Ingrid: Well, we're halfway through the year, and market is sending mixed signals. Are we headed for a soft landing or even more uncertainty? And what's the role of commodities in the investing landscape? Welcome to the second episode of TDM talks Mid-Year outlook. In our first episode, we delve deep on the equity market. And today we're going to pull the lens back a little bit and look at the asset allocation landscape across asset classes.
And we're going to also take a deep dive on what role commodities have been playing as we did in our first podcast. We're going to look backwards over the last six months to take a look at the back half of the year and what we're expecting. Joining me today as a podcast favorite, Michael Craig, head of our asset allocation team, managing over 100 billion in assets for our clients.
And joining us also our guest Hamza Hussain from our commodities team to tell us just how commodities will play a role in this landscape. Gentlemen, welcome.
Michael: Thank you.
Ingrid: So, we're going to take the same format I did with our equities team. I'm going to start with you, Michael. Let's talk about the first six months of the year. Was it as you expected? What surprised you the most?
Michael: Well, it wasn't it wasn't as we expected. and I think part of that was just we had a; we had policy our April 2nd. from our conversations. half the administration wanted to start. We knew tariffs were coming. Half the administration was moving towards a start, slow and ramp up in terms of trying to get countries to adjust behaviors.
But that side and when it was more of the economic nationalist side, Pierre Navarro little Nick who, who pushed for the kind of big bang approach. candidly, the administration probably lost a month as they tried to have to unwind, the chaos that that created both in the markets, trade flows, the looming shortages that were going to hit U.S. shelves, quite rapidly.
And I think we're back now to where we thought we'd be. And that is tariff policy will probably come in some like a sales tax, 10 to 13%, higher for China. and the administration will start to focus on, on its other goals in the back half of the year. So, a lot of volatility in the first half.
The markets have reacted both negatively and positively as we've walked back the kind of extreme tariff policy. I think the tariff story is probably in the latter, if not ninth inning. I think we're getting to a point where we have some degree of where we know we're going. but that now leads us into, into what we're thinking in the second half.
The there, I think not surprise to us. is that the dollar has been soft. And I think this is more of a, of a trend than just a trade, in the sense that the world's behaviors are going to lead to, changes in investment policy, changes in government policy. And I think that now that will lead to stronger growth.
relatively speaking to the, versus the U.S. and then lead to a weaker dollar.
Ingrid: Yeah. Great callout on that. And for our listeners, we do have our recent our Global World Order podcast, where we did highlight the, portend the weakness of the U.S. dollar. And what about the fixed income landscape in the first half of the year rates?
Michael: you know, bond returns or give or take 1% now. credit it was repriced negatively and then has come back. rates have been modestly higher. really the US story has pulled up the rest of the, the market, but not that that, a mediocre start to the year, clipping at 1%. The return of the relative to US equities and Canadian dollars.
Not horrible. and so not a not a great start to the year, but not at, not a terribly horrible one either. Just kind of, mediocre.
Ingrid: Humza, I'll turn the question to you. We've seen a lot of activity on the commodity front in the first half of the year. Gold energy prices. Talk a little bit about that.
Humza: So, I think, the bigger theme is that we are in a, we're at an interesting juncture for commodities. I think today you would look at commodities and say it has a lot of tailwinds. the first one I would describe as internal to commodities, and that's the traditional kind of business cycle and commodities, which is because of the how long it takes to bring supply on lines, like a very long 30-year cycle.
And so, it's a traditional cycle where you have, we go through a period where you have high prices, high prices, encourages investment, encourage investment, encourages oversupply. Then you have oversupply, which causes low prices and so on. And so, if you look back at the decade prior to Covid, that was definitely a period of underinvestment. And so now we are going to reap the effect of under investing in commodities over the prior decade.
And so, commodities are tight, inventories balances are tight. And we see that sustained for the next 10 to 15 years. I think the second set of tailwinds are all the big themes that were that kind of capturing headlines right now, all that investment in energy we need to make for AI, decarbonization, electrification, all those big themes in terms of supply chains, in terms of manufacturing, reshoring, French shoring, near shoring.
and then there's also rearming re industrialization. And related to that, I think we're on the precipice of some of the largest global fiscal expansion we've seen in probably 50 years, since World War two. If you think about if you look at us, you know, they've been running 5 to 10% deficits for the last ten years and will probably continue to do so for the next ten years.
I think about Europe, and there are $800 billion plan that they've announced. Think about Germany, who are kind of very traditional fiscal stalwarts, changing their rules so that they can do a 500 billion rearming re industrializing program. Think about China. They're going to 2025 is probably the year they run the biggest fiscal deficit over the last ten years.
And so that also helps commodities on both ends because these are not monetary policies is our fiscal industrial manufacturing driven policies. And so, they all support commodities on the on the demand side for materials and energy. But if you think about how they're doing it, they're running fiscal deficits. They're effectively printing money. So, you're debasing currency. And in that kind of environment, you want real assets.
And gold and commodities are the realest of assets. Right. And then on the last part on, on geopolitics, I think we're moving into a world that is increasingly becoming more chaotic. And I think the best way to express a long chaos position is through commodities.
Ingrid: And through gold. As you we talked about, we met in the fall just for Christmas for our listeners. We have a commodities podcast. And really, what we've seen in the first half of 2025 was exactly the landscape that you talked about. So really great. call it okay. Well, looking back to the easy part, gentlemen, let's look forward to the last half of the year, the back half of the year.
What are we expecting?
Michael: So out of the out of the start of the US. midterms are rapidly approaching. And in 26, you know, the last thing the Americans want is any type of recession going to that because that will lead to, a not a good result for them, the current governments in the midterms. I think, deregulation is going to be a top priority this fall.
particularly with respect to financials, energy, general investment in general. I think a lot of the environmental, constraints will be lifted. and that will lead to probably a stronger growth in 26. Again, I think we're going to go into a soft patch this fall. And that's not neither here nor there, but broadly speaking, stronger growth in 26.
In the non-kind of US sphere, Western sphere. American policy has, has it ironically, you know, Make America Great Again is actually led to make the world great again in a sense that we're moving towards countries focusing on self-sufficiency, taking care of their own defense policy, driving aggregate demand higher. many economic models, the country's been following have been and driven by exports growing fast than imports, exports going to the US consumer recognizing that might not be the most, attractive mode of, of growth.
You see, I think you'll see countries really focus on consumption and investment depending on their mix. that that will lead to higher nominal growth. And our work empirically, shows a very, very high, strong relationship between nominal growth and top line revenue for companies. And so, we would expect to see revenues grow far faster than trend in the coming years with this fiscal expansion.
It's going to come at a cost. We're going to spend more money than we're taking in. but, growing your debt isn't the worst thing. If your GDP is growing at a faster clip, that's very sustainable. So, think about, you know, when you're start out, just out of university, you don't qualify for a large mortgage because you have no historic history.
But as you as you work and as you build your human capital, as you, as you gain assets, your capacity to increase your debt or lever, your balance sheet increases. And so, a similar way to think about, country is that, yes, they're going to be spending money, but what's that money being spent on. If it's being spent on redistributive policies, you get Argentina, or Venezuela.
But if it's spent on assets that create growth or create real or increase the potential growth, those are good investments. Where it becomes cloudy is what's going to be the efficacy of that of that investment. So that's where we're spending our energies. Are these investments they make sense. Are they're going to lead to stronger growth.
But our senses for the second half of the year the stock market should do okay. we would we're honestly bullish right now on equities where I do see some not so much risk. But just I think the capital gains story is over is in fixed income. the demand for capital is going to increase. as Humza just said, the world now is looking at starting to soak up their excess savings for their domestic priorities.
and overall, this will lead to, to long term bond yields being higher, than perhaps where they are today. I think the US is probably somewhat priced for that. Canada is not. So, I wouldn't be surprised to see Canadian rates drift higher. that'll be a headwind of fixed income. But the yield you're getting now is far higher than it was ten years ago.
And you are your levels are just under 5%. So that'll make up for it. But you know, from an investment backdrop outside of the kind of crazy events like we've just seen in the middle East, you know, the 12 Day War, you know, we should see a relatively strong equity market with pockets of, of higher volatility.
And I think that overall volatility will be higher, in the, in the in the months and years to come.
Ingrid: And there will be commodities in the back half of the year specifically.
Humza: So, I'm going to cheat a little bit. And instead of trying to make a call for the six months, I'm going to kind of focus more on the big thing. But I think the big themes that apply over the next six months are the same. They're going to apply over the next 20 or 30 years. Right. And so, my view is that the upcoming 20, 30 years are not going to look anything like the previous 20 or 30 years.
Right. And I and I think, a lot of people who have built these models in the mental frameworks of how the world works, how the economy works, how government politics work, they're going to be constantly found themselves surprised and, and wrong. And so, you know, if you think about the last 20, 30 years and we kind of simplify it and distill it down to a few kinds of big themes, it's, you know, US hegemony.
Dollar is king global rates, making a beeline to zero. And trade was so frictionless that essentially the developed world was happy to outsource all their manufacturing, their security and energy needs. And I think all those forces are now either receding or in full reverse. Right. And so, so for us, you know, we have to think about that when it comes to portfolio construction.
And so we have to think about, you know, how do we build, a more better, more durable portfolio in a world where the volatility of everything is higher, the volatility of interest rates, of inflation, of policy, of geopolitics, how do we make a stronger, better, more diversified portfolio in a world where bonds and equities are positively correlated?
And that's where commodities come in because I think commodities will thrive in a world where you have increased volatility of everything. And we've seen that over the last five years.
Michael: And sometimes, you know, I'll meet with clients. They'll be like, well, what do you what do you investing in now. And we always are making kind of the marginal dollars to where we think the most attractive investment opportunity is. But the secret to long term success is understanding, clients risk preference and then building a portfolio that is able to accrue the highest amount of return for that risk preference.
And, and the secret with commodities is just to pick up on one item I said is that it behaves quite differently than stocks and bonds. you know, the reason we use infrastructure or real estate, it behaves quite differently than stocks and bonds. And so, as a result, we're able to actually engineer that goal is to engineer portfolios, are able to achieve a higher level of return per unit or risk because we've optimized our diversification. You know, this past a little while, you know, today commodities are selling off because we've got a ceasefire going into the last week, you know, and stocks and bonds where we're struggling a bit, commodities rallied.
And that's kind of a microcosm of what we're trying to achieve. And that is far more diversified portfolios, similar levels of risk. But the outcome is, an expected higher level of return. and that's where the engineering and the more of the science of what we do comes into play. and looking for what is what is the investment we don't have today that's going to make our portfolios better.
And that was really the genesis behind why we built out a commodities group, one of the, you know, few in Canada to actually do that, for, for clients. And it's, so far, it's been very good. I think I would just say a big chunk of the commodity return comes from the yield. It accrues from the collateral.
So, when Humza takes in a dollar, they buy short term T-bills and then they use derivatives to get the commodity exposure. So ironically the yield of the commodity portfolio is, you know, 5%, five and 8%. We already get we know on any given year this is where we're starting at. And, I would be well, we might see a bit of, interest rate cuts, maybe 1 or 2 more in Canada, maybe one and then 1 or 2.
In the US. There is a body of, of, of central bankers who actually don't want to cut rates. So, we just don't see we might see a little bit of headwind on rates. But actually, as the world starts to accelerate again, overnight rates should rise in tandem with that. And that actually is a is a accrues to benefit more return in the commodity strategy.
Ingrid: Let's create a first, midyear outlook podcast. We talked about equities and the outlook was positive. I'm getting a similar theme here in the theme that I'm really taking away from our conversation is the power, the diversification, the added secret source of commodities and the real resilience focus on the portfolio construction. You can ask you the same question I asked our equity team, and I'm going to ask in our future podcasts, what's that one thing in the back half of 25 that people aren't thinking about?
Michael: Yeah. So, I think the possible surprise in the back half, will be, debt swaps. So, this is more of a, you know, it might happen, might not. But in other words, a push to make it happen. And what I mean by that is there's trillions of dollars of US bonds, floating around reserve managers, managers, balance sheets in the world, particularly in Asian countries.
And the US is looking at this. And then the challenge is you constantly have to refinance. it creates co-dependence. Those countries are also relied on the US consumer, and they also rely on the US military. So, you can just all these things now are in the same package. And, and from our conversations there's active negotiations to, to term that out to swap that short term debt for century bonds on marketable securities.
This is going to take a lot of pressure off the front end of the US bond market. These bonds will be taken off the market that this hold them, they'll still be used. They'll be fully fungible. They'll be able to be used as collateral. So from the reserve manager's point of view, you know, you're taking a, a four year bond and turning into 100.
So maybe not so happy about that, but if it means that's where you're going to get military security, you'll take that. this would be likely a dollar negative. it would be a bond market positive. So something that I don't think anyone's really talking about thinking about. But from our conversations, it is, you know, once we get through kind of the current chaos, the Middle East, it is an active negotiation, and something to be mindful of as a potential shock, to markets, shock in a sense of a dollar negative, bond positive and probably equity positive.
Ingrid: So, so much ground we've covered, gentlemen. Thank you so much. that is a wrap on our second episode of our mid-year update series. going forward, we will be touching base on fixed income. And following that, we'll be delivering your podcast on real assets. thank you again, gentlemen, for a great conversation. And to our listeners, make sure if you haven't already listened to our summer series on equities that is loaded, you can get it where you listen to your podcasts.
Thanks and have a great day.
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