Podcast: Brent Joyce discusses GLC's 2018 Mid-Year Capital Market Outlook

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Brent Joyce joins the podcast to talk about GLC's Mid-Year Capital Market Outlook and what to consider for the rest of 2018.     

Christine W.: Hello, I'm Christine Wellenreiter, Vice President of Marketing and Communications at GLC Asset Management Group. I've got Brent Joyce, GLC's Chief Investment Strategist joining me. And on today's podcast, we're going to be answering some of the most common and burning questions that advisors have about capital markets and the economy.

Christine W.: Before we begin, I just want to remind you that if you haven't already done so, please subscribe to this podcast. Just search GLC Asset Management on your favorite podcast player. You'll find us there, and you'll get new episodes automatically when they're released. Of course, you can still find our podcasts on our GLC website. Now, with that out of the way Brent, do I have you on the line?

Brent Joyce: Yes, good to be here Christine.

Christine W.: Great, thank you very much for joining us.

Christine W.: Brent, rumor has it you've been quite busy. I know you've been traveling, speaking with advisors, but also you've just recently published GLC's mid-year capital market review, where you've built on a lot of the topics and themes that you are out and about speaking to advisors about.

Brent Joyce: Yes, and anyone can find that on our website, the Mid-Year Outlook.

Christine W.: Great. Well, today what we've done is we've gone out and asked a group of advisors to submit one question. Just one question, but it for themselves or for their clients, that they really want to hear from you right now on the economy and the stock market. So my first question that came in, and actually I think it's quite a broad question is: what are your thoughts on market volatility and global growth in the next year?

Christine W.: And Brent, I see this as a real context question. I can almost picture the type of investor this person is. Someone who wants to put into context all the noise they see in everyday headlines, and gain some perspective to help them frame that news. Especially recently when we've seen these bouts of volatility.

Brent Joyce: Yes indeed, Christine. And volatility just isn't in the equity markets. We've seen a fair degree of volatility in fixed income markets as well.

Christine W.: Yes, we have.

Brent Joyce: And we certainly believe that the world economy and financial markets and continuing to progress through what we see as the later stage of the business cycle. And this stage is often characterized by heightened volatility. It can have the potential for sharp, short run-ups in equity prices. We certainly saw that in January at the beginning of the year. And then fast moving price corrections, which we've certainly been more familiar with lately. All in the backdrop of that is an environment where it's typical to see bond yields rising.

Brent Joyce: The concern is that attempts to time each of these markets gyrations we believe are largely a fool's game. And it's our view that the best approach to handle the current environment is one where clients and investors become neutral, a neutral stance, a balanced stance, that is appropriate for their risk tolerance and for their time horizon.

Christine W.: Right, so not taking outside risks really, right?

Brent Joyce: No, it's not the time to overreach with aggressive growth cycle positioning, some sort of an attempt to squeeze every last drop of the risk-on trade. I think that's an environment which potentially puts years of very rationed, prudent financial planning at risk.

Christine W.: I think it does, too.

Brent Joyce: Yeah, we caution against extrapolating the trends of the past several years in the darling sectors. Things like emerging markets, information technology stocks. In fixed income it's high yield bonds. But, and if you look at the industry flows, and certainly in discussion that we have with our business partners, we feel that people are doing that.

Brent Joyce: And I'm not saying there's no place for these things. There certainly can be in a well-diversified portfolio. But people need to watch their exposure. You know, information technology as a sector in the US, it's up about 100% in the last three years. Emerging markets is a top performer over a broad swath of equity asset classes, as you expect it to be in an environment where we have had solid and synchronized global growth.

Christine W.: Right.

Brent Joyce: I would mention there that, caution folks you know, global equity has been a popular choice for a lot of investors if we look at industry flows. And to peel back the onion and make sure that those global portfolios don't have out-sized exposure to emerging markets, either. Some exposure is fine. But we want to make sure that we temper our enthusiasm for where we stand today and not where we've come from over the past two to three years.

Christine W.: Right, because we really are in the later stages of this business cycle, right?

Brent Joyce:  Yeah, and that was the other part of the question is what do I see for growth? Well, we certainly have continued growth in corporate earnings, but we think the pace of that earnings growth is set to slow.

Christine W.: Mm-hmm (affirmative).

Brent Joyce: The devil is sort of in the details. We've got absolute levels of certain fundamental metrics that we would look at in the economy that are supportive of corporate earnings and that's supportive of equity markets.

Christine W.: Right.

Brent Joyce: But we also think that they justify further central bank monetary policy tightening. And with that, you're going to have higher bond yields. But for all these things, unlike when we were talking in January at the beginning of the year where they were synchronized and accelerating, we're now seeing them diverging across geographies and not universally accelerating. So we have to take that reality and put it up against expectations for equity performance and bond returns as we move forward.

Christine W.: Right.

Brent Joyce: Specific markets, the U.S. is going to lead global growth. It's being boosted obviously by fiscal stimulus, tax cuts, et cetera. And it's getting a normal, late-cycle boost of business investment. When we look at Japan and Europe and Canada, these are markets that are cooling from very high levels of growth last year.

Christine W.: Right. I remember the Canadian market, the GDP was really running quite hot.

Brent Joyce: Yeah, so this is a health down-shifting if you will to growth, still growth that is more sustainable.

Christine W.: Mm-hmm (affirmative).

Brent Joyce: Chinese growth is moderating but only slightly. But here we have to be careful that small shifts on such a large contributor to global growth that's important at the margin.

Christine W.: Yeah.

Brent Joyce: It also feeds into emerging markets that I mentioned if you've got slower growth in China.

Brent Joyce: I guess the biggest thing that's changed from the last time we spoke at the beginning of the year is, you know, it stems from the move up in bond yields-

Christine W.: Right.

Brent Joyce: -and the improvement in equity market valuations.

Christine W.: Okay.

Brent Joyce: So the most commonly cited evaluation is price earnings multiple. And here we've seen an improvement both on P and E, price and earnings.

Christine W.: Okay.

Brent Joyce: So on the E, the earnings, corporations globally, they've been delivering very strong earnings' growth, largely surpassing analyst expectations in many cases. We're seeing forward guidance being boosted out which is a positive thing. And then on the P side, the price side of these shares we have obviously had some corrections in major markets throughout the winter in the neighborhood of 10% and very few have recouped back to their prior year highs, notably Canada is one that has. And yet, we've seen Canadians moving away from our home market just as we're starting to see it perk up a little bit.

Christine W.: Right, so really some of those healthy corrections that we hear talked about.

Brent Joyce: Yeah, so the bottom line is we have got decent growth. We have to be cognizant about the rate of change of it and that is starting to moderate. That feeds into I think moderating return expectations for equities, and a backdrop where we would expect to see increased volatility. And you mix all that together and the best line of sight for me is that suggests a neutral stance for investors where they have broad geographic and sector diversification in equities and they continue to have an allocation of fixed income that will mitigate risk when we have periods of equity market downside.

Christine W.: Makes sense.

Christine W.: So my next question Brent is coming from an advisor worried about their retired clients. This is, of course, a growing demographic of people, people who are no longer drawing an income from an employer or business, and they've got some real worries about what their investment options look like right now. And it's now time for them to be drawing on their savings.

Christine W.: So this advisor asks "How do we position bonds with our retired clients in this challenging environment without immediately looking to riskier solutions?" And Brent, I don't really think that's an isolated question.

Brent Joyce: No it's one that I hear quite commonly from all parts of the country.

Brent Joyce: Now just before we get into that specific circumstance of someone who needs to draw income from their portfolio, I do want to say that for other clients, you know clients who are in the accumulation stage that are still buying investments, they should be sticking with a balanced portfolio that's well disciplined and continue to invest. Some days they'll buy stocks cheap, some days they'll buy bonds cheap. Some days they might buy them both cheap. But it really is, the comments now are to that advisor's question of someone who has to tap their portfolio for income on a regular basis.

Christine W.: Okay.

Brent Joyce: So as I mentioned, we've got increased volatility not just in equities but also in fixed income and one of the dangers if you have to reach into your portfolio to raise some cash and make a withdrawal to fund lifestyle needs is having to do that at an inopportune time. So for those types of advisors, and we can talk more broadly about my views on fixed income in a moment, but immediate, near-term cash needs, I think advisors need to be somewhat more creative. And I think of it as putting assets into a couple of buckets. So you'll have a bucket of money that's for the next one to three years, potentially. That's meant to meet those lifestyle requirements.

Christine W.: Right.

Brent Joyce: And for that it's wholly appropriate to be in the safest assets that are out there, whether that is money market, guaranteed investment certificates where you're talking to advisors and clients are just taking a bit more of an interest in those now that yields have moved up a little bit, short term bond, mortgage funds, those are all types of things that would be appropriate for those kinds of investments.

Christine W.: Shorter term needs, right.

Brent Joyce: Yeah, and that then allows the remaining part of the client's portfolio to be viewed less concerned about "Oh I might have to tap this for some money next money," and say "Well, I'll not have to worry about this for at least three years because I've got this other money I'll put aside."

Brent Joyce: And given that, we're still facing an environment where I see muted returns for fixed income. We've come quite some distance. Interest rates in Canada, if you look at Government of Canada ten year bonds, you know those yields have more than doubled from where we were a year and half or so ago.

Christine W.: Right.

Brent Joyce: I don't think they double again from here. We're maybe around the two-thirds mark of where they should be headed so there's a little bit more to go. And then in that environment, what do we need fixed income for? Well we need it for a risk mitigation tool.

Christine W.: Right.

Brent Joyce: You know, it continues to be in my mind one of the most powerful tools for mitigating risk when we have equity market sell-offs. And as much as we see the current landscape being constructive for equities for the near-term, we're down the road here and in the later stage of the business cycle where the timing is delicate. And folks who have had patience with those fixed-income positions, I think I would tell them to continue to have patience with them and they are going to be well-rewarded and happy that they've held on to those positions when we have bouts of equity market volatility that we expect to see and that we are already seeing this year.

Christine W.: Right. When it comes through to within the fixed income environment and the various sectors and choices that people have there, do you have a view, especially for that, not for the immediate cash needs for a little bit longer term on what's looking the most attractive right now? Or what's not?

Brent Joyce: Yeah, so similar to the equity story, it's making sure that you understand what's inside your portfolio as a fixed income. Things that have done extraordinarily well are going to have difficulty continuing to generate those same types of return in our view. Certainly high-yield bonds fits into that category.

Christine W.: Mm-hmm (affirmative).

Brent Joyce: And for a lot of fixed-income investors, they're investing in portfolios of balanced, fixed-income solutions and I would want to make sure that within that there isn't and out-sized waiting to high-yield bonds. They're not the type of instrument that historically has provided the kind of safety that you get from government bonds.

Christine W.: Right, they can actually be quite volatile, can't they?

Brent Joyce: Exactly. So it's getting to that notion of what is it that I own and am I comfortable with how this is going to behave under a variety of scenarios.

Christine W.: So in terms of investment-grade bonds, do they look attractive at this time?

Brent Joyce: Yeah, so the government bonds are the safest but they're going to be facing the most pain, I guess, in terms of further yield increases. High yield, you don't get a whole pile of safety but there is still some running yield in there. In our view there's not enough to justify having much exposure to high yield at this juncture.

Christine W.: Right, given the risks.

Brent Joyce: Yeah, and then investment grade is sort of, runs both sides of the road. You have some element of safety in a risk-off type scenario. And you're getting some element of yield pick up, so it is in our balanced portfolios and in many referenced income portfolios, the area that we have the greatest weights is in investment grade corporate bonds.

Christine W.: Brent, I think I save the most topical question for last, and it's a question on trade. Specifically, can you comment on the effect of trade issues on Canada as well as the global growth picture? And of course, you know, we can't escape it. We're seeing news report after news report on trade lately and whether it's another new Tweet or more tariff talks or more rocky negotiations between countries you know, frankly, most of it doesn't sound that good for Canada. We're an export nation.

Christine W.: What do you have to say about trade and what it's going to mean for Canada and I guess the global economy as a whole?

Brent Joyce: Yeah, it's certainly topical. It's all over the media. I think we need to one, take the media with a grain of salt. They're in the business of fear and greed and capturing our eyeballs. So I think a lot of discussion-

Christine W.: Right, of course.

Brent Joyce: -in the news headlines at least is highlighting or jumping to some of the more extreme, speculated outcomes, few of which, most experts agree are as likely to happen. There's not a zero change there but the media is going to play those up for sure.

Christine W.: They're going to take the extreme. Right.

Brent Joyce: So that'd be one thing I would caution on things.

Brent Joyce: And then more broadly, this is just another layer of risk that is added into the equation here amongst some of the other risks that we've talked about in the later stage of the business cycle that reinforces our advice for investors to move to their neutral portfolio positioning.

Brent Joyce: In general, should we see some of the worst case scenarios on trade, and these things are attacks on consumers, they're a drag on global growth, it would get at the heart of those solid earnings that I talked about for equities. So overall, it's a dampening on economic growth and it would be a negative for equities and a positive for safe-haven fixed income. So this again gets back to this, we continually come back to the notion of let's make sure that we have a solid foundation and that we're balanced.

Christine W.: Right, because it's not just an uncertainty for investors, it's really businesses and where they invest and it just creates a lot of, yeah, uncertainty as these sort of trade negotiations continue on.

Brent Joyce: I think negotiations is the right word. I mean at present, the outcomes are uncertain, but the talk of trade wars is largely based on speculation and I think posturing in, obviously the NAFTA negotiations are ongoing and that's a positive. And the U.S. an China both seem interested in negotiating and they're laying their cards and jockeying in advance of that.

Brent Joyce: So for now, much of the actual outcomes of the trade rhetoric do remain speculation. But you're right, markets don't like the uncertainty and we're seeing bouts of short-term sort of trade related equity market volatility in particular. But in bonds as well. And you're seeing the response in fixed income that you would expect to see in the risk-off environment. They are mitigating that downside in equity.

Christine W.: Right. They kind of highlight that important benefit of why you hold bonds in your portfolio, right?

Brent Joyce: Right. I think earlier this year people got frustrated when they were losing money in equities and losing money in bonds for a week or two. And that wasn't the relationship that we're talking about. Now we're seeing the more normal relationship that we would expect from fixed income to equities when we're talking about this growth impediment risk scenario that trade has the potential to do.

Brent Joyce: So you've got uncertainty there on the market side. And you touched on it, there is also uncertainty that is clouding business decisions. So these are, they're complex, interconnected relationships with the potential for some unintended consequences.

Christine W.: So but, you know you talk about these unintended consequences but if you listen to President Trump, he says trade wars are easy to win. So, do you think he's right?

Brent Joyce: Not in my opinion. And you can think about some of the things that have happened in the last number of weeks, so you can take Harley Davidson for example, they're reacting to counter-tariff measures on the part of the Europeans, and they're saying "Listen, we're going to have to build these motorcycles outside of the U.S. in order to get away from the tariffs that were put on there."

Brent Joyce: And the Europeans were crafty about it. They've targeted very high-profile U.S. goods that are going to make a big splash. Harley-Davidson is a pretty iconic American brand.

Christine W.: Right.

Brent Joyce: But there's other stuff that doesn't necessarily stand out off the page. Daimler Chrysler so a German car maker is warning on its profit forecast, and what they're saying "Listen, we build sport utility vehicles in Alabama. We export those to China and those are going to be subject to a counter-tariff by the Chinese." So now you've got a German company making cars in Alabama trying to get them to China. You know, who exactly is winning this trade war in that sort of a scenario?

Christine W.: It really highlights sort of that whole knock on effect of trade and how it really is a complex issue, and creating sort of a chink in that link between one company to another, between a tariff on one country. It really just sort of all interconnects.

Brent Joyce: And for Canada specifically we have to separate between what the economic impact might be for us as a country, and what does that look like when we look at Canadian corporations that we invest in on the Canadian equity market, or that are in the SNP TSX composite index.

Christine W.: Mm-hmm (affirmative).

Brent Joyce: I think it's difficult for people to separate those two things but the reality is, a large chunk of the companies, bellwether Canadian businesses that are household names have significant exposure and operations, physical operations quite frankly, in the United States, and some of the best performers this year are a list of names that people would probably be, you know, might be a little surprised with. So Suncor, TD Bank, Shopify, Bambarger, Magna, these things conjure up this image of "Well these are at the pinpoint of trade."

Brent Joyce: Well these stocks are performing well and that's because they have ties and operations in the U.S.

Christine W.: Right.

Brent Joyce: Those jobs and investments are going to be welcome and remain welcome in the U.S. but the profits flow back to Canadian shareholders at the end of the day.

Brent Joyce: So we have to be cognizant that the headlines are pretty inflammatory, actual outcomes versus threats, it remains to be seen. And let's not jump straight to the conclusion that the worst case scenario draws all this blood from Canadian equities.

Christine W.: Right, right.

Brent Joyce: There's feedback loops with the currency as well. So if you have an abrogation of NAFTA then there's certainly downside risk for the Canadian dollar, and then that in turn means that those Canadian businesses who are bringing foreign U.S. dollar revenues, you know convert those to Canadian dollars to report the earnings, that's more earnings.

Christine W.: Right.

Brent Joyce: That's going to be reflected.

Christine W.: Right.

Brent Joyce:  That's part and parcel why the Canadian market, despite the rhetoric and us being picked on perhaps, has recovered its earlier swoon and is making new all-time highs.

Christine W.: Right, right. Which is nice to see.

Brent Joyce: Mm-hmm (affirmative).

Christine W.: Brent, that's sort of your bottom line on the threat of trade war, but do you have a bottom line in terms of your views on fixed income equity or the market volatility or anything like that.

Brent Joyce: Yeah, it's the theme from our mid-year outlook which is time to be moving toward a neutral stance that's aligned with your personal risk tolerance and your time horizon. A neutral stance provides exposure to participate in equity market growth without stretching your risk tolerance.

Christine W.: Right.

Brent Joyce: Neutral is not do nothing, right? It's stay disciplined, it is revisit your risk tolerance. Revisit your near-term needs if you should have any, like we've talked about. It's understand what you own and how it can be expected to behave under a variety of scenarios that we might see unfold as we move forward here.

Christine W.: So really a position of strength for today's current market environment.

Brent Joyce: Exactly.

Christine W.: Brent if our listeners want to learn more about the topics and views that you spoke about today, where would they go to find that?

Brent Joyce: They can go to our website, GLC's website and they'll find a trade piece and they'll find our mid-year outlook. And they can also follows us on Linked-In.

Christine W.: Perfect. Thank you, Brent and I look forward to chatting with you soon on the issues that affect the capital markets at home and abroad. It's always a pleasure to have this talk with you and it's all very informative, so thank you.

Brent Joyce: You're most welcome. Look forward to chatting with you next time, Christine. Thank you.

Christine W.: This podcast was recorded on June 27, 2018 from London and Toronto, Ontario.

Speaker 3: The views expressed in this commentary are those of GLC Asset Management Group, Ltd. as at the date of publication and are subject to change without notice. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell specific investments. Nor is it intended to provide tax or legal advice. Prospective investors should review the offering documents relating to any investment carefully before making an investment decision, and should ask their advisor for advice based on their specific circumstances.

Copyright 2018 GLC. You may not reproduce, distribute, or otherwise use any of this article without the prior written consent of GLC Asset Management Group Ltd. (GLC).

This commentary represents GLC’s views at the date of publication, which are subject to change without notice. Furthermore, there can be no assurance that any trends described in this material will continue or that forecasts will occur; economic and market conditions change frequently. This commentary is intended as a general source of information and is not intended to be a solicitation to buy or sell specific investments, nor tax or legal advice. Before making any investment decision, prospective investors should carefully review the relevant offering documents and seek input from their advisor.