rates, there's still quite a high degree of profitability and things look quite positive as things continue to grow. Most importantly for the states as well, deposit flows have stabilized, which has obviously been a bit of an issue year to date. So that's positive. So I think things are quite strong and quite solid for global financial health.
INGRID MACINTOSH: Also up in the lightning round. Breaking my own rules here, Michael, “Canadian financials.”
MICHAEL BROWN: I mean Canadian financials, same thing. Capital levels are high, provisions are there while cushioned against credit. The big thing there would be the loan growth and outlook for Canadian housing. There still continues to be some growth. So that we'll see. But in the meantime, we get a positive capital return and a potential for increased buybacks at dividend yield.
INGRID MACINTOSH: So net positive there, too. We heard Justin start the podcast this morning talking about the handful of stocks that would have been the best of times. So my my theme for you today is “technology or technology frothiness.”
VITALI MOSSOUNOV: There is some there is some - we can start with valuations that simply observe the Nasdaq 100, those large 100 in big tech companies, they're trading at about a 36% premium to the S&P 500. At the all time high was 41% all time high in the last 20 years. And that's that's almost up there. And, of course, that that high was back in 2021.
We know the performance through ‘22. So, look, Justin had it right. We had a very big run. Part of that was because these companies were the first to go through a slowdown in a recession. They had the big earnings cuts just starting really in Q2 of 22 when all the other parts of the economy were still chugging along.
JUSTIN FLOWERDAY: So they bottomed out first. Investors bought them, but I'd say in many instances they were getting ahead. They're getting a little too far heads. I think this frothiness is out there and you need to be very, very selective heading into Q2 and certainly don't bank on that kind of outperformance.
INGRID MACINTOSH: Yeah, I think that's a terrific reminder because it's that, you know, investing is a long term promise. The technology market, while it looks phenomenal year to date, we have to put in that last two last three year perspective and we look at that from that standpoint. Let's make it a little bit fun, guys. Let's let's take the pressure off you as we wrap it up a little bit and give us something else to think about.
What are you watching? What's your favorite streaming channel and what are you watching. Vitali, you first.
VITALI MOSSOUNOV: I don't have Netflix. I have the YouTube. Everyone does.
INGRID MACINTOSH: A short attention span.
VITALI MOSSOUNOV: But yeah, well, that's exactly what it is. And I just find that all the world's content, anybody can be a creator and put their videos, their creations, their thoughts, their energy on YouTube for free. And so I love spending time there because you can research any subject that you want and a great channel that I recommend is “Told in Stone”
And it's this gentleman who, the historian from the U.S. that makes short 10-15 minute informative videos about ancient Rome, Pompeii, such things. It's very, very fascinating.
INGRID MACINTOSH: But I going to actually go and check that out because I got some geek in me. Michael, you what do you watch.
MICHAEL BROWN: Young children in the house? I don't have much control on what we watch. I can see that it's lately a lot of Phineas and Ferb. But I will say my wife and I are finishing off Ted Lasso and enjoying that on Apple Plus. And that's great so far.
INGRID MACINTOSH: I cried when that was over. Enjoy that.
MICHAEL BROWN: We've got two episodes left so I'll keep you posted.
INGRID MACINTOSH: I won't - no spoilers here. What about you Justin?
JUSTIN FLOWERDAY: Recently very little television watching for me. The problem is I've got the opposite issue of Vitali and I think he said Netflix versus Disney. But can we say Netflix versus Disney versus Prime versus Paramount versus Apple TV Plus and every other service because we pay for them all in my house, which is a problem. If I were to cut one, my kids have gotten older, I think it would be Disney Plus.
And in terms of watching shows, the next one that I'm going to watch is season ten of “Alone”, which is a show about an individual ... individuals who need to survive in the wilderness by themselves for as long as possible, with ten items.
INGRID MACINTOSH: Is that to say what you want to watch because you're living with teenagers at home? Sure. Okay.
VITALI MOSSOUNOV: Can you choose the ten items?
JUSTIN FLOWERDAY: From a list of 50-ish items. Yes.
INGRID MACINTOSH: Is one of them a streaming service?
JUSTIN FLOWERDAY: Sadly, no.
INGRID MACINTOSH: Okay, here's my last on for you, Vitali, Twitter or Threads?
VITALI MOSSOUNOV: Twitter for sure.
JUSTIN FLOWERDAY: Twitter.
INGRID MACINTOSH: Michael.
MICHAEL BROWN: Can I say I'm on neither?
INGRID MACINTOSH: Yes, you can!
MICHAEL BROWN: I do see Twitter through LinkedIn. So yeah, Twitter.
INGRID MACINTOSH: Okay, Great conversation. Gentlemen. Always a pleasure. For our listeners, you can always find more of our podcasts on our website or on Twitter @TDAM Canada and on LinkedIn at TD Asset Management. Thanks everyone. Have a great day and stay safe.
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