Speaker Key:
GS Gregory Sweet
WB Wes Blight
VO Voiceover
00:00:00
GS Welcome back to Let's talk Investing. I'm your host, Greg Sweet. We're recording here at the beginning of October, a perfect time to take stock of markets, discuss what's driving them, and gather some practical lessons for investors. Joining me today is Wes Blight, Vice President, Portfolio Manager on our multi-asset management team. Wes, thanks for being here.
WB Thanks for having me guys.
GS We've had quite the year the markets. Let's dive in and help our listeners make sense of it all. If you've been watching the news or checking your investment absolutely, you've probably seen headlines speaking of record highs and equity markets. For someone who might be wondering, should I be celebrating or should I be worried? What's really behind these record highs?
00:00:42
WB That’s a great question. And you're right to wonder. It's really been quite a ride. Think of it this way. Both the S &P 500, which tracks America's biggest companies and our own S &P TSX composite here in Canada have been breaking records left and right. We're talking 40 plus record highs for the TSX and over 25 for the
S &P 500 just this year alone. These amazing results are off the back of last year when we also saw many record highs. So, this streak of hitting new peaks has become almost routine. What's interesting in my mind, what matters most for everyday investors is there's a real disconnect happening between these soaring stock prices and some genuine economic challenges that we're facing. It's kind of like having a party on the upper deck of a ship. While there's some rough water below, everyone's celebrating but the captain is still watching the weather.
So what's driving this party atmosphere today is top of mind. Now companies have been reporting really strong earnings, that's their quarterly profits, and when companies make more money than expected, investors get excited and they bid up stock prices. You can think of it like this. If your favourite local restaurant suddenly started making twice as much profit, you'd probably think it was worth more as a business. But at the same time, economists are warning that global economic growth is actually expected to slow down. So we have this puzzle where individual companies are doing really well, they're making good profits, but the overall economic engine that drives everything is expected to run a bit slower. Now that sounds pretty negative, but there's some really good news that makes this market rally healthier than what we've seen before. Unlike in past quarters where it was mostly just the big tech giants like Apple, Microsoft, and Google, that we're driving markets higher. This rally has spread across many different sectors. We're seeing significant gains in banking, materials, energy, and other industries, not just technology. When market gains are broad-based like this, it's generally a much more sustainable and healthier sign for the overall market. It's like the difference between having one star player carrying your entire hockey team versus having the whole team contributing and that second scenario is much more likely to lead to long-term success.
00:03:07
GS So for our listeners who might be thinking, wait, if the economy is slowing down a bit, why are my investments going up? Can you explain why markets in the economy don't always move in lockstep?
00:03:18
WB Absolutely. And this is one of the most important concepts for investors to understand. Think of the stock market like a forward-looking crystal ball. While economic data is more like a rear-view mirror. Here's what I mean. When companies report strong earnings today, investors get excited, they buy more stocks, that pushes prices up. But those earnings reflect what had already happened in the past quarter, the past year, etc. Meanwhile, economists might be warning about challenges that are coming down the road. The market is always trying to price in what it thinks will happen next, while economic indicators tell us what has already happened. It's like the difference between a weather forecast and yesterday's temperature reading. That's why you might see your portfolio doing really well, even when the economic headlines seem worrying, or you could have the opposite. The key lesson don't expect markets to always mirror what's happening in the broad economy right away. They're often looking ahead while the economic data is looking back.
00:04:20
GS There’s been a lot of talk about trade wars and tariffs this year. How has Canada actually fared compared to our neighbours south of the border?
00:04:28
WB Despite all the concerns about trade tensions, Canadian stocks have actually outperformed US stocks so far this year. That might surprise a lot of people. Here's the backdrop. Tariffs which are basically taxes on imported goods are at their highest levels in the US since 1933. To put that in perspective, we're talking about the Great Depression era. These tariffs hit everything from the electronics in your phone to the clothes in your closet, and they're especially heavy on goods coming from China. Now this has created real challenges and that about 60 % of US companies are seeing their shipping and logistics costs jump by 10-15%. Just put that in context, imagine if your monthly grocery bill suddenly went up by that much. It adds up fast for businesses and it will be passed through to the American consumer as well. Now here's where Canada has been smart. We focus more on inter-provincial trade; that's trade between our own provinces and strengthening relationships with our closest trading partners. It's like diversifying your friend group instead of putting all your social energy into one relationship alone. On top of that, now that the dust has settled on most of the new tariffs, Canada still has one of the lowest tariff rates with the US, and that means that we can continue to be their best source of inputs and at the best price. This is paying off. Our material sector, which has been boosted by Gold's absolutely incredible performance is up more than 50 % this year. For context, gold has been seen traditionally as a safe haven when people worry about economic uncertainty. At the same time, our banks have also been stars this year, consistently beating profit expectations, while our tech sector here in Canada keeps growing thanks to AI advances as well. Here's the bigger picture though, it's not just Canada that's doing well.
Emerging markets and international equities have performed strongly too. And even balanced portfolios, those that mix stocks and bonds together, have outperformed the pure S &P 500 this year.
00:06:36
GS It seems like everybody's talking about artificial intelligence these days. But in actuality, how is this affecting investments and should investors get excited about this AI buzz?
00:06:43
WB Let me give you a real world example here, Greg, just how practical AI has become. My colleague's wife recently needed to hire a gardener to help with her parents' property. She went online, she sent out her request, and within just five minutes the phone rang. When she answered, it was an AI assistant talking to her. It sounded totally human. It introduced itself as a digital assistant, and then it said things like, how are you today? Can you give me a bit more information about what you need?
That same gardener later told her that instead of having to drop their tools every time the phone rings to answer calls and get back to people, this AI assistant handles all of that for him. He said it frees up tons of time and it's fantastic at actually closing business for him. Didn't replace anybody, just made him way more efficient at his job. And I think my colleague's wife appreciated it too, because he got the answers that they were looking for in pretty timely, efficient fashion. And that's exactly what we're seeing everywhere.
The AI revolution is very real. It's happening in Canada. It's happening in the US. It's happening around the world. There's some numbers that might surprise you, and that spending on AI infrastructure is expected to reach three to four trillion dollars by the end of this decade. And to put that in perspective, that's roughly the entire annual economic output of Germany, one of the world's largest economies. Another interesting fact is this same investment has roughly four percent of US GDP. But for the first half of this year, it was responsible for 92% of US GDP growth. That's a massive number. And what's exciting is that AI isn't just helping tech companies anymore, it's making all kinds of businesses more efficient.
You can also think about your doctor using AI to read x-rays faster, or logistic companies using AI to find the best delivery routes. Even in our own investment world, we're using AI tools to analyze thousands of different investment opportunities, spot trends that otherwise might take humans much longer to identify. Now, U.S. technology stocks have been leading this charge. And the good news is that the benefits have started spreading to other sectors as well. There's a small warning sign for investors here, though, and you're kind of picking up on it already. And I know we talked about this in past discussions. The S&P 500 is now heavily concentrated, with only the top 10 companies making up more than 40 percent of the entire index. Think of it like this. If you thought you were buying a diversified basket of 500 companies, but nearly half your money is actually invested in just 10 companies, that can make your investment much more volatile. If just one of those big companies stumbles, it could drag down the whole basket.
00:09:28
GS Let's zoom out to the bigger picture. For someone who's trying to plan their financial future, how should they think about what's happening globally and what does this mean for Canadian investors specifically?
00:09:37
WB This is where it gets interesting because we're seeing very different stories in different parts of the world. Understanding these differences is crucial for smart investing. So let's start at home. Canada has been facing some real headwinds, particularly on the economic side, and that we're looking at economic growth of just 1 % in 2025. And that's pretty sluggish. Unemployment is rising and our exports to the US have taken a hit because of those tariffs we talked about earlier.
That hit isn't as significant as other countries, but it's still pretty significant from where we were before. Here's something that might surprise you though. The average Canadian household wealth is actually holding up pretty well. It's like having a steady job, even when the company that you're working for isn't growing as fast as it used to. Now south of the border, the U.S. had a strong comeback with 3.8 % growth in the second quarter, but that's expected to slow down as well. And their unemployment rate in the U.S. is starting to tick up too.
Globally, that picture is even a bit more mixed. So the World Bank just cut their global growth forecast to 2.3%, which if that was realized, that would be the slowest growth since the 1960s. Just think about that. We're talking about the slowest worldwide economic growth in over 60 years. Now, most countries have seen their growth expectations revised downward, but emerging markets are still expected to grow at a healthier 4.1%, and that's in 2025. Now we used to talk a lot about the world being set up in a two-speed economy. It's always been a lot faster for emerging markets versus slower economic growth for developed markets. So here's the big lesson for investors. When different regions are performing so differently, diversification becomes absolutely critical. It's like the old saying about not putting all your eggs in one basket, but even more important when some baskets are doing much better than others. And remember what we talked about earlier, Markets are forward looking while economic data is backward looking. So your investments might be pricing in a recovery or improvement that just hasn't shown up in the economic statistics yet.
00:11:42
GS There’s been a lot of action from central banks lately. For our listeners who might not be following every Bank of Canada announcement, can you break down what's been happening and why they should care?
00:11:54
WB Central bank decisions directly affect everything from your mortgage rate to how your investments may perform. So it's really central to a lot of the work that we're doing as well. Let's start with the Bank of Kennedy brought up in September, they lowered their key interest rate to two and a half percent. And they did this because they saw signs that our economy domestically was weakening. They also saw that unemployment was rising. So they cut rates to make borrowing cheaper and encourage more economic activity. So you can think about that as though interest rates are like the gas pedal for the economy. you lower rates, you're pressing on the gas, you're allowing things to speed up. When you raise them, you're hitting the brakes to slow things down. Now, the US Federal Reserve also made their first rate cut of the year. They brought their rate down to between 4-4.25 % because they're seeing similar signs from the underlying economy. Their job market is cool. Even though inflation is creeping up slightly in the US, a part of that is considered short term because of those tariffs that are making imported goods more expensive for the consumer. Now over in Europe, the ECB, that's the European Central Bank, is keeping rates steady after cutting them earlier this summer. So what does all of this mean for your investments? Rate cuts usually create opportunities, especially in what we call interest rate sensitive sectors. So growth stocks, companies that are expected to expand rapidly, they often do better when borrowing is cheaper.
And then real estate investments can also benefit because lower rates make it less expensive for borrowers. And that can really drive the entire housing market. There's also a currency angle here that affects Canadian investors. When rates change on both sides of the border, so I'm speaking specifically about the Canadian-US border, it affects how strong the Canadian dollar is compared to the US dollar. If you own US stocks or international investments, Changes in currency exchange rates can boost or reduce your returns when you convert them back to Canadian dollars.
00:13:50
GS Let’s get practical here. How has all of this actually showed up in our portfolios? What's been working and what should investors be thinking about going forward?
00:13:58
WB This is where the rubber hits the road for everyday investors. So this year, growth focused portfolios have clearly outperformed income focused. So, growth portfolios focus more on stocks and target a higher total return while income portfolios focus on investments that pay interest like bonds. The reason growth has won this year is largely because fixed income, that's bonds and similar income focused investments have had a tougher time on a relative basis.
When interest rates are uncertain and changing, bond prices can be more volatile. And that's exactly what we've seen. It wasn't until the last few months when the market became convinced that interest rates were going to fall. And this has been good for bonds, but only more recently. So here's the important point. Active management has made a real difference this year and a real difference for us. Instead of just buying and holding a bond index, we have navigated the challenges and added extra value versus those bond indices despite the difficult environment that we've had for passive fixed income investing. Looking ahead, those rate cuts that we just talked about should help fixed income investments continue to recover. And here's why. When interest rates fall, existing bonds become more valuable because they're paying higher rates than the newly issued bonds. It's like owning a house that suddenly becomes more attractive because the mortgage rates drop. Plus on top of that, lower rates reduce the cost of capital businesses, which in turn supports overall economic growth. And it also helps the balance sheet for those businesses. Now, the most important point, at least this is from my perspective, I think this is very, very important. There is no one size fits all investment solution.
Every investor needs a portfolio that matches their personal situation, financial goals, how much risk they can stomach, and how long they plan to invest. As an example, if you're 25 and you're saving for retirement, you can probably handle more volatility in exchange for potentially higher long-term returns. If you're 65 and you need income from your investments, you will likely want a more conservative approach that prioritizes steady payments over growth.
00:16:09
GS That's excellent advice. That's where a financial advisor or financial planner comes in and adds a ton of value in the client advisor relationship. As we wrap up, Wes, what are the key takeaways you want our listeners to remember as they think about their investments and their investment decisions?
00:16:23
WB There are four crucial lessons that come out of everything we've discussed today. First, we don't try to be day traders responding to every headline or market movement. We talked about how strong company earnings can push markets higher, even when the broader economic picture is uncertain. The markets daily ups and downs are just noise, but separating the signal from the noise requires the expertise and discipline that we've developed over years of managing portfolios. That's exactly why we design our portfolio solutions to focus on long-term strategy while filtering out that daily market chart.
Two, today's markets demand the sophisticated diversification that we have built into our portfolios. We've seen how different regions, sectors, and asset classes are performing very differently right now. True diversification means spreading investments across countries, currencies, sectors, and asset types and we are constantly monitoring, rebalancing and adjusting these allocations. Our portfolios handle all of this complexity, ensuring that our clients are properly diversified without having to research and manage dozens of different investments on their own.
Third, we stay on top of central bank policies and interest rate changes as part of our daily work. These decisions create ripple effects throughout the investment world, creating new opportunities and changing which type of investments we should emphasize. We have the resources and the expertise to analyze these macro trends and adjust our portfolio positioning accordingly. Now that's something that would be overwhelming for individual investors to do effectively while still managing their own careers, managing families.
And the fourth point, and I think this is the most important one, we tailor our investment approach to your unique situation while providing the professional execution that you need.
A 30-year-old saving for retirement needs a completely different strategy than a 60-year-old who's planning to retire in five years. And we customize our portfolio management for both of those scenarios. Now the reality is that successful investing today isn't about picking the next hot stock. It's not about timing the market. It's about having a professionally managed diversified portfolio that's specifically designed for your goals, and it's regularly adjusted as conditions change. That's what lets you focus on your life, your career, while we make your investments work for you in the background.
00:18:53
GS That's a perfect summary Wes. Having professionals handle the complexity and an advisor supporting your planning needs will allow you to focus on what matters most to you. And that's what smart investing is all about. Remember, market stories are always evolving, but good investment principles are timeless. Investing early, taking advantage of the power of compounding, investing often, taking advantage of dollar cost averaging, choosing a diversified solution that manages risk and remaining disciplined through good markets and periods of uncertainty are the four key principles and fundamentals that have stood the test of time. The investment world is always changing, but working with an experienced portfolio manager who builds and manages investments designed specifically for your needs gives you the best chance to achieve your financial goals. Thanks for joining us today. We'll be back next quarter with more insights from our portfolio management team.
Here at Scotiabank, we're focused on being your most trusted financial partner for every future. We'll see you next time on let's talk investing. Until then, be well and keep investing.
00:19:57
VO This audio has been prepared by Scotia Global Asset Management and is provided for information purposes only. Views expressed regarding a particular investment economy, industry or market sector should not be considered an indication of trading intent of any of the mutual funds managed by Scotia Global Asset Management. These views are not to be relied upon as investment advice, nor should they be considered a recommendation to buy or sell. These views are subject to change at any time based upon markets and other conditions, and we disclaim any responsibility to update such views.
To the extent this audio contains information or data obtained from third party sources. It is believed to be accurate and reliable as of the date of publication, but Scotia Global Asset Management does not guarantee its accuracy or reliability. Nothing in this audio is or should be relied upon as a promise or representation as to the future. Commissions trailing commissions, management fees and expenses or may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return are the historical annual compound total returns, including changes in unit values and reinvestment of all distributions, does not take into account sales, redemption or option changes or income taxes payable by any security holder that would have reduced returns.
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