Watch our Friday Market Insights – Rising ten year interest rate is forecasting economic growth, with Thomas Irwin and Mike Thiessen
This week's questions
[00:00:00] : Intro
[00:00:39] : I want to start with our view of the markets this week. What happened, Mike?
[00:01:37] : For the first time in 13 months, their (Fund Managers) biggest concern wasn’t covid. I was, in fact, inflation. So shouldn’t this be a win?
[00:02:59] : Recently there’s been some concerns about this variant and some countries have announced that they are up now a third wave. Is is this a worry or is the market again looking past this?
[00:04:41] : So I just wondered if they’re still confident (the Feds), why aren’t they raising rates sooner?
[00:06:10] : Does Genus look at Telus as a buy? Do we own Telus? And how does that look for Canadian health care?
Thomas Irwin: [00:00:03] Welcome, everybody, to our Friday Market Insights. Today is Friday, March 19th. My name is Thomas Irwin. I’m a partner and associate portfolio manager at Genus Capital. And with me today is Mike Thiessen, partner and director of Sustainable Investments. Welcome, Mike. This week was the one year anniversary of this shutdown. So a year ago, events were being canceled, our office closed, and lots of people started working from home. So, so much has changed in the last year. I’ll get to more on that in a minute. First, I want to start with our view of the markets this week. What happened, Mike?
Mike Thiessen: [00:00:43] So the S&P 500 was down almost one percent this week, the TSX was about flat this week. Big news for the week is the continuing increase in the US ten year yield. So they hit a one year record at one point seventy four percent this week. This week, the Fed did come out and say that they want to keep rates near zero through twenty twenty three. But at the same time, the FOMC did come out with quite a positive forecast when it came to GDP growth, when it came to inflation. But the Fed did say that they’re willing to really overshoot when it comes to inflation, overshoot when it comes to employment as well. So it’s overall flat, slightly down down week, but relatively stable compared to the previous few weeks that we’ve seen.
Thomas Irwin: [00:01:32] Right.Thank you. I saw there was a report this week from Fund Managers and for the first time in 13 months, their biggest concern wasn’t covid. I was, in fact, inflation. So shouldn’t this be a win?
Mike Thiessen: [00:01:46] Yeah, so the concern around inflation is all around fear of rates going up, so yields going up and yields really have been a driver of growth. And historically, lower rates do drive more growth if rates do go up. We’re basically cutting off all this near to free money that a lot of these companies are getting. And this money is really fueling a lot of their growth and has been over this whole pandemic period. And then it also affects valuations of companies. So there are plenty of companies, especially tech companies, where a lot of their valuation is based on these future cash flows and those future cash flows. In order to value the businesses today, we need to discount those future cash flows in the present value. And if we discount those future cash flows based on a low interest rate, then then their present value is quite high. But then if we just got them on a higher interest rate or yield than their present value is much lower. So inflation is typically a good thing. It’s meaning that the market is doing well, the economy is starting to heat up. But then there’s fears of this, of cheap money being cut off.
Thomas Irwin: [00:02:56] Now, I will ask one covid related question then, and that’s recently there’s been some concerns about this variant and some countries have announced that they are up now a third wave. Is is this a worry or is the market again looking past this?
Mike Thiessen: [00:03:13] Well, the market is looking past this. Of course, it is making things more shaky than they would be otherwise. But if you look at Canada, if you look at the US, we’re relatively flat in most places. The US, there’s many areas that are new cases are going down. But if you look at our first and second wave that we had, there was enormous spikes, really sharp spikes in total active cases. We’re not seeing this right now, but there’s areas of Europe and other areas of the world that are seeing more of a third wave. But right now we’re not seeing this. And I think as more vaccinations come into the system in Canada, that will help to really flatten that back curve and hopefully help it dip down like it has been in the US. So I think that it is looking positive for the future, but you never really know, especially with the new variants.
Thomas Irwin: [00:04:02] Yeah, I was alarmed by the news that there were over 90 thousand new cases in Brazil in one day and thirty five thousand in India in one day. So still some alarming numbers. But I agree that things tend to be especially here, seemingly on the way down, which is good. A move to the Fed meeting this week. And they announced that they were upping their growth forecast, GDP expected at around six and a half percent. I’ve heard some estimations even higher than that for this year. And they’ve also committed to not changing the rates. So increasing the rates until twenty, twenty four. So I just wondered if they’re still confident, why aren’t they raising rates sooner?
Mike Thiessen: [00:04:48] Yeah, so they are becoming confident on growth, but the market still is quite, quite shaky. It’s not a strong market. And so I think they are wanting to make sure that they don’t dampen any of this growth that is happening. And we have to remember that a lot of this growth is just a bounce back from lows. So we we hit these lows a year ago. And so a lot of this growth is just us getting back to those pre covid levels. It’s not necessarily us growing beyond that. So it’s not. Yeah, it’s not it’s not enormous growth in that sense that we’re really moving forward. And then we also have to remember that rates and growth are really intertwined. So so lower rates are going to foster more growth. So if you were to take if you were to take the low rates out of the the Fed’s model when it comes to growth, then you’re going to have lower growth. But then the higher growth brings about higher rates in the future. So it’s a bit it’s a bit it’s a bit intertwined and a bit complicated there. But I think the key is that we’re really just bouncing back. So this growth is about them.
Thomas Irwin: [00:05:52] Yeah, OK, thank you. We’ll end today with a question from a client and a client who is concerned about Telus’ movement into the health care space. So with the acquisition of COPEMAN and medicines and so does Genus look at Telus as a buy? Do we own Telus? And and how does that look for for Canadian health care?
Mike Thiessen: [00:06:19] So we don’t own to tell us in our core funds right now that are quantitative models have a score in the low 70s out of one hundred, whereas there’s a lot of other companies in the 80s and 90s. So we tend to hold those rather than the 70s. But tell us it made a lot of great strides in the past few years, especially this last year, getting it more into health care. So there could be a lot of growth there. They made some key acquisitions in health care. They’re really getting into telemedicine and they have the Babylon app. I actually have the Babylon app on my phone, which allows you to do video calls with doctors. And so there’s large movement there. They’ve also done the the vaccination bookings as well. And then and then within telecommunications, there is consolidation happening with Rogers acquiring Shah, which he had Shah in one of our dividend portfolios. So that was quite positive news. But consolidation typically is going to be good for for tell us there might not be as good for consumers, but we’ll have to see. Yeah, and I think health care, especially telemedicine, is going to continue to grow. We’ve we’ve seen widespread adoption of it over this past year just out of necessity. And so I think in the future, people are going to continue to think about calling or doing a video call with the doctor rather than possibly going in. So I think they have a leg up there in Canada. And so it’s all this innovation has been really positive for them.
Thomas Irwin: [00:07:48] Yeah, that’s great. Thanks. Thanks again, Mike, for your insights and your commentary. That’s all the time we have for today. Thanks to Mike for joining me and your clients for their trust in business and to our prospective clients for considering us. Thanks and have a great weekend.
Mike Thiessen: [00:08:04] Thank you.