Veteran portfolio manager points out some issues peers should be looking at as economies restart
As different parts of the country enter phase one or two of their reopening, there are still questions around economic recovery. Despite debates on whether that’s U- or V-shaped, for Wolfgang Klein, portfolio manager, senior vice president, senior investment advisor at Canaccord Genuity Wealth Management, he is looking at the issues that will spur any type of bounce back.
“The yield curve is very important. You need to see it steepen and spreads widen out. You want to see the banks begin to work and you need to see signs that the economy is taking hold, and it will be when the value names kick in. You need to watch the banks and see if interest rates rise at the end of the curve, on the 10-year.”
Currently, the US 2Yr/10Yr spread sits at 0.64%, while in Canada, the spread is just 0.36%.
When it comes to the banks, they have seen their values drop during the pandemic. Stock prices for both RBC and TD, for example, plummeted on March 23, RBC to $72.25 and TD to $49.28. They have since recovered, RBC to $94.64 and TD to $64.90, but are both short of their highs from earlier this year. That is important to Klein as it could present an opportunity. “I think the Canadian banks are very cheap and if you buy them at these levels you will be well rewarded. I wouldn’t back up the truck, but I think they should be owned.”
As for interest rates, last week the Bank of Canada, under new Governor Tiff Macklem, made no changes. Yet with the stimulus the economy has seen, Klein says that could be an indicator. “The amount of stimulus coming to the economy in areas like infrastructure, buildings, hospitals, schools, pipes, water, utilities is going to be real and significant. Ultimately, all of this will become inflationary, which could spell the end of low interest rates, you could see rates rise and bonds fall. Some say rates will stay low, others say that inflation is ahead of us and higher rates not too far off.”
A real area of interest for Klein is employment. March saw the Canadian unemployment rate have its largest one-month drop (7.2%) since data was recorded, with Statistics Canada also issuing a flash estimate that April will see a decline of another 18%. Klein notes that the market is highly correlated to economic activity, which has been hit hard by unemployment. For him, he is unsure how long it will take to correct that.
Still, Klein does see some opportunity, especially close to home. “I do think Canada can stage a better run because the Canadian market has lagged the last 5-10 years. I think the Canadian market is a better market to buy today than a few years ago, so I am keen on the TSX 60.”
Despite the issues, Klein says this period has shown the value advisors provide. “It is times like this that shows the value of the advisory role in providing advice; robos certainly are unable to do that. The world is complicated, clients need good, solid, sound, competent guidance and are leaning on us for solid advice.”
That is why, despite the volatility the pandemic has produced, Klein continues to stress the importance of a long-term approach to his clients. “My view is one of a longer view. I am trying to stack the probabilities in my favour. We live in a probabilistic world, everything I talk about is based on probability, there are no assurances. To improve probability, you need to extend time horizon and I think you need to change the discussion with clients to that. The traditional asset mix of bonds and stocks is under pressure, but the stock aspect of the market I continue to like, it is just a matter of time horizon.
“The economy will grow and as it grows the stock market will grow with it, it has always been that way and I expect it to return to that point. How long, that is anyone’s guess, patience is in order, there will be periods of frustration to be prepared for. Use history as a guide, if you look at the numbers over a multi-decade period, they look better going forward.”
