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Friday Market Insights – The Bank of Canada is calling for a strong economic recovery

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Friday Market Insights – The Bank of Canada is calling for a strong economic recovery, with Sue Talbot and Wayne Wachell

This week's questions

[00:00] : Intro

[00:00:21] : Can you give us a recap on what happened in the markets this week?

[00:01:48] : So does that mean the economic recovery is happening much quicker than anybody thought?

[00:02:18] : So the regarding the other major economies, you do think the other central banks will follow suit?

[00:02:38] : When interest rates when they do rise and if they rise, what is our strategy going to be here at Genus?

[00:03:06] : So the Liberals released the first post pandemic budget and I think everybody was bracing for more taxes, especially on the capital gains front.  And this doesn’t really align with what the Bank of Canada is saying. So what’s happening here?

[00:04:39] : The debt as a percent to GDP is I think it’s going to peak this year to over fifty-one percent and then eventually land around forty-nine percent four years later. So do you think this is going to impact economic growth at all?

[00:06:06] : So could this – COVID-  cause a country like Brazil or India to default or restructure their debt? And if that were to happen, what would be the wider ramifications to the market?

Sue Talbot: [00:00:04] Hi, everyone, today is Friday, April twenty third and welcome to Friday Market Insights. My name is Sue Talbot and I’m a partner and portfolio manager here at Genus. And with me this week is Wayne Wachell. Wayne is our CEO and chief investment officer. So, Wayne, let’s get right to it. Can you give us a recap on what happened in the markets this week?

 

Wayne Wachell: [00:00:24] Well the market it was flat this week. Most markets were flat. There was there was some volatility within that. A couple of negative events that happened that put more of a risk on tone to it or risk off, I mean, to own up to it. First off, was the situation in India with the with the COVID breakout there. It’s got that market rattled the market a little bit. And then later on the week, Joe Biden came out with his plan for the marginal tax rate or tax rate on capital gains at forty three percent and the market went down a percentage of that right off the bat. There’s some concern about that that could if that comes to fruition, I don’t think it will, that could mean maybe seven percent of the of the US market just because of the impact on tax.

 

Sue Talbot: [00:01:11] Right. And the markets back up today, I think. And, you know, markets were at all time highs. So you would expect people to have netted out with gains. And of course, if they could realize gains at a lower rate, they would obviously try and do that. Let’s talk about the Bank of Canada came out on Wednesday and said that it was scaling back on quantitative easing or emergency stimulus and were the first major economy to do that. They also signalled that interest rates may increase and they also revised their growth estimates upwards to six and a half percent from four percent. So does that mean the economic recovery is happening much quicker than anybody thought?

 

Wayne Wachell: [00:01:55] I think our view is that there is going to be a strong recovery. So I think it’s in line with our view. And they have a good track record, by the way, of making these calls or forecasting team is very good at this. They tend to be one of the first banks to move in a different direction than other central banks. And and so I think you’re going to see more from other central banks in a few months.

 

Sue Talbot: [00:02:15] Ok, so that is going to be my next question. So the regarding the other major economies, you do think the other central banks will follow suit?

 

Wayne Wachell: [00:02:24] Yeah. Central banks always tell you they’re not going to raise rates or stop QE until they do. And I think the bank the bank of Canada is the first one to come to confession and say we’re going to lighten things up a bit here.

 

Sue Talbot: [00:02:36] Ok, so the follow up question is, when interest rates when they do rise and if they rise, what is our strategy going to be here at Genus?

 

Wayne Wachell: [00:02:46] I think we’re positioned pretty well there already. We have low short term maturity, short duration, the bond market and our bond portfolios. We’re pushing more of the cyclicals which do well when rates rise and we’re also pushing more into value, which will do well in a rising interest rate environment. So I think we’re there, but we’ll probably push even more in that direction.

 

Sue Talbot: [00:03:04] Ok, so let’s talk about the budget. So the Liberals released the first post pandemic budget and I think everybody was bracing for more taxes, especially on the capital gains front. And that did not happen. So that’s good news. But there was a lot of spending in this budget and I don’t think they left anybody out. So there’s going to be provided for students, parents, seniors, small businesses. And this doesn’t really align with what the Bank of Canada is saying. So the Bank of Canada saying is, you know, we’re starting this recovery phase, so we’re going to take a step back. But the government is saying, look, we’re still not out of the woods yet, so we need to provide all this extra aid and stimulus there. So what’s happening here?

 

Wayne Wachell: [00:03:49] Well, I think, number one, the government has a political agenda as well. And the Bank of Canada is focused on economic reality. And I think they have a better grip on what’s going on. I think both the US and Canada have really airtight side, is spending too much money to try to get through this and manage the risk, if you will. And I think that’s what the Bank of Canada is saying. You’ve spent a lot of money. The economy is going to be strong and the forecast is six point five for this year, the same with Global. So it’s going to have an implication on capital markets, on the bond market. So it’s they have different agendas and the Bank of Canada is, I think, tuned into reality.

 

Sue Talbot: [00:04:27] Ok, so just getting back to the budget and the debt, so all the spending is obviously going to increase the debt and I think the number is going to reach one point four trillion in five years. And the debt as a percent to GDP is I think it’s going to peak this year to over fifty one percent and then eventually land around forty nine percent four years later. So do you think this is going to impact economic growth at all?

 

Wayne Wachell: [00:04:55] No, I think the spending since college started, the pendulum started has been massive. We’ve doubled our debt in basically a year. But the good news is we’re starting from a very low base and we’re back to 50 percent debt to GDP at 50 percent. The US is at one hundred ish. Japan’s over two hundred. It leaves over two hundred. So we’re in a good situation. I would say back in the 90s, we around between nine and one hundred percent at the peak. So all the work we’ve done since then has helped us right now at this current situation. So we’re we’re actually in a good space right now. And so long as we don’t continue this degree of spending, there shouldn’t be any issues. They seem to be reining it in, at least in their budget forecasts.

 

Sue Talbot: [00:05:41] So it’s good to put that number into perspective, because when people hear fifty one percent, that sounds quite high. But relatively speaking, we’re in a better position than a lot of other countries. So unfortunately, covid is still in the news. The worst cases are in India and Brazil. In fact, Canada banned flights from India yesterday and this is obviously having a devastating impact on their economy. So could this cause a country like Brazil or India to default or restructure their debt? And if that were to happen, what would be the wider ramifications to the market?

 

Wayne Wachell: [00:06:19] Well, I don’t think it’s going to happen in number one. You know, we’ve all gone through locked arms. We’ve all had issues here in Canada and the U.S. And if you look at look at India on a per capita basis, it’s four times bigger than the US. So I don’t think it’s going to we’ll see more government spending like we’re seeing we see in the US and Canada, central banks will ease their debt to GDP is not that bad. I think it’s actually lower than Canada’s right now. So they do have the the the fiscal and the power to make this all happen, to keep things afloat. I think they will.

 

Sue Talbot: [00:06:51] Ok, great. So I think we’ll end it here. Wayne, thanks for your comments and your insights and thanks to everybody for watching. And if you have any questions, please reach out to your portfolio manager. And if you’d like to learn more about Genus, you can visit us at our website. So thanks again and have a great weekend, everybody. Thanks Wayne

 

Wayne Wachell: [00:07:13] Thank you.

 

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