Candice Bangsund, Vice-President, Portfolio Manager of Global Asset Allocation at Fiera Capital joins us for a wide ranging discussion about fixed income and equity markets, and the nature of global monetary policy and central bank stimulus in the midst of COVID-19. We talk about where the opportunity set is for investors and how she is approaching the key asset allocation decisions at Fiera. Valuations are high in both equity and fixed income markets, and investment income is at an historic low. We talk about where investors can rebalance their portfolios for both higher income, as well as equity growth for the period ahead.
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Full transcript:
Pierre Daillie: Hello, and welcome to the insight is capital podcast. My name is Pierre Daillie, Managing Editor of AdvisorAnalyst.com. Our special guest is Candice Bangsund, Vice President and Portfolio Manager of Global Asset Allocation at Fiera Capital. Candice is a member of the asset allocation committee focusing on central banks and fundamental macro analysis.
She also actively participates in the development and communication of the asset allocation strategy. When it comes to economic and investment matters, Candice is Fiera Capital's global spokesperson.
Her career in the investment industry spans almost 17 years, including eight years as an investment research analyst at Franklin Templeton. While working with Franklin Templeton and the Franklin Templeton global asset allocation committee, she gained extensive experience with global macroeconomic research for asset classes, regions, sectors, commodities, and currencies. She also conducted multi-manager fund research and analysis with a focus on Canadian and global equity asset classes.
In addition to managing its own investment mandates Fiera Capital is also the sub-advisor to Horizons ETFs’ active fixed income ETFs.
Candice obtained her CFA designation in 2009. She is a 2003 graduate of the University of Regina in Finance. Without further ado my conversation with Candice Bangsund.
Pierre Daillie:
Hello, Candice. How are you doing?
Candice Bangsund: Oh, not too bad. Keeping very busy these days. And yeah, just the same old work from home. The new reality it's, it's got its benefits, but it's obviously, it's not ideal in a lot of ways as well. I really miss being a part of the team, and next to my colleagues and I typically work on the trading desk.
So I'm always surrounded by people and, obviously there's lots to talk about these days too, and you just don't do it as much when you're working remotely like this. Yeah, so it's an adjustment, but yeah, it's becoming the new norm, which is good.
Pierre Daillie: Yeah, it's the kind of business where the banter's really helpful; you get to use your colleagues as sounding boards and have open discussions. Now, if you want to do that, you have to go to Zoom or Cisco or something, and it's not the same sort of energy or vibe.
Candice Bangsund: Exactly. Especially if it's something that just happens in the market. It's Oh my God, did you see what Donald Trump just said? or, Oh, look at this data point and you don't hop on a zoom call just for that. Everything now is scheduled and, but...
Pierre Daillie: yeah, the spontaneity of it all..
Candice Bangsund: Yeah, exactly. Exactly. I get a lot, yeah. Energy from being around people and, being at home all day alone, it's just kind of excruciating. So, my outlet is I play golf, so I try to go out every afternoon after work and that to me is a good social activity.
And the best part is be around other human beings, which is nice in person. And yeah, it's the perfect COVID activity. Cause you're a social distancing at all times. One guy sprays his drive to the right, the other to the left, and then you meet up at the green and...
Pierre Daillie: yeah. and you're still able to have that social connection.
Candice Bangsund: Exactly. Yeah. Oh, that's been a great outlet. At the beginning of spring, my golf club didn't open until I guess it was May 25th. So, the whole month of May, I was just getting pretty restless. Yeah. Bit squirrely, I'm like, I need to get out of here and it's getting nice outside, but there's not a lot to do.
And at that time, obviously, people were very cautious about what they were doing, nothing was open. So it was a, that was a tough time. But as soon as the course opened, I was like, all right, this is going to be my daily, or, a couple of times a week outlet just to get out and, a change of scenery and get some exercise and have some fun.
Pierre Daillie: Candice, welcome to the show.
Candice Bangsund: Thank you for having me.
Pierre Daillie: it's great to have you. Before we get started, I think it would be helpful if you told us a little bit about your background how you got into the financial industry.
Candice Bangsund: So yeah, I've been in the industry for, for a number of years, going back to 2003, started out at Franklin Templeton investments, in Calgary. And, at that time I was doing multi-manager research, global macro research as well. That's I guess what sparked my interest in the more top-down asset allocation aspect of things.
So I was at Franklin Templeton for seven years and, after that, and that was actually working on the Quotential team, which is a, a multi-strategy, top down, bottom up an all in one solutions. So that's why I had that broad experience, on the analyst front, after that, I moved to a small private wealth firm in Calgary called Canadian Wealth Management.
And there I was managing the Canadian equity aspect of the portfolios, as well as doing the asset allocation. I also had a small book of business as well, private wealth individuals. So that was a great experience and, trying out some different aspects of the industry, dealing with clients directly, but also on the investment management aspect. We were acquired by Fiera Capital, my current employer in 2012. and then that's what brought me out to Montreal, to join the global asset allocation team, which is, basically, headquartered in our Montreal head offices. So that's what brought me out to Montreal.
I'm doing a global macro research, obviously a lot of the communication of the strategy, we essentially determine the mix between stocks and bonds and cash for the entire platform across Canada, whether it's our private wealth accounts or our institutional balanced mandates. we've got some pooled balanced funds as well.
So I'm a part of the asset allocation committee that, derives the asset allocation calls. And then of course, like I said, the communication aspect is of utmost importance, keeping our clients and stakeholders, apprised of all the latest and on the macro aspect, as well as when we make changes When, things are volatile as 2020 has been, it's just keeping everybody, up to speed on our thinking and, putting out a lot of commentary, just to keep everybody up to speed on what's happening. So that's a big part of the job as well on top of the research and the decision-making aspect of it.
Pierre Daillie: Yeah, for sure. I think, the global macro, part of the business is. I think it's possibly, it's one of the most exciting parts. I feel like often when I look at, the passive investing landscape that the, the passive, academics have really taken a lot of the fun out of investing. And, by fun, the curiosity, the intellectual curiosity, the exploration of markets, because to the sort of passive investing in academics, it's been just the data. But there's so much more to it. And that's, I guess that's the part that you get to do in your day to day work.
And so I'm excited to have this conversation with you and get your views on what's happening, across the board and have a wide ranging discussion about markets. This market is so many things are happening in this market. There've been so many dislocations has been such an interesting time to look at it, never mind investing in it.
And there's so many moving parts right now that are still, every anybody's guess as to too, where it all goes and how it all progresses or concludes. We're six months into. This pandemic and all of that, all of every, everything that's come with it; all of the stimulus, all of the measures that have taken place, whether it's the Fed or the bank of Canada, what are you seeing? as well, some of the more striking features of both bond and equity markets. And I know that's a broad question, but why don't we start with fixed income in terms of some of the broader striking features that are, apparent today, and then maybe we can get into equities as well in general.
Candice Bangsund: Yeah, and it all comes down to one thing and that's largely the unprecedented policy response we've seen, come out of the pandemic, back in March. the most prominent theme that we've been seeing in markets is this, unreal, unrelenting, Pledge for support, whether it's on the central bank, front, the government aspect of things, the very timely and assertive policy responses, largely what sparked this very sharp revival in global equity markets that, it has been nothing short of impressive, at the same time, but on the bond side, we're seeing the positive correlation between fixed income and equity returns, both higher, in 2020, or, following the, the fallout earlier this year. And so that all, predominantly is a result of that policy response, central bankers immediately stepped up and, proved successful in ensuring that the health crisis didn't morph into a credit crisis.
Same thing on the government, fiscal policy has been instrumental in alleviating a lot of the pain for consumers and businesses and help to bridge that gap when the economy came to a virtual halt back in March and April. So that's been another crucial source of support and on the equity front, of course, The environment, a very accommodative monetary policy has sent interest rates, tumbling, lower and boosted what investors are willing to pay for equities.
That's been the main driver of equity market returns. On the bond front, obviously tumbling bond yields has been positive for government bonds as well, or the fixed income space in general. I think it's interesting though, when you look at the results, everyone talks about how fast and, forceful this global equity revival has been.
If you look at the drivers of the equity market returns, since the March 23rd lows, it's predominantly been driven by multiple expansion. So that's the liquidity, that's the policy aspect of things where there's been very little. I'm in the way of recognition for earnings expectations were actually revised lower over this time period, due to massive economic destruction at hand.
So that underscores in our view, the defensive nature of the equity market rally. and that also helps to explain the uneven, market rally, given that it's been predominantly driven by growth oriented, technology sectors for, for example, where unnerved investors just pile into these high-flying growth sectors for the promise of growth at any price.
And that is largely a result of that very low accommodative interest rate environment. So it's a, it's definitely been, an interesting few months since those, since the lows we saw back in March.
Pierre Daillie: It sure has. I think, just to come back to the, the fixed income space, I think when we had that dramatic dislocation in the credit market, where there was no bid really at one point, that was scary. Of course, the Fed stepped in and signaled that they would be buying the high yield indexes themselves through the ETFs.
I'm curious, like we, I think we know by now what that has meant for, corporate spreads, they've come down. The spread now is around 5% or 500 beeps, thereabouts, give or take 10 or 15 beeps. High yield is no longer high yield.
It pales in contrast to the end of last year where Morgan Stanley pointed out that, 40% of investment grade bonds could fall into the triple B space, signaling, other dislocations. This was pre-pandemic, but now post pandemic, everything has been saved.
And I'm curious, like we know the Fed has already done this, did the bank of Canada, do anything similar? Did the bank of Canada step in and support the Canadian credit market? I'm just curious, I don't recall seeing much news on that front.
Candice Bangsund: Yeah, the bank of Canada also stepped in as well. and it's expanding its balance sheets, similar to what we're seeing in the US and Europe, et cetera, even in the UK. The bank of Canada is buying government bonds, but also extended that to provincial bonds.
And I believe some, corporate issuers as well. So there's been a similar, level of support coming from, central banks globally. And in fact, but, yeah, Canada also. stepped up and, pledged to, basically do whatever it takes to, alleviate some of the pain in the credit space.
Pierre Daillie: Yeah, I guess maybe it wasn't talked about as much because it wasn't as perhaps publicly controversial as the Fed doing that, in terms of crossing over the line, from its rules, about whether or not the Fed could do such things.
So basically that means that, we've seen a similar recovery in Canadian credit. The other thing is, during the whole crisis period, quantitative, easing was still going on.
And I came to this realization that wow, quantitative easing, which was already continuing, is still happening concurrently with the fiscal stimulus and all these additional measures that have been put in place to shore up consumers and make sure that everybody gets their paycheck and, unemployment benefits.
And, in some cases in the U S for example, a lot of people are making more money, as unemployed or a furloughed, than they were when they were working, pre-pandemic. Not only do we have quantitative easing, which continues to prop up the market, but we also now have this, consumer shoring up this fiscal stimulus that, shoring up of businesses.
How has that possibly changed your asset allocations? It's staggering when you really start to add it up; just in the U S alone in a very short span of time, a few months, we've had $3 trillion in stimulus commitments. We're tossing around these numbers now in the trillions of dollars and, does anybody understand actually that’s, 3000 billion dollars?
No, it's not. It is we're, we're so Footloose and fancy free now, I think. And so used to these numbers, I remember when, the Congress and the Senate took weeks to pass a $700 billion rescue in 2008, and when that happened, that was just like, wow, that's incredible.
It's an unbelievable sum. And now it's happened, multiples of that have happened in three months.
Candice Bangsund: My perfect example is just last week, there were rumors, floating around, that the Republicans were talking about maybe doing, being okay with a fighter $500 billion, extra stimulus package, because of course those negotiations are deadlocked right now.
And the consensus was calling for, I believe one, one and a half trillion. So they'd meet somewhere in the middle. and then this, this report came out last week that. Floated the idea of, Oh, just 500 billion, and like you say, compared to '07/'08, that would have been, just revolutionary.
It really speaks to the, you know, I talked about this at the beginning of our conversation that very timely and assertive response. Policy makers have essentially stepped up and are willing to do whatever it takes to, revive the global economy. And, at the same time, obviously that's been, massively beneficial for financial markets.
You talked about the U S response, but globally. The amount of monetary and fiscal stimulus that's been implemented or is being, injected into the system amounts to 30% of global GDP. that's just, unbelievable, and obviously again, it's been a huge source of support. and like I said, it was, Something, I don't think anyone was expecting, in the order that the amplitude of that response, of course the markets just sold off so quickly, back in late February through March, but that is why we've seen such a sharp rebound. A lot of people talk about the disconnect, how can markets be rising when we're in the middle of this? this pandemic and global recession while markets are forward looking and, they're looking through Q2 and of course looking at all of that stimulus in the system, and now we're seeing the results.
It's actually, I'm helping to revitalize, economic activity. And of course, that's what the markets are responding to.
Pierre Daillie: Yeah. So now in lieu of all of that valuations have become a discussion. and the basic argument for today's valuations is the old discount cash flow argument, which is that interest rates or yields on risk-free investments has fallen to a historical lows, at the zero bound.
Theoretically it says valuations could be close to infinite, but realistically that's the justification for where valuations have headed in the last three or four months. And then secondly, so valuations are a concern, number one, in the equity market and it’s also a concern in the bond market, depending on what happens next. and then if you're an income investor, if you're looking for income, yields on sovereign debt are also at historical lows where, if you're, for example, a retiree or nearing retirement, and you're looking at the question down the road, where are you going to get yield today, if it's not from government bonds and you're maybe not necessarily willing or understand the willingness to take risk in the credit market, where yields are better, but you're paying a high price for high yield or you're paying a high price for investment grade today because of the conditions in the market.
That really creates quite a conundrum for investors in terms of whether or not now is a good time to invest. I think the corollary to that is that because of this incredible 30% of global GDP stimulus, that's out there floating around in markets and in the ether of the economy, there's a huge pent up spend coming economically from the fiscal measures. And then there's also this added liquidity that's continuing to be added to the financial system, through the back door with quantitative easing, continuing. So, what are your thoughts on that? Where do you go, do you buy, do you play the momentum stocks and succumb to the fear of missing out and buy names like Google, Apple, Tesla, or, do you look at other areas that are more, from a valuation standpoint, opportune. I'm going on here, but there's been a for a very long time.
Candice Bangsund: I don't even know where to begin.
Pierre Daillie: And there's so much, so valuations are high yields are low. Yeah.
Candice Bangsund: Okay. That's a good way of simplifying things. And maybe I'll just start with, our base case and what that means for these asset classes, because, you could argue that both bonds and equities are overvalued at current levels.
But we have a slightly different view. Our expectation over, the next 12 to 18 months is that we see a continuation of this rapid economic revival and that largely hinges on the successful discovery of a vaccine, in the likely coming year. But we're even saying maybe towards the end of 2020 or first quarter of 2021, and this is something that has not yet priced into the equity markets.
I talked about before, how the equity markets have been predominantly driven by, this liquidity. The response from central banks, of course, the growth sector, the FANG stocks. These are the sectors that have led the global equity markets out of the doldrums since March. and of course, what we have, I haven't seen his broad participation.
The equity rally has been very narrow in fact, and there's still a lot of sectors and. stocks in general that haven't participated to the same extent. And these are particularly in the more value oriented cyclical space. So you think about resources, industrials, financials. these are the sectors that we think have a further potential upside and, in order for the bull market and equities to continue, we'll need more wide participation and we think those are going to be the sectors that, that, drive the next up leg and equity markets. And that of course will hinge on that discovery of the vaccine scene that will allow for, the economic recovery to continue. and without any role blocks, of course, that would remove a key headwind, that's lingering and weighing on sentiment in general, because like I said earlier, the, if you look at the breakdown of the equity market, it's actually been very much an unloved equity market rally, very defensive in nature. And that largely hinges on the fact that there hasn't yet been. a development on the vaccine front, we're getting closer.
There's been some news that is moving in that direction. And of course, investors welcome that. But, it's interesting because volatility, for example has come down, but it's still historically elevated. It's the VIX is still above 20. This is largely reflecting that health aspect, that virus related uncertainty.
So the successful discovery of a vaccine should facilitate that rotation from growth to value to drive the next, continuation of the equity market rally. So that's why we see further upside in equity prices from here, even after the strong gains that we've seen since March 23rd. On the fixed income front though, we think that government bonds, don't offer a very compelling proposition at these low interest rates. The most acute phase of the recovery and the downside in bond yields has already happened. And we think that the path of least resistance for bond deals will be higher from here, given the global economic reacceleration, improving inflation expectations. But the good news is that central bankers are obviously, active and aren't going to let the backup and bond yields destabilize the market.
So we don't anticipate the 10-year going back to 2%. And the next, 12 months we think the, the central bank backstop will ultimately cap any meaningful upside and bond deals. But nonetheless, that does mean, very modest, if not even mildly negative return expected returns for government bonds.
So our strategy is to move up the risk spectrum, given our optimistic outlook for the global economy and financial markets and the next 12 to 18 months. So that means, moving into credit. you talked about the narrowing and spreads again, that's right in a huge positive for the credit space, high yield, et cetera.
but we still think there's room for. some further compression and again, yeah. And you're getting that yield advantage there as well versus government bonds. it would be a similar outlook for emerging market debt where that reflationary environment of stronger global growth improve trade the weaker U S dollar.
Again, this is a lucrative combination for, the emerging markets, the equity and the, debt, France. and finally, within the fixed income space, I talked about credits high yield corporates, but inflation protection, again, a result of all of this stimulus that we're seeing this sheer abundance of support from central banks and governments.
This is going to stoke inflation expectations. on top of that, we've got oil prices that have made a nice recovery as well. So the tips, asset class, real return bonds. This is an area where the prospects are a little bit more, compelling, then government fixed income or government debt. but overall, we are at, a maximum underweight allocation to government bonds and, we have, allocated to equities the credit space, like I said, just moving up the risk spectrum, in anticipation for that stronger, global economic revival in the coming year.
You think that where we are with yields right now. Do you think that's potentially something that causes investors to make, unreasonably risky moves, where they're possibly reaching for yield in places where they don't understand the risks?
Like you guys are active managers. you're not buying the entire high yield market, within Fiera. You have your credit, portfolio managers who are selectively buying, the names that they like that they've done the homework on, as opposed to buying the entire market.
Pierre Daillie: What is it that, if you're in a, let's say in a traditional 60/40 portfolio right now, If you're an advisor and your clients are in a 60/40 portfolio, Where do you go; where do you reallocate? and I think you, we may have covered this already, but where do you reallocate your 40% fixed income sleeve, from say governments and sovereigns and maybe some credit, in order to not only find yield, but keep the risk at the same level without overextending on the risk budget.
Something that, Fiera, has been increasingly focused on for a number of years now is the non-traditional income space. given that our expectation for some time has been that. with the yields at these rock bottom levels, there's very little opportunity in that traditional fixed income space.
And of course, you alluded to this earlier, but this component of the portfolio is of utmost importance for our clients from a risk management perspective, income generation. These are very important considerations when building a portfolio for a client. So we can't, just say, forget it we'll pile all of this money into equities because of that would increase the risk in the portfolio setting.
And that is something that is not conducive for a lot of our clients. So we've been moving more into the non-traditional income space. So infrastructure real estate agriculture, these asset classes offer a compelling, income, income stream and the order of six, seven, 8%. volatility a little bit higher than your traditional bonds, but much lower than your equity asset class.
So from a portfolio aspect and a risk reward proposition, if you allocate to some of these non-traditional asset classes, in order to get that income, you're not imploding your risk profile and from a. Optimized portfolio perspective. It's actually quite a compelling risk reward proposition to divest out of the traditional bond space where I, like I said, we expect very modest if not negative expected returns, into this more non-traditional space.
So it's, managing the risk in the portfolio. and with, like you talked about, there are no other alternatives, the T.I.N.A. aspect, that's been a big part of the issue as well. This year, particularly on the retail front, where we've seen record number of brokerage accounts being opened and investors piling into these growth stocks, fueling the fire.
Of course, this has been a successful trade, but I think that also leaves it in a very vulnerable position where a lot of the money has been flowing aggressively into these high-flying sectors while that, that can create some problems, should, the bubble, so to speak burst, and, that's, that too corresponds to our call for a rotation to value, because the catalyst for.
That rotation would in fact, be that the vaccine news, the successful, therapeutic, this would allow for that strong recovery and spark that rotation. And that's where all those excesses in the technology space might be a little bit vulnerable. So it's, it's a, it's definitely a, an interesting yeah environment, but, from a portfolio perspective, government bonds in our view, just, demonstrating very little in the way of a value proposition at this time. So we've been, proactively looking elsewhere.
That's especially true, if the Fed, for example comes along and implements yield control where there's no room for even the duration play this paper. So you spoke about some of the other, alternative asset classes that you're using for, building income in portfolios, where do those particular assets fit?
Are they equity or fixed income? I think one of the problems that advisors might have is how those assets are categorized depending on, types of securities they are. Do they fit into the fixed income sleeve or do they fit into the equity sleeve?
Candice Bangsund: Yeah. So we would classify those as real assets. So you got real estate, agriculture, infrastructure, and we put those in what we call non-traditional income.
It would be between income or fixed income, traditional fixed income and equity. But like I mentioned earlier, much less volatility than equity, but of course, much higher income generation than bonds. The only caveat though, is the liquidity premium; these aren't, always daily liquidity.
So, you're getting compensated by that in your 6% to 8%, income stream. So that would be, the one, risk, but you're being compensated for that being in these asset classes.
Pierre Daillie: Yeah, I guess you know, this is tangential to what we're talking about, but when advisors are dealing with, their investment policy statements, in order to make room for these real assets, they may have to revisit all of their investment policy statements, in order to shift, let's say what used to be potentially, let's say as much as a 30 or 40% allocation to fixed income, they may have to make a 10 or 15% or 20% allowance for these other assets. There's more work involved. It's not simply a matter of trying to make it fit nicely into the fixed income category in order to shore up the investment income from the portfolios.
Candice Bangsund: Yeah. You have to rewrite the policy statement because there are different considerations with these investments, whether it's liquidity; some have, a holding period, et cetera. So we've gone through the process on all sides of the business and, optimizing the portfolios to fit this asset class in there.
And in all cases, it's coming, out of have traditional bonds, out of have fixed income, and like the percentages that you talked about actually made a lot of sense. If you had a 40% percent benchmark previously to traditional, now that's likely 20%, with 20% allocated to non-traditional, if not more for that matter.
But again, it depends on the individual client as well; their tolerance for risk, their need for it. These are, like I said, they're longer term, investments, but, from a portfolio perspective, it creates more of a compelling opportunity in this environment where traditional bonds aren't going to do what they have historically.
We're just coming off of a 30-year bull market, and in bond markets, how much further can they go? They can bounce around here for a while. And like you said, the prospect for yield curve controls or kept interest rates are likely going to keep rates lower for longer, just again, really reinforcing that. There's not a lot of opportunity, particularly on the income front, and this is a very. Important source of return or, an important consideration for a number of our clients.
Pierre Daillie: So Candice, what are you, most bullish about and at the same time, most bearish about?
Candice Bangsund: So I'll maybe start on the bullish front, because we are bullish right now and we're I'm, as you can tell, very optimistic about the, Oh, the outlook. A couple of, I think in your questions, you talked about what are the silver linings.
And there is a lot of good news out there that is coming to fruition here and has largely endorsed our positive view on the world. So, the first is on the health front. the second wave of virus cases that we saw in the U S particularly in the South and the West, I have now shown some signs of improving.
So, the dynamic on the virus front is improving likely as a result of the dialed back reopening plans and the increased caution from people in general. But. There's seeing there's some notable downward trends, in new cases, hospitalizations, mortality, there's treatments now that are proving effective in reducing, hospitalizations, mortality, et cetera, and helping people get better so that the trends on the health front, in our mind are increasingly constructive.
I don't want to downplay, the virus because it's still very much out there and it is a risk. but we're seeing some progress towards, getting this thing under control, whether it's the way that we live on a day to day basis. just being more careful, or, the hope is for a viable therapeutic to quell the pandemic, all, entirely.
And that's something also where we're seeing some encouraging developments on the development of the vaccine. There are, I believe 160 candidates in preclinical trials right now, 30 of which. are, in either phase one, two or three, eight different candidates right now, or final stages of development.
So this, in our mind, has increased the likelihood of the probability that something does prove effective and gets approved here; hopefully by the end of the year, but if not early in 2021, this is something that is not yet priced into the market, because like I said, that's that catalyst that you're going to need to ensure that the global economy remains durable and this recovery is sustainable.
So on the health front. Yeah.
Pierre Daillie: that, yeah, that people are actually able to go back to work and feel safer and more confident about things. right now we're still in this sort of circling pattern around benefits and people, people mostly staying at home. and so until.
Until things change for real, in a fundamental way for the economy right now, we're still largely being propped up by all the stimulus, it has to be backed up by people actually returning to being out in the public and going out to restaurants and going to their office and commuting and all of that.
I mean, there's, There's so much talk right now around that uncertainty. So I'm. I'm bringing that up because I think that's the main reason why it's not priced into the market yet is because there's really no answer about that. Yet. We ran a survey in the last month where we asked if there is a COVID vaccine, are you going to go for it? And 65% said, yes, but there's 35% of our responses that are no, not sure. not really don't understand vaccines. So there's 35% of people who, even though, there would be something preventative available to them at some point would still not do it. Maybe that's, I don't know if that's anti-vaxxers or whatever that is, but at least 65% of us, and the sample is advisors.
it's a sample of about 900 right now. 900 people have responded, so it's a small sample, but it's a, it's the advisor sample; and so 65% of advisors have said, that they would go for the vaccine and that's been pretty consistent from the start.
Candice Bangsund: That's a very important, part of the equation and the resumption of more normal activity, particularly in those leisure travel retail spaces that we talked about, the other encouraging, development or the, the silver lining, if you will, is again, like the fact that central banks and governments remain so fully engaged, but this has actually helped to boost economic activity.
I think a lot of people have been overly concerned about the high frequency data, the foot traffic, restaurant, dining, et cetera, but there are other parts of the economy that are doing extraordinarily well. Look at the us housing market. This has been a bright spot for the economy.
Even retail sales activity back at pre-pandemic levels in the U S and in Canada. Again, this, largely a result of that, that abundance of policy support that's helped to alleviate the pain, in looking at the global economic data, again, expectations were extremely pessimistic and we're seeing the numbers exceed expectations across the board.
I look at the global economic surprise index. How many or how much data is exceeding expectations and it's at a record high right now. The last peak was in 2009. the global economic aspect is quite an encouraging as well. So when I think about the, the bullish rationale, the reason to be optimistic, obviously first and foremost is on the health front.
That's the key catalyst that we need to ensure that this recovery becomes self-sustaining and that we don't go back into that economic stagnation, if you will, but the economic and earnings data coming in better than expected. And, of course all of this a result of that policy support and there's more to come.
You know, it's likely that the U S government does come to some sort of compromise and releases another fiscal package here in the coming months, leading up to the election. the Federal Reserve right now, we're waiting for a key speech from a Chair Powell tomorrow about the potential for, not yield curve control, but their monetary policy framework, which is essentially going to reinforce that rates are going to stay lower for an extended period of time.
This is not a one-year aberration. It's going to be a number of years right now, the economic stoppage from March and April created such a hole in the global economy. that central bankers are going to continue to stimulate in order to close that gap. And at the same time, that means an environment of low inflation, allowing them to pursue these aggressive accommodative monetary policies.
But the end result is going to be an extended period of time of above trend growth, which of course is, a very favorable outcome for equity prices in general. when it comes to though, the risks I like to. I look at things from obviously a long-term perspective.
Our time horizon from an asset allocation perspective is 12 to 18 months. And they're the biggest risk is obviously, lack of, a viable vaccine to STEM the spread of the pandemic because that of course, would resolve in, a more prolonged period of economic weakness, stagnation.
we don't think it's likely that the global economy will go back into those draconian lockdown measures that we saw in March and April. There seems to be very little in the way of appetite. To do but at the same time, similar to what we saw in the U S plans could be rolled back, more modestly, maybe more localized, shut downs or, lock downs of certain industries.
But it won't be that. economic stoppage that we saw earlier this year. So that of course, is, it's somewhat of a positive development, but nonetheless that's right. A scenario where we don't see a vaccine in the next 12 to 18 months would be fairly detrimental for the global economy, as for equity prices that have priced in.
a lot of this, recovery, so they would be vulnerable. Yeah. In that situation. The good news though, and offering some downside protection on the equity front is the fact that you have that backstop from policy makers. and that in our mind has reduced the odds of a material, sell off, in the equity space.
But that being said in the near term, so between now and call at the end of 2020, we could see some more sporadic boats of volatility and this would mainly be a result of geopolitics. So I head of the U S elections, for example, we expect to see a little bit more in the way of volatility and this could spark a sell off and equity markets, particularly in the U S where we've seen the most notable gains.
but again, this would likely prove to be fairly short lived. same thing and related. It would be on the U S China front. relationship, the relationship between the U S and China has been deteriorating. There has been concerns about the phase one trade deal. We got some good news this week.
It appears that both sides are taking a conciliatory approach and a willingness to leave the deal intact. but of course we could see some more rhetoric, and maybe tough on China. Talk ahead of the U S election as these guys get to a campaign and et cetera. So Trump's obviously looking for a win, and, that could be a way to, to do so to be tough, a little bit tougher.
On China so far, we haven't seen any notable escalation. Like I said, the developments this week, they had their phase one review virtually. And like I said, that the, there were signs of progress there, but, it's something that we'll be keeping an eye on. But the point I wanted to make is that while this could create some more periodic bouts of volatility and potential downside, that downside should be fairly limited.
And that is because of that, that, amplified central bank and government response that should, limit those losses.
Pierre Daillie: There's two things that I wanted to touch on in terms of asset allocation. For investors who stayed the course who stayed put throughout the dislocation of March, what recommendations might you have in terms of rebalancing their portfolios?
We've talked about fixed income and, moving some of the fixed income sleeve into, some of the real asset areas. But on the equity side, we've seen a pretty big run up in, the indices, particularly NASDAQ and the S and P 500. A lot of it is dominated by a small number of names, and in fact, if you remove some of those names, the markets are looking pretty much like other markets around the world. The worst time for investors to make these asset allocation decisions is in a crisis, and getting out of equities when they're at their worst is probably the worst mistake that investors can make, and so as a corollary to that, the best thing investors could do. Is that in times of great market strength, like we've experienced since, really investors have gotten a second chance to revisit their portfolio allocations. So assuming you've gone through the day downturn and you've recovered and your portfolio is mostly recovered or fully recovered from the bottom in March.
What are the key areas that you would rebalance out of and into?
Candice Bangsund: First of all, I would say that if you did stay the course through February, March, congratulations, because that took a lot of guts and you did it, you made your money back and maybe more because your bonds would have done very well in that situation as well.
So well done. When it comes to though, now that the dust is settling somewhat and we're getting a little bit more, visibility regarding the future. where do we go from here? And particularly as it pertains to the equity space, I would be looking to, reduce exposure to some of those sectors and agents of the world that really led this, this, bear market rally off of those March.
Lowe's particularly when you talk about the NASDAQ S and P 500, both at record highs right now, this is largely technology driven. And if you remove those Fang stocks, for example, from the S and P 500, the S and P is up actually down maybe 4% year to date, something like that versus it's a 6% gain that we're seeing right now.
like I said, those, that outperformance was largely driven by, uncertainty and like I called it the unloved equity market rally, unnerved investors, just flocking to these high. growth sectors for the promise of growth and what's what was an uncertain environment. But I think opportunity is now is in the cyclical space, the more economically sensitive sectors and regions of the world and that, is why we have an overweight allocation to the Canadian equity market right now.
And we implemented that back in early July when we started to see the developments on the vaccine and the health front. that would basically validate that expectations for that stronger recovery. so I would be using strength in the growth sectors, whether it's technology, healthcare, from a regional perspective or from a market perspective, NASDAQ S and P 500 to rotate.
Into some of those previously getting sectors of the market, whether it be resources, finance, naturals, industrials, this is inherently a call on the kidney and stock market due to its high concentration in the more value-oriented sectors. The TSX is a value play while that the U S markets are more of a growth place.
So that's something where. I think we could see, more potential for upside in those sectors that have lagged, since March. And like I mentioned earlier, that rotation will be needed in order to sustain or in order to extend, the bull market even further as we expect. like I said before as well, the environment is quite conducive or lucrative for stocks right now.
This environment of low inflation non-inflationary growth, central banks basically, pulling out all the stops. This is creating a very compelling environment for equities, but within we see more upside in those, value, oriented cyclical sectors of the market.
Pierre Daillie: Yeah, there's been more dispersion in returns on stocks than we’ve been led to believe.
Candice Bangsund: If you look at the underlying details and the percentage of stocks that are actually at a 52-week high is very low, it's very much been a narrow participation. so I think that creates opportunities within, the equity market space.
Pierre Daillie: Yeah, it's interesting. if we look at the last three, four or five months where we've had this incredible recovery and in markets, it's really being driven by this concurrently running monetary policy and fiscal stimulus.
I love the fact that you've determined that the vaccine is not factored into the market valuation and what's different about the fiscal stimulus is that unlike the quantitative easing, it has real inflationary consequences down the line and it's not going to be something that happens in the next six months. It's going to be something that unfolds over the course of the next several years or longer, as this money that's being pumped in fiscally is entering into the longer-term recovery.
But when you add the vaccine to that picture, it’s not hard to see why you're bullish on Canada. What areas of the Canadian market do you like the most?
Candice Bangsund: Again, it's expectation for the rotation from growth to value. We like this sectors that have lagged in the run up since March, we prefer resources, given the sharp revival in commodity prices that we've seen.
And again, that should be amplified further should the economic, revival continue on uninterrupted? So the resource space, this is where valuations are looking extremely attractive and there's more potential for upward revisions to earnings. And we've already seen that start to come to fruition here in the last month or so where some of these depressed earnings expectations are being revised higher. We also like the financial space, given our expectation for steeper yield curves. So the short end of the curve, keeping a well anchored by central bank support. But yeah, the longer end moving modestly hire this should bode well for, or a bank profitability.
And again, from a valuation perspective, we think there are some notable upside there as well. So it's predominantly the resources. So energy, materials, gold obviously has had a very impressive run as well, but yet stocks are not yet, reflecting that fully. So there's likely some more upside there as well.
So again, it's very much the value-oriented space that hasn't fully participated in the rally since the March lows.
Pierre Daillie: Candice, before we let you go, we’ve been, in social distancing, for, five months now, what have you been, streaming or watching or reading, during all of this time? Has there been anything notable that you've watched on Netflix or books that you've read?
Candice Bangsund: To be honest, I spend a lot of time reading macro research and I actually find it to be very entertaining, just to pull off a research piece and read that. That's fine by me. What's interesting about this year and what we're seeing, and I'm sure this is the case for a lot of people, but I'm spending more time on the World Health Organization and John Hopkins websites than I ever have, reading up on vaccines and treatments and the medical aspect. That's, something that I've been, forced to actually, dedicate a lot more time towards, because it has been an important part of our, of the macro story.
yeah, it's, it's been an interesting time.
Pierre Daillie: The vaccine really holds the key to everything. Doesn't it?
Candice, I want to thank you very much for your generosity and your time. I hope we'll be able to do this again and follow up with you in maybe the next quarter and see where things are, see where we're at and get your point of view. Terrific. we're honored to have thank you so much.
