Speaker Key:
GS Gregory Sweet
CM Craig Maddock
WB Wesley Blight
VO Voiceover
00:00:00
GS Welcome to Let's talk investing. I'm your host, Greg Sweet. There is no question Canadians are looking and deserving advice during uncertain times, and today our goal is to help shed some light on current market conditions and what that might mean for long-term investors. I'm back with our guest, Craig Maddock, vice President and head of the Multi-Asset Management Team, and Wesley Blight, vice President & Portfolio manager on Craig's team.
Today is April 3rd, and we're here to talk about trade tensions, growth expectations, technology disruptions, and shifting market dynamics, and what does that all mean for our portfolios. Welcome, Craig and Wes. Thanks for joining me today.
00:00:37
WB Thanks for having us.
00:00:38
CM Thanks, Craig. Always great to be here.
00:00:40
GS Well, it's 1.30 Eastern on April 3rd, as I mentioned. Let's start the conversation with the obvious. Tariffs. Can we recap what President Trump is doing south of the border? And in your opinion, what's he really trying to achieve?
00:00:54
CM Well, Greg, our timing for recording I don't think could have been any better. Yesterday at 4:00 PM we heard President Trump from the Rose Garden with his official tariff plan dubbed Liberation Day. Now that's a tariff or attacks now applied to almost all imported products into the United States, ranging from 10 to 50 or even higher percent new tax on Americans for Imports.
Pretty damaging. The eyebrow raises, I'd say is that all foreign cars now will have an import tax of 25%. He claims his goal is to bring manufacturing back to the United States. Uh, he wants America to be the, you know, manufacturing superpower that it used to be that they're going to make things for the US and for the rest of the world. He claims that the US has been ripped off by the rest of the world, and he gave other countries credit actually for creating policies that actually ripped them off. He also notes that the US administration, quite frankly, has allowed this to happen for decades, and you know, he's going to reverse all of that with these new tariff policies. that ultimately this will help them pay off their massive debt and maybe motivate consumers and businesses to increase the made in US products that are currently being purchased in the US.
He also wants to pass what he called a big, beautiful bill that will reduce regulation attacks in an effort to grow the US economy at face value. It sounds like a noble plan, what he is trying to do, but this, you know, really haphazard use of tariffs, you know, the speed and timing at which he's come out and revealed this information.
And quite frankly, the sheer size he likes to talk about big and bigger than anything has ever been done before. Clearly, this is a bigger tax on us consumption than ever been put on US consumers before. Both in magnitude of tariffs, and on top of that, just the sheer amount of imported goods into the US today is larger than any point in time in history. Those two things together just seem reckless and over the top.
00:02:51
GS So that's a good context. Good background. Many of our listeners are investors. In your portfolios and portfolios that your team manages, I'm sure question is top of mind for them today. How has the trade war hurt our portfolios and how are financial markets reacting to the uncertainty?
00:03:08
CM Well, Greg, we usually do these reviews on a quarterly basis and talk about how things have gone for the quarter. So I'll start there, which means really at the end of March. Probably a shock and a surprise to most clients, but portfolios with say 60% equities, which is a way a lot of our typical clients invest, would've had a positive return year to date.
Some might be slightly positive up, say 1%. There could have been a few that are slightly down depending on exactly how you've invested, but give you a feel for, it's been a pretty okay start to the year, given the fact that we've had this massive amount of uncertainty coming in of tariffs. Probably seen headlines talking about equity markets going down as opposed to going up a little bit more often than they had been more recently. The tariff impact so far, at least up until the end of March, wasn't really that problematic. Today, unfortunately is a little bit of a different day. You know, we do hope maybe some of that sentiment changes in the coming hours or days. The good news is that bonds actually were up solid in the quarter. We talked a lot about that in previous podcasts where, you know, equities were priced for perfection.
Things were maybe set for some kind of a setback or a slowdown in this year, even though we were somewhat constructive on stocks, one of the big things that we talked about a lot was the fact that bonds were paying a much higher return at a much better starting yield, and therefore would offer protection to investors to the extent that we did end to earn any volatility and clearly bonds were pretty good in the quarter, helping portfolios. With some positive returns. The US however, and this is where we've seen some of the concentration, the US in particular, the MAG seven stocks, the parts of the market that have been going up quite a bit for a number of years, were very expensive. We're trading on Four multiples that were somewhat unrealistic, really had been priced for perfection, and those have driven up the market a lot. That's really been the area, at least up until now, sold off the most. So we almost saw like a repricing of the most expensive stuff and the rest of the markets for the most part. Kind of, we're going a little bit sideways again, sum up a little bit, sum down a bit, but really nothing to write home about. And the problem that we've had now is that, you know, Trump's second term, and especially from the news that we got last night, I'd say has been far from perfect, even though the markets were priced for perfection. You can use an example of, say, the Russell 1000 growth segment of the, the US stock market. It was down about 10% through to the end of March. That would be down even further today. But we often on these podcasts, talk about the benefits of diversification in our portfolios. So yeah, we have some investments in US growth for sure in our portfolios. We have a, a reasonably decent allocation to it, but we have a lot of other investments. We've got US value to diversify our portfolios. We've got dividend investments, international equities, Canadian equities, emerging markets, alternative investments, and as I already mentioned, bonds and all of those actually fared reasonably well in the quarter, which quite frankly offset that reversal we saw in US growth investments.
And I think the challenge that we saw in this, uh, US market leadership has continued on to today. We've also seen in the quarter the likes of Chinese AI companies, so artificial intelligence companies coming out in China, showcasing that they have these new technologies. Were able to rival perhaps some of the other AI models and could do so in a much more efficient way with respect to technology. And that was, you know, I don't want to say a game changer, but a revelation, uh, that maybe we're still at the early innings of this AI theme and there's still a lot of good technology advancements to come. For those who had never heard of BYD, you probably have in the quarter. BYD is a Chinese electric car company and quite frankly, has rivaled the likes of all other car companies, including Tesla. And it was, you know, thrust into the media headlines. As a massive threat to US car companies, especially as we've talked about this US trade war. No surprise why Trump has put a 25% tariff on foreign cars. One of the big ones would be to fight off the likes of A BYD, who's selling electric cars for a fraction of the price of a Tesla, and for all intents and purposes from people who have reported on them, seem like a much better car. Meanwhile, if you look over to Europe, and quite frankly all around the world, we're all waking up to this reality of Trump 2.0. USA first sentiment kind of goes beyond trade and into foreign policy. Talking about NATO. NATO countries are now on the defensive after taking, you know, quite frankly, years of underspending on their NATO obligations, and they're all sort of stepping up to that reality that maybe the US won't be there to save everybody. So there's a scurry to catch up, and that's unleashed a new policy activity. You're gonna see more fiscal spending from likes of Europe on defense, uh, and even Canada, and how we actually bulk up our military going forward. So this outlook has really actually helped our allies around the world to band together against the Trump regime.
You sort of sum up where we've been, we're in this, uh, new world order caused by some very disruptive policy positions coming into the United States. And of course it's starting to cause some, I'd say some real economic pain.
00:07:52
GS You know, we've talked a lot about the importance of diversification. I think, um, we all probably would be a bit surprised, you know, ourselves from 12 months ago to think that we're in the reality that we're facing here today. We're proud Canadians. So let's turn to Canada. Let's talk a little bit about the economy. What's the impact of the tariffs here at home?
00:08:11
WB The Canadian equity market actually outperformed the US market year to date. Similar to what Craig was describing from an economic backdrop perspective and some of the disruptors that we're seeing for us, technology names as an example.
Those have been the reasons year to date for why the US equity market has been underperforming other countries, quite frankly, and Canada's included in that bucket for sure, from an economic perspective. The Canadian economy is clearly under pressure. We're seeing softening manufacturing data. We're seeing reduced expectations for GDP growth, and we're seeing even an increase in inflation expectations.
Now that's all in the context of high policy uncertainty and reduced confidence in the path for economic growth going forward. Said, it sounds like everything's negative, but it's not true that everything is negative. Where we're at right now from a Canadian economic perspective, there's lots of opportunities here, and as Craig Notes goods in the US MCA, they are not included in the tariffs that were announced yesterday. That offered a reprieve in the Canadian US dollar movement that we've seen over the last several months. So not just year to date, but that kind of move of the higher US dollar extends back into late 2024. A fair bit of that has already been a wound by the time that we're recording the podcast. Bond yields are moving lower across the globe. Canadian rates were largely unchanged. Earlier on in the day. And I think part of that is because we've already seen a lot of the negative impact for the Canadian economy on the tariff rhetoric being priced into the Canadian market prior to yesterday's announcement. And I think that's an important consideration for what's been baked into the market's expectations versus. The reality of what those tariff announcements were yesterday being different from what the market had anticipated, and that's true across the globe and specifically true for Canada as well. Leading up to yesterday's announcement, uh, we clearly had reduced confidence both from a consumer perspective.
From a business perspective in that the BOC, business outlook survey was meaningfully lower and has been meaningfully lower for the last little while, and we have seen maybe as an offset, some sparked Canadian patriotism. We're seeing that in the election polling as well. And that, um, some of the, the liberal party having been out of favor for a while has certainly moved up. And I think part of that has been influenced by the Canadian patriotism and the, and the response that we are seeing from Canadians in the face of the tariff threat. In the trade, war. Domestic opportunities certainly helped to improve the resiliency of the Canadian economy.
That's coming increasingly into focus. So thoughts around building pipelines. Reducing or eliminating the trade barriers that we have in the interprovincial trade across Canada. That could lead to an increase in GDP growth of 4%. So that's unleashing the ability for the domestic economy to perform better than it has been over the last several years as some of those policy restraints are removed. And then also this is going to take longer to play through by just rethinking globalization across the Canadian economy, looking for new trading partners or enhanced trading partners and trading relationships with Europe and China, as examples as we look to rethink some of those trade policies. Now getting back to the equity market in Canada, just for a quick minute, resources rallied, uh, so we certainly saw that play out. Gold prices are at or near their all-time highs. Same with copper. There may be an opportunity here. For us to continue to see some acceleration or outperformance in Canadian equities relative to the US and relative to the rest of the world, given the focus of our equity market on those areas of the economy.
Just to put a finer point on what's driven, the rally materials are up 20%. Year to date energy's up 3%. Even some of the more defensive sectors in the Canadian equity market, so namely utilities are up almost 5%. Those are meaningful increases in an environment where the news, the headlines, the rhetoric, feels very negative about capital markets, the economy overall. We continue to expect moderate expansion for the rest of 2025, and although the probability of a recession is certainly heightened due to the ongoing uncertainty and the announcements that we got yesterday, it's not our base case that we're going to fall into a, a domestic recession. And having the ability for the Bank of Canada to further ease policy helps to support some of the resiliency of our domestic economy.
00:13:00
GS It's nice to have some of that dry powder in policy rates right now. Certainly empowering the Bank of Canada to make some, you know, sound smart decisions as they look forward. Let's head south of the border. Just thoughts on the impact to the US economy, maybe the US consumer, you know, what's happening down south.
00:13:17
WB So far we're seeing much slow down in growth. That's pretty clear, but the US economy has been still outperforming most major economies year to date. The outlook for a weakening economy is still suggesting that there's going to be a relative resilience across the us. Absent the news that we got yesterday with the news embedded yesterday, I think it's going to be awful tough for the consumer to maintain the spending that they have been fortunate to be able to spend for the last several years.
I think it's really hard for businesses to be able to keep spending thinking about their ability to plan and finance long-term projects. The confidence just isn't there, and we're definitely seeing that reflected in the soft data. So sentiment based surveys are deteriorating. They’ve deteriorated rapidly, both on the consumer and on the business side. That isn't necessarily isolated just to the us, um, that is cascading everywhere globally. I talked about that from a Canadian economy perspective as well. And at the same time, we've got inflation remaining sticky. Tariffs at minimum will cause at least a one time bump up in inflation. They're inflationary for two reasons. One, just the increased tax absolute cost goes up. So that's going to be inflationary. And then you also have the risk, and we saw this in the data from February, consumers pulling purchases forward, trying to consume quicker in anticipation of higher costs coming down the road that is shown up in the actual hard data and is also getting baked into the inflation expectation.
So from that perspective, it becomes harder for the Federal Reserve to balance that managing inflation and supporting economic growth. So thinking about the language that the Federal Reserve is using, you're starting to see transitory show up again, and that's their view on inflation and that they do not know yet what the knock on impacts of tariffs are going to be. So there's obviously the one time increase in prices, but you don't yet know what the knock on impact for those price increases will be in that, do the domestic producers take advantage of the opportunity to raise their prices? They've just been given the global green light to go ahead and do that because import prices are moving up.
So if you've got tariff prices coming in, so for imported goods into the US they move up, take a washing machine, all of a sudden a washing machine that has been imported into the US costs, you know, 20% more. It gives the ability for a domestic producer of that same washing machine to increase their prices that cycle can cause more inflation than what is already accounted for as a result of the direct impact of tariffs. So that's where I think the Fed will spend more time. From an economic perspective, thinking through, okay, we need to do something in order to combat that inflation and this inflationary pressure would be coming without a corresponding increase in growth. And that's where the stagflation risk pops in and that's why we're seeing inflation break evens move up a little bit. So that's forward-looking inflation expectations. They're moving up a little bit. They're not moving up so high compared to what we saw in 2021, so that's something to put in context. We're seeing a deterioration in economic data, but it is not as significant as what we've just gone through during the pandemic and coming back out of the pandemic.
And that is reflected in corporate earnings as well. I think expectations remain strong even though growth forecasts have been cut. That's largely due to the potential increase costs for tariffs. There's still a lot of volatility around where we think and where the market thinks earnings estimates are going to be. They're going to be all over the map for the next little while. As we continue to digest the news of what transpired yesterday and the market continues to digest that news, there's always the risk of some of it being unwound.
00:17:08
GS Let's broad note what's happening in the global economy from your point of view.
00:16:26
CM If we go back to the start of the year, we were anticipating a mild slowdown, you know, still positive growth globally, uh, for the economy, and ultimately that would've been positive for portfolios both in stocks and bonds as we started the year. As Wes mentioned, I think, you know, a, a more significant slowdown is quite frankly, likely as a result of the tariff policies that were announced just last night in addition to higher inflation, as Wes mentioned, that will come with that.
So I think the challenge that all countries are going to face right now is how to respond to the tariffs, just to reminder the tariffs are attacks on US consumers when they import goods. So really the direct impact for China, as an example, who's been slapped with very significant tariffs. It doesn't actually impact China directly. It basically impacts the US consumer who's buying Chinese products. But the byproduct should be that US consumers will buy less Chinese products or look for a substitute for those Chinese products. Now, I would argue that there's a lot of stuff in in the North American market that is produced in China that the United States will never replace.
They're not going to make it themselves, right? The big ticket items, televisions, cars, washing machines, as Wes mentioned earlier, you know, those big things. Yeah, I can see why maybe the US is going to get excited about doing that. All the stuff you can find at the Dollar store, probably not. So does the dollar store now become the Buck 50 store? Probably. And that's just going to hurt the US consumer. But I'm just trying to give you a glimpse of, you know, what actually could or should happen as the, almost like the global trading relationships reset as a result of these tariffs, right? There's the, what the US wants to do. And then there's what's likely or rational for anyone to actually do as they go through this. And unfortunately, we're at the very, very early stages of this. I think the short answer is that we would assume consumption globally will go down from where, what otherwise would've been if there weren't these tariffs. There's likely to be retaliatory tariffs. So you know, China will put taxes on goods coming into China from the US as an example, as with Europe and Canada. So Canada's already come out and announced they'll put a 25% tariff, as an example, on cars that come from the United States. All of those knock on effects I think will start to redirect trading relationships, China and their electric car business. They'll certainly be looking for new clients to buy their cars and to the extent that right now they're still willing and able to make stuff, which they are, uh, they're going to be looking for new clients to sell that to.
Those new clients theoretically would benefit from lower prices because if they had a large consumer in the US and then they have a technically smaller consumer in the rest of the world, they're going to want offloads those goods at lower prices. The rest of the world could benefit, quite frankly, from lower prices in their trade relationships, irrespective of what the US is doing between US and the rest of the world.
Sadly, we are still at the fairly early stages of this. I think it does really illuminate, as I mentioned earlier, around why we have diversified portfolios, and that's not just diversified by geography or even sector, but quite frankly, the different portfolio managers that are making decisions on behalf of our clients each and every day across these different asset classes and areas. All have different views and are going to interpret this different, and it's going to show up differently in the types of decisions they make. And I know right now as they're digesting this information and trying to think forward around how it would impact the companies that either they own today or the ones they might want to own tomorrow based on these changes, uh, it will give us a great opportunity to reshape portfolios. I know we're not telling wonderful news right now, right? We're definitely in, in the midst of a trade war that's just been initiated by the US. Things are clearly not as clear as they were at the beginning of the year, and that uncertainty is going to cause some, you know, some challenges with portfolios in the short term. But long term, I actually think there's the light at the end of the tunnel already started to talk within Canada around trade barriers that exist across provinces that we could, you know, be able to modify. There's talks about pipelines being created in Canada to get our natural resources out to other markets and not just be dependent on the US.
These are things that quite frankly, should have happened years ago, and all other economies around the world are having the same kind of conversations today. We probably never would've had, had the US not gone as big as they did on a trade war. So, you know, there's that old statement around never waste a good challenge or opportunity, right? So I think there is a good challenge and opportunity that the world is facing. I have a lot of confidence that the rest of the world will step up. We'll recreate new paths for trade. Uh, we'll create new profitable relationships, uh, and make them even bigger and better before, and quite frankly, from a diversified portfolio where for the last few years we were so impacted by the US strength and particular in the stock market.
I think to pass that torch to a lot of other countries right now and give others an opportunity to get some growth and to drive some things for their consumers, I think the US is actually maybe giving us a benefit in the end.
00:22:00
GS So maybe the natural last question for you, Craig and Wes, as portfolio managers, what are you doing right now?
00:22:06
WB I think the components of our portfolio construction are really paying off in spades. So we talked earlier about the news suggesting that equity markets were greater, and we've certainly seen the underperformance of US equities, but our portfolios are generally actually positive here to date. We are laser focused on realizing our client investment objectives through the long term. We maintain the core tenants of our active management and that we are looking for appropriate diversification by asset class. Region style across equities and all of the components that go into building a robust portfolio. We continue to provide in our day-to-day thinking and how we're managing our portfolio strategically. This noise that we're experiencing right now over the long term doesn't really matter. And maybe Craig, you can talk a little bit about how we are practically thinking.
00:23:10
GS Yeah, absolutely. Wes and I think you said it well. You know, we're focusing on what we can control. I. As active managers, we can control all the positions in our portfolio, right? So, we can look at tactical strategies and adjusting our positioning based on the information that comes in. We do our best, try not to speculate, but really look at the facts, right? What actually is happening, what is changing? What is the highest probability scenario and then repositioning portfolios. To make sure that we're best set up for the future scenario that is most likely to unfold, and that, you know, that's our job day to day. That's what we're constantly doing. Whether that's a tactical decision, whether it's updating our strategic positioning, whether it's adjusting that diversification that you spoke of, Wes, you know, it's all of those things. In times like this, you know, we've got your back. We're doing all of that heavy thinking, uh, making adjustments so that quite frankly, our clients don't have to worry about what's going on and trying to adjust their portfolios for that reality. We're going to do that on your behalf when you're investing in one of our accounts.
00:24:05
GS Awesome. That's, uh, probably a good spot to tie up the commentary regarding the markets and the economy. What is it that the retail investors should be thinking about? How do they take action? I'll start by saying, you know, this is probably the most important one. Active portfolio management has moments in time where it's challenged against, you know, high tides floating all boats, but it's the market environments that we're in today that, you know, remind me around the importance of having active management in my portfolio.
Trusted portfolio managers like yourselves and the team that you have behind you making smart, thoughtful decisions and navigating through the market environments and the economic conditions. That we've discussed here today. So for me, you know, really reassuring and you know, res solidify some of the trust that I have in this value of active management and the importance of having actively managed portfolios as part of, you know, mine and obviously our clients long-term financial accounts.
I also think about moments like this as being a great opportunity for our clients to make good, thoughtful, personal decisions around. Committing to the financial plan, setting goals, working with an advisor to ensure that the actions that they're taking are properly helping them achieve those long-term investment objectives or those long-term goals that they've set for themselves.
I'm always cautious to say it's markets like these where you want to reassess your risk tolerance, but I do think it's a moment in time to reflect on your risk tolerance. How are you feeling today? How did you feel at market highs? And making sure that you are, you know, properly positioned in the right asset allocation that gives you guidance and comfort, knowing that you can still achieve your long-term objectives, which require growth, but in a way that allows you to, um, sleep well at night.
And, you know, obviously, you know, the guiding hand of an advisor and the active support of a portfolio manager is a big key component of that. We talk about four core disciplines in investing, the spirit of investing early and investing often the importance of diversification that we've talked about today and discipline, which is really that theme around, you know, markets have historically rewarded the disciplined patient investor.
Those principles didn't change yesterday. They didn't change, you know, mid-January, and they've been true to their principles through many, many different catalysts of market volatility in the past. So, as I, you know, think about the advice that we're providing through our distribution channel. It goes back to revisit the plan, revisit the conversations around your asset allocation, recommit to the principles of early and often, and diversified and discipline. And like other periods of market volatility. We know that this too shall pass, and we will find ourselves in greener pastures. Looking back, realizing that this was just simply. A blip along that journey, long-term perspective is a, is a pretty beautiful thing when you start thinking about long-term investing. To the listeners of our podcast, thanks for investing your time. Obviously, these are important conversations, valuable conversations. It is prudent for us to make smart long-term decisions with your capital. It's important for you to make smart long-term decisions with your investments. Together with a Scotiabank advisor, we know we can together help you achieve those long-term objectives.
Realize the goals that you have for yourself and for your families. Craig West, as always, so fantastic to hear from you. Get the updates, build that confidence. Appreciate you always being willing to come and spend some time with us here on Let's Talk Investing. And with that, thanks everybody for listening and have a great day.
00:27:46
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