Transcript
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NARRATOR: 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.
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INGRID MACINTOSH: Whether it's a global pandemic, a resurgence of Omicron, or now the Russia-Ukraine crisis, the first few months of this year have been incredibly challenging on markets and investors. On this edition of TDAM Talks, I'll be speaking to one of our most engaging guests, Michael Craig, who is the Managing Director of Asset Allocation and Derivatives here at TD Asset Management. We're going to talk about how the market and the outlook might be affected by the war in Europe, and our position today in Central Bank policy.
Michael, welcome to TDAM Talks.
MICHAEL CRAIG: Good morning, Ingrid. Thanks for having me.
INGRID MACINTOSH: So much for us to talk about today, obviously. Let's get right to the situation that we're seeing unfolding. And as we know, this changes day by day. So note, anything that we say can change in a day or two.
But let's try and get landed on where we think we are with respect to the Russia-Ukraine war, Omicron, and really, Central Bank policy right now. Let's look at it from the landscape of outlook for markets. Let's look at it from the landscape on how we've shifted our perspective on global growth, and maybe what we think about Central Bank policy going forward.
I know it's a lot to cover. I recognize that you are, what, one voice. But I want to take this apart a little bit for our listeners. So where do you want to start with this? Or what's the thing that's keeping you up most at night right now?
MICHAEL CRAIG: Um-- yeah. I mean, there's a lot a lot to unpack there. Let's start with most recent, in terms of Central Bank policy. Markets have started to price out about a hike this year.
So originally, we were thinking about 6 to 7. Now it's down to sub 6. I think I'd still take the under on that as we go through this year. Likely to see a hike next month by the BOC. Likely to see hikes by the Fed more front-loaded.
But depending on where we are in three months, that might be in this rate-hiking cycle, depending on how material the hit to global growth is from the conflict in Ukraine. So, it's very fluid. And as a result, you're seeing the front end of the bond markets rally quite aggressively. You're seeing the long end of the bond markets rally quite aggressively.
We've actually been positioning for this not because of Ukraine, but we just thought the bonds had gone too far too fast higher. And so seeing a real rally in the bond markets right now. In terms of this crisis -- of, let's say, markets or equities, different markets are going to be affected quite a bit differently.
I think the most acute pain to be felt in the developed world will be in Europe, in terms of just the hit to growth. Or-- you know, Russia is a huge consumer of a lot of European goods. Europe is dependent on Russia for natural gas and oil. And so, you know, you have a real squeeze here between the cost of living and the slowdown in growth.
And you've already started to see the ECB talk-- back away from stopping their purchases of government bonds. You're already starting to see the less likelihood of the ECB hiking. And what's also really interesting is that in this recent rally, you're seeing kind of peripheral spreads, you know, Italy, Spain, move in lockstep with booms.
And I would say that-- you know, this is-- may be a bit more of a stretch. But this might be the last kind of glue that actually solidifies the ECB as a single block. You know? And I think that might be-- things that might come out of this, I think you see a much more united Europe going forward. Economically, geopolitically, militarily.
And that's something to-- that's a whole other conversation, in terms of-- essentially, this is the beginning of the rearming of Europe. And you already saw-- have seen that with the German-- the German government proposed 2% of GDP to military spending.
The final aspect, thinking about this in terms of kind of the broader implications, and one would be Europe. The second thing would be North American markets. And I think we're probably the most fortunate in this, if there is, you know, a fortunate place to be. We're the least affected.
We don't have a tremendous amount of trade with Eastern Europe, Russia, or Ukraine. And we are fairly, to some degree, self-sufficient in terms of energy and food. And so North American markets certainly will sell off in sympathy with this. Though in terms of our growth profile, probably the least affected, relative to Europe or Asia.
INGRID MACINTOSH: So when we look forward to the equity market landscape, relative to where you might have found us earlier in the year, how much would you call down your expectations for equity market returns over the course of this year? Like, what's the order of magnitude that you might be thinking about when we-- I get there's a lot of variables in there. But how much would you move that outlook?
MICHAEL CRAIG: Yeah. [SIGHS]
You know, that's a tough one. In many ways, what's happening right now is really-- again, it's a pretty violent rotation. With the rally in bonds and real interest rates coming lower, tech is less vulnerable now. I've actually seen the NASDAQ start to outperform somewhat.
I think the market has been pretty heavy in the cyclical area. And I think that's a bit of a verification there. So, energy, I think, continues to do very well. Oil prices are going to go higher. Natural gas prices are going to go higher.
But I think financials are a little bit vulnerable right now. If we start to see rate hikes being priced out, that's not going to be terribly accretive to the financial sector, and with the growth slowdown. So, it's hard to make a real call in the overall market. You know?
I tend to look at where the opportunities are, where the risks are, invest accordingly. And then we'll see how things pan out. But I think it's fair to say that, you know, we're thinking kind of mid-, single digit returns for this year.
There's certainly more downside probability to that now than there was a month ago. And I'd probably stop there for lack of a better answer. Because, quite frankly, I just don't know.
INGRID MACINTOSH: Yeah. I know I'm putting a lot of big questions to you. And I'm going to pivot a little bit, because-- you know, volatility, it's certainly challenging for Asset Managers. But it creates massive opportunity.
And if you were to read the headlines day-in, day-out, week-in, week-out, it wouldn't look like we've had a ton of market volatility. But for those of you on the front line, we haven't had a week yet this year where we haven't had at least one day with a 2% swing intraday in the markets. What sorts of opportunities are you taking or looking for within that volatility? And maybe could you go a little bit deeper on the piece you just started to talk about there, with respect to that rotation that we're seeing inside the marketplace?
MICHAEL CRAIG: Yeah, you know, in terms of managing, you know, it's a pretty interesting environment. You know? Not to make light of things. But a lot of different things to do and depending on the mandate.
You know, our accumulation strategies, which were more of absolute returns, could be retirement, et cetera, really looked at various kind of geopolitical hedges to use. So, we've used puts on euro again. So, shorting the euro would be one place that's been helpful.
We bought some gold, are very active in the options markets, and broadly speaking, have come out of this fairly well. You know? If you were to tell me what had happened this year and told me where the returns are, I'd probably take it.
In our more kind of capital growth strategies, or strategies where we're trying to build wealth, we are sitting on materially higher cash right now. We have taken down a lot of our riskier stocks in small cap, for example. And really in a position to look for kind of the next opportunity.
My sense is that as both volatility, inflation, and growth-- I've been talking about a lot about this. It's kind of, like, stuck in my head. There's a lot of ways you can kind of frame it.
But if we're going into, and I believe we are, going into a world with materially higher risk of volatile growth and inflation, you want to own companies that, A, have better balance sheets, stronger balance sheets, and have more predictability of their business models. That typically gets you to a quality bias. And then you can use that within a values world or a growth world. But I think that is going to be the sweet spot. And the opposite of this would be kind of marginal businesses that do really well when everything is rallying, and, you know--
INGRID MACINTOSH: Yeah.
MICHAEL CRAIG: --get hyped-up. But they don't have the sustainable business model. There's a ton of risk that they default, because you just don't know when the capital markets are going to be open. If you need to raise capital, and we're in a period like today, it's going to be hard for kind of marginal businesses to tap funding. So, I think-- so where I'm going with this is I think we're going into a world where premiums for risk are higher.
So, you're going to get paid more for holding corporate bonds. You're going to get paid more-- equities are going to be cheaper. And that's a good thing for investors. But the likelihood to see more and more defaults is also higher. And so therefore, I think it's a world which is far more accretive to active managers than passive, and a world where I think just this is going to be more the norm than the exception for quite a long time.
INGRID MACINTOSH: Yeah. Quality counts. You started to touch there on commodities. Let's talk about the commodity landscape, especially where we are today at.
What's your view? What are you focused on? What are you looking at in commodities? And how do you use them in the portfolios?
MICHAEL CRAIG: So quick plug. We are building out a commodities team. We did kind of-- you know, a couple of-- a year and a half ago start down this path. Really excited about offering this, in terms of our way we look at things.
We think we're moving into, at minimum, a bullish market for commodities. And, you know-- and it could be as much as a real-- a next commodity super-cycle, not unlike the 2000s. And the issue with commodities is they go through these long periods of over- and under-investment. So, you go through a period where, all of a sudden, demand increases. There's not enough.
We start, you know, building mines. It typically tends not to be terribly sustainable. We overbuild.
Then you go into a glut, and commodities go into a bear market for a long period of time. We had just been in one of those periods for about 11 years. Really, since the financial crisis. That's really when commodities really started to roll over.
And I think 2011 was, like, the peak of it. And since then, it's been pretty soft. We're now in a world where we've got material deficits in the supply-demand functions of many commodities. Not just-- oil gets the headlines.
But this is the case in base metals, green metals, energy. It's just not enough. And we haven't exploited enough new sources. And if you add on the ESG constraints to resource or fossil fuel production, we're going to see higher commodity prices. And that doesn't even touch on something that I think that's been a little bit overlooked with this crisis in Ukraine, is a tremendous amount of global grains are shipped out of that part of the world.
I don't think it's crazy to foresee food riots later this year in other parts of the world where food is a bigger part of people's consumption basket. So food inflation is incredibly destabilizing. Because it's not exactly something that we can substitute out.
INGRID MACINTOSH: Yeah.
MICHAEL CRAIG: And so, you know, longer-term, I think, it's going to be an important part of people's portfolios. I think we're very-- we're in the foothills of this rally. You know, if you look at the long-term chart of commodities versus equities, we are at the trough.
Even though there's been a bit of a rally, it's nothing compared to the difference in returns of equities versus commodities over the many years. So, we're pretty excited about the place. I'm concerned about grain inflation this year from more of a humanitarian perspective. But in the years to come, I think it's going to be a pretty accretive place to be.
INGRID MACINTOSH: I'm going to double-click one more time in the commodity space. And can you talk a little bit about the fossil fuel transition in the energy space? Outlook on that? Thoughts on that?
MICHAEL CRAIG: I think it's very messy. I think we spent a lot of energy on reducing supply, which is needed. I don't think we pushed enough to reduce demand. And ultimately, the thing that's going to really reduce demand is going to be price. You know?
I don't think-- if I said to you six months ago that you'd be filling up your car at $2 a liter, you'd probably think I was, you know, a little bit nuts. I think that's probably going to be the case this month. And, you know, why stop here?
This is going to, I think, accelerate this transition. I think it has huge implications. You know, EV cars get the headlines. But you almost think about the way we design cities, the way we live, the energy intensity of life, that's going to have to be rethought in a world of much higher energy.
Because renewables just aren't-- we're just not at a point, in terms of our technology, for renewables to take over the role of fossil fuels. And therefore, that requires using less energy. So again, [LAUGHS] it's going to be messy. Probably lots of opportunities.
I think in Europe, particularly, there'll be a huge push to remove dependence off Russian energy. That gets you to renewable. And I think probably natural gas and nuclear have been overlooked. I think we're starting to become-- we're starting to realize now the necessity of these kind of transition fuels.
And I think that's where you probably see a bit more of a bull market. Natural gas-- you know, if you can swap out coal for natural gas, you really reduce your carbon emissions. And nuclear, you know, it's not like it's-- we're not in the 1950s anymore. The technology has come a long way. I think that probably is also an area that is more looked at as a replacement for oil and coal.
INGRID MACINTOSH: There's so much in there. And as you were saying that, you were talking about, you know, rethinking our cities, rethinking-- and I think about what we've just been through for the last two years, where we have learned that the model of work looks very, very different. And gone are the days where you're going to see an exodus of people traveling an hour in each direction in a car alone, day-in, day-out.
Like, there's so much change. So much opportunity. So much for you, as an Asset Allocator, to be thinking about. As we wrap it up here, what would you be your messages to investors today?
Because clearly, investors are going to be very worried. You know, we've come through two years of uncertainty. And now we have uncertainty in a brand-new flavor. What would be your message to our investors?
MICHAEL CRAIG: Well, my first message is we're on this. You know? I know that's always stressful, and you see the headlines. But on the ground here, I feel-- you know, I have meetings with my staff every day. Reset where we're at. My first question is where we're vulnerable.
We're on top of this. And I look at how we've done this year and how we've done in bull markets. And, you know, the testament of a great investor is how do you do in a bull market, and how do you do in a bear market. You know?
We had-- last year was a good year for our clients. This year has been a struggle, in an absolute sense. But we've been able to generally protect capital. And we're set up quite well for-- and there will be more bear market-- bull markets.
So, for many of our clients, my message would be, we're on top of this, and we've got it back. In terms of investing longer-term, critical thing is that you always-- the biggest risk for any investor is getting to the point when you need to start drawing down your wealth and not having it there. And I would continue to encourage investors-- the one thing that we can't control is exactly-- is understanding the needs of all of our clients. And that's really where our wealth professionals step in.
And that is the most important thing. We're here just to facilitate to ensure that it makes happen. But understanding those goals are critical for kind of long-term financial success.
INGRID MACINTOSH: Yeah. Goal-planning advice. Understanding what you're going to need. Having that good financial hygiene. And then trusting us to both grow and defend those assets that you've worked so hard for.
Anything else you'd like to leave us with? I know that we do have some new podcasts coming down the pipeline in support of our asset allocation business. And I understand we have a new video podcast coming in the next few weeks.
MICHAEL CRAIG: We do. Stay tuned for that. You know, part of what we try to do is ensure that there's maximum transparency about what we're doing, so our clients understand how we think and what we're up to.
For those clients who have family in Eastern Europe, you know, thoughts go out for you. I've got some colleagues and friends who are in the same boat. So, it's not an easy time.
And you kind of-- you look at these things, and you-- sometimes, you're a bit removed until you start to see images on TV or social media. And it's incredibly upsetting, you know, what a mess we're in. But, you know, I'm hopeful--
Instability tends to breed stability. And I'm hopeful that this breeds a better world when it does pass. And it will pass. But, you know -- but I'd probably just stop there.
INGRID MACINTOSH: Michael, thank you so much for joining me today. A lot of ground covered. A lot to be telling our investors. But, you know, top of the house is we've got this.
We know that we will continue to try and support our investors and our advisors through this landscape. We're going to continue producing commentary and market-breaking focused outputs so that we can help you feel more comfortable. Also, you can always go to TD Asset Management on Twitter at @TDAM_Canada.
And follow us on LinkedIn at TD Asset Management for updates. Thanks, everybody. Stay well, stay safe.
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