En avant : La décision de la Banque du Canada et votre avenir financier

[00:00:21] Jordan Chevalier: Hello, and welcome to The Upside. I'm Jordan Chevalier. Joining me today is institutional portfolio manager, Ilan Kolet. Ilan is a member of Fidelity's Global Asset Allocation team. Ilan, thank you for coming on the show.

[00:00:33] Ilan Kolet: Thanks very much, Jordan. Good to see you.

[00:00:35] Jordan Chevalier: We're here, I think, mainly to talk about rates. The Bank of Canada, they paused rates. Were you surprised at this decision at all?

[00:00:44] Ilan Kolet: It wasn't a surprising decision. The Bank of Canada has cut rates many, many times since they started last year. We're sitting at 2.75% right now. There were large cuts at the end of last year and already a couple of cuts this year. The Bank is in a really, really tough position right now in terms of scenario analysis, and I know we'll get into that, but it wasn't overly surprising to us. What I would say is we don't predict specific outcomes from specific meetings. We knew rates were going to be moving lower from their peak, from their post-COVID peak, because they didn't have to be so restrictive and the Canadian economy was fragile, to say the least, coming into this tariff shock. They paused and have very, very clearly expressed, yesterday in the press conference and in the monetary policy report, in detail that they are ready to react. They stand ready to act, I think in the press conference they said that a dozen times, they're ready to react to the incoming data or the balance of news as it changes. Unfortunately, it changes day to day, hour to hour at times making the jobs of monetary policymakers and my former colleagues at the Bank of Canada all that much more difficult.

[00:02:02] Jordan Chevalier: That's very insightful. You mentioned the Canadian economy a little bit, specifically the housing market. I know that's top of mind for a lot of investors, the Canadian economy more broadly but the housing markets, how does that rate sort of change the balance there? 

[00:02:16] Ilan Kolet: The housing market, it's an interesting one. Post 2008 Canada came through the global recession sort of first or second best in the G7, tied with Germany, I would say, and then rates moved much lower globally, including in Canada. Canadians did what low rates incentivize you to do. They bought houses, cottages, condos, Sea-Doos, they bought everything. It was fine to manage that debt service, manage that amount of debt when rates were manageable and inflation was low. Then we got the largest inflation shock in 40 years resulting in 475 basis points of tightening by the Bank of Canada in 18 months. Our view has always been this is going to be problematic and challenging for Canadian households. In Canada we have full recourse mortgages and sort of culturally we pay that mortgage but what we do is we cut discretionary consumer spending sort of to the bone to make sure that mortgage payment gets paid. We've already seen this.

[00:03:18] The way to think about the Canadian economy and housing, and I'll talk a little bit more about housing in a second, Canada was entering this trade and tariff threat in a vulnerable position to start with, exceptionally high levels of debt because we were sort of over our skis on debt and that debt was going to be renewing at rates higher than where it originated. Our concern has been roughly 50% of outstanding mortgages renew between now and the end of next year and that debt is renewing at a higher rate than where it originated. Again, I'm the genius who bought a house in Toronto in 2021 so it's close to home. That's going to be problematic. In terms of the actual mechanics of the housing market it's really interesting what you're seeing.

[00:04:03] If you would ask me, how was the housing markets so resilient through the pandemic, I would say that wasn't really resilience. I think what that was was a massive, an enormous increase in population. Canada's population grew by three million people in the last three years. That boosted demand. That made the housing market appear resilient. Well, not really resilient. There was some sort of creative math around mortgages, there was pent-up savings, there was households borrowing money from their parents or grandparents. People were tapping lifelines to make that mortgage payment. A lot of those things have come away and are coming undone. Population growth has reversed very, very rapidly so that demand shock is coming away. Rates will be higher. On top of that we're contending with this tariff shock. What I would say to anyone listening today, specific to their own mortgage they should probably talk to their advisor. This is a conversation you have with your advisor. From our perspective, from the asset allocators we're still concerned about the macroeconomic strength of Canada.

[00:05:17] Jordan Chevalier: If this is a pause that we've had this week, if the next two decisions are cuts, let's say, is that enough, do you think, for consumers, especially with housing, to kind of come off those sidelines or are we still looking for more?

[00:05:32] Ilan Kolet: It's a very tricky decision. It really varies by region. For example, we often hear about in Vancouver and Toronto consumers coming off the sidelines when you see those changes. I just came back last night from a trip to the prairies. I was in Regina and Saskatoon so hello to everyone who's watching out there. There's such a huge housing shortage in some of those markets that houses are selling instantly. You have to think about it, one quarter of 1% is not suddenly perhaps bringing in a huge swath of buyers. Those buyers were there.

[00:06:09] The other thing that we're seeing, and the Bank of Canada put out a survey at its last decision in March showing hesitant consumers and households. Again, I don't want to be too scary but in the type of environment we're in if you have a job that might be exposed to the downside of tariffs you're probably delaying large decisions, not just the washer and dryer but certainly the house. We are seeing that in the survey data that households are holding more precautionary cash and businesses are reducing hiring expectations, business investment decisions. There's just a more cautious tone. Right now that's a cloud hanging overhead, kind of have to wait to see what the weather looks like.

[00:06:51] Jordan Chevalier: Very interesting. I think a lot of people, before the Bank of Canada decided to pause rates a lot economists were sort of 50/50. They weren't sure if it was going to be a pause or a cut. The trade war, this US policy, this whole environment that the US, Canada and many others are in, are you surprised at how this is all sort of ... the fallout in Canada, I think that a lot people were, quite frankly, scared when it started but economically has it been a little bit more balanced with sort of the pause to tariffs and some of the things that we've seen.

[00:07:22] Ilan Kolet: It's an exceptionally difficult time to be an economist, to be an investor and to be a policymaker. We saw something from the Bank of Canada yesterday that we have not seen in a while, really since COVID, which is normally at the April monetary policy report, which was published yesterday, they release their baseline forecasts. They decided not to yesterday. Instead, what they did is they put out two scenarios. It sounds like they're sort of dodging the bullet but it's actually much more helpful. Scenario analysis is much more helpful when the path forward is so uncertain. Why provide false precision, oh, the economy is going to grow by 1.8%. The second decimal we don't even know on a good day. It's much more useful to provide two distinct scenarios, which is exactly what the Bank of Canada did.

[00:08:20] Under one scenario it was tariffs get negotiated away. It's negative, it's somewhat negative, I would say, and results in sort of slower growth but they get negotiated way ultimately. The second scenario that they put forth was the downside scenario, a long and protracted trade war, a recession, job loss, declines in investment, declines in consumer right, a really negative scenario. What they expressed in the press conference is that we're probably somewhere in between the middle of these two things. The news flow changes so drastically it's very very, very hard to come up with an actual base case and scenario analysis actually makes more sense.

[00:09:06] In the context of our funds, we use scenario analysis as well. I very rarely get to talk about it but we work with a really, really strong asset allocation research team down in Boston. We speak to our underlying managers in Canada, in the US, overseas. We also have scenario analysis in terms of what it could mean for our funds if we get scenario A, B or C. The way that we position in our funds is the size of a position in one of our funds reflects the conviction in the view. Right now we have taken steps, and we discussed this in our Elbows Up [a[er published three, four weeks ago, that is investor-friendly, I would say. We've taken precautions. We're leaning away from the US, we're leaning away from Canada, regions that would be hit quite hard. We're learning into Europe, signs of galvanization there, and we've added to inflation protection because the type of shock that we're thinking about right now is less growth and more inflation. It's damaging and it's very, very difficult for policymakers.

[00:10:10] Jordan Chevalier: You mentioned this sort of scenario A where, let's say, we're in a pause now, by and large, things get negotiated away, is there any sort of upside to any sort of Canadian markets that you'd say in that scenario?

[00:10:21] Ilan Kolet: This is a really tricky question. It's very hard to think about upside in the presence of the kind of volatility and uncertainty we're dealing with right now. If you look hard enough, you dig deep enough there probably are some silver lining. For example, we have been talking about for decades in Canada removal of interprovincial trade barriers and diversifying our export trading partners. Interprovincial trade barriers, a lot of them are, I would say, sort of cumbersome and impede business. If the fire has moved closer to us to actually get rid of these things and just trade better within Canada that is a net positive. Now, it doesn't happen overnight. Removal of these barriers takes time. There's a lot of interesting research around interprovincial trade barriers.

[00:11:11] The other one, and I would this is far more critical and important, is we need to diversify our export base. To put these numbers in perspective roughly 30% of Canadian GDP are exports. That's large. To put that in perspective housing is about 10, a little bit less than 10. But 75, 80% of our exports go to one customer, the US. Roughly 20% of the Canadian GDP by itself is just exports to the US. We have one customer and you're vulnerable when you have one customer. We absolutely need to diversify our export base, our trading relationships. Now, the thing is, as I highlighted on a Fidelity Connects with the great Theo Argitis a couple of weeks ago, we actually have a trade agreement with Europe. Hasn't really amounted to much but my hope is this sort of leads to a bit of galvanization in Canada to get some stuff sorted. Really what we're looking for here, not to get too nerdy, is productivity growth and an increase in potential growth. Again, we've been very productive about talking about productivity in Canada but we haven't actually had the productivity growth. We need to sort out this issue and get some of these large infrastructure projects over the line to boost growth. And it's urgent now.

[00:12:41] Jordan Chevalier: Absolutely, and I think a reason why some would say it is urgent, yourself included, there's sort of the recession fears, maybe also recession's scary, older brother, stagflation. I know it's hard to predict and we're looking at scenarios but are these fears real for Canadians?

[00:13:00] Ilan Kolet: They are and they should be, they absolutely should be. Again, I don't want to be alarmist so we're always going to position the funds to not just add value when the line is moving up but preserve basis points and do better when the line is going down. Again, your advisor is the person to really reach out to to talk to about this. Under the downside risk of severe tariffs that last a long time that don't get negotiated away that is a recession risk. It is declines in GDP, it is job loss and it would be rough. The Bank of Canada knows this and they are waiting and ready to react to cushion the blow of this downside shock in the event that they need to.

[00:13:49] What makes it difficult, Jordan, exactly as you mentioned, is stagflation. Stagflation is less growth, less growth or declines in growth, a recession, coupled with high inflation. From a central bank perspective this is particularly tricky. The Bank of Canada has one job, it's to keep inflation between 1% and 3%, but in the event of a significant shock to growth that leads to job loss, that leads to less exports, that leads to less business investment, less consumer spending they would have to trade off some higher inflation temporarily and push rates lower in order to sort of stem the bleeding or mitigate the downside damage from that recessionary shock. And they would do that. They would communicate it exactly, I think, in that way. The difficult thing, again, is we don't actually know the path forward.

[00:14:46] I spent some time with advisors out in the west. We were at Revelstoke and the news at the bottom of the chairlift on tariffs was different than when we got to the top of the mountain. This is changing minute to minute, hour to hour. We're not going to position our funds every single day differently based on the news flow. That's what we're not going to do. What we are going to do is we're going to lean away from asset classes that we think will lag, the US and Canada, we'll lean into spots that we think can do well, Europe, and we'll add to inflation protection. Gold is the best example I can provide. Gold has been that reliable inflation hedge. We've added to it meaningfully starting last month, two months ago, and it's been beneficial in terms of preserving those basis points.

[00:15:40] Jordan Chevalier: Is there something from an investor's point of view that they could look for to say, okay, maybe we're coming out of this sort of recessionary fear period, a sort of a signal, maybe not a green light but maybe even a yellow signal that things are trending in the right direction?

[00:15:54] Ilan Kolet: I think investors, advisors, they're watching the same news flow that we're watching. We watch it very, very closely. This actually speaks to exactly the benefit of working with an advisor. For investors that are listening reach out to that advisor, have that conversation. They can certainly tell you the Fidelity perspective. We put out lots of videos, lots of webcasts, lots of papers. We attempt to make all of those very, very jargon-free and accessible. This is exactly the time when ... you don't want to underreact but at the same time overreacting is just as damaging. If you had overreacted, for example, in COVID or in any sort of downturn you'd likely be poorer today than you were before that event. That stick handling we do from an investment perspective in the funds and your advisor can help with in terms of navigating this sort of stressful day-to-day situations of that.

[00:16:58] Jordan Chevalier: Absolutely. Are there any things before we go here, sort of some final thoughts to investors, Canadians and advisors, everybody watching the show, things that you can leave them for maybe in sort of the short to mid-term.

[00:17:11] Ilan Kolet: First, I want to thank everyone for their support. There are over 600,000 individual investors in the managed portfolios, probably close to or above a million individual investors in our total fund suite that we manage, that $100 billion group of funds. The way that we've achieved the results that we have and the peers beaten at the 1, 3, 5, 7, and 10-year horizon is a very, very research-based incremental approach to portfolio management. The pillars, macro, bottom-up, valuation, and sentiment, which we've talked about in many papers, that is the process that we will follow and continue to follow to navigate this really difficult time. That's what we'll continue to do. Again, with the partnership of advisors this has been sort of, I think, the key to this success.

[00:18:06] Jordan Chevalier: This has been a great chat. I know I speak for all investors. There's a lot of great things to take away from here. Thank you again, Ilan.

[00:18:11] Ilan Kolet: Super. Thanks, Jordan.

[00:18:12] Jordan Chevalier: For more insights from Ilan and the GAA team check out their latest thought leadership paper entitled Elbows Up, available now on fidelity.ca. Thank you for joining and see you next time on The Upside.