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While equities have had a positive performance year to date, many investors are still positioned for risk. Brad Simpson, Chief Wealth Strategist with TD Wealth, joins MoneyTalk’s Anthony Okolie to discuss the dichotomy he’s seeing.
Transcript
Anthony Okolie – While equity markets have had positive performance so far this year, there’s still a lot of gloom amongst investors as funds continue to flow into GICs and money market funds. Joining us now to discuss this perception-versus-reality issue in the markets is Brad Simpson, Chief Wealth Strategist with TD Wealth. And, Brad, thanks very much for joining us.
Brad Simpson – Thanks for having me.
Anthony Okolie – Now, Brad, you have this new report called The Best of Times and the Worst of Times where where you look at perception-versus-reality issue in the markets. What are you seeing right now?
Brad Simpson – Yeah, I guess we’re probably on about month two on this, because I admit we’re fascinated by this subject. And we’re fascinated by it because at different periods in time, we have different extremes that happen in markets. And this one, even if you look at your introduction today, going through what’s going on in equity markets– if you think back over the last couple of years, how many times have you said, well, the Fed thinks one thing, Nvidia is doing another thing, and how much it’s been those kind of– those are two tales there that have really driven this.
And I think these two tales drive an awful lot of the discussion. So when we look at the retail investor or the wealth investor, and we look at what they’re doing, on the one hand, they are kind of bidding up equity markets on one side, along with some institutional investors. And on the other side, of course, they’re building up these cash positions.
And so I think I’ve talked about that an awful lot. But it’s not just the non– let’s call it the non-sophisticated investor. You’re also seeing this in the pros, and you’re even seeing it in private markets– these kind of extremes where there’s the positive side and then you have this negative side. So I, of course, brought a chart along for this.
And, really, all we’re looking at here is we’re looking at the deal count and the deal value in private equity over the last few years. And of course, when you’re seeing lines go down or going up, what you’re seeing is that both the deals and the value of the deals have been decreasing. And what that is that is less deal flow, less money going after things. And of course, that is because there’s the same sort of fear that is in public markets.
And that, I think, is indicative of with all the things that we’ve been seeing going on– the geopolitical, the concerns around inflation. And I think that it’s really important for us to kind of step back from this and somehow kind of come to terms with this duality that is in the marketplace. And so if you look at what kind of the big investors in private equity are doing, they’re actually starting to allocate capital here.
And that’s really interesting. Now, the deals that they’re doing are a little bit smaller, but their activity is increasing. And it’s increasing quite dramatically. The other part of where it’s increasing in is they’re starting to be more involved in secondaries.
So secondaries is really taking deals that one private equity group is sitting on and going in and purchasing those off of them. Now, one of the things that I learned from one of my mentors along the way is that you can have really good assets shake out of the hands of weaker hands. And I think that’s a little bit of what’s going on here.
And some of those weaker hands are really the folks that either can’t deploy the capital or are kind of caught up in the fear part of this market. And so I think that this is a really interesting thing, though, that we have going on. Now, the other part, I think, that if we reversed and looked back when I was here, let’s call it in January, I was talking about how little fear there is in the options market, like how little hedging was going on.
Now, we’ve started to see that pick up a little bit. So if we look at the expense of hedging today, it’s considerably more expensive than it was when I was here last time.
Anthony Okolie – What does that mean?
Brad Simpson – Well, it means that because of, I would say, the move that we’ve seen in equity markets, one– so the valuations of them. Two, that if we went back a few months ago and we were talking about inflation, inflation was at a more positive trend, in particular in the United States. And of course, then we saw that CPI print in April. And that started to change the narrative around the inflation story.
So as that narrative started to change, we’ve seen equity markets become a little bit more volatile. We’ve certainly seen interest rates a little more volatile. I think if we looked at April, for example, you can kind of look at it– you look at a 30-year Treasury bond, you saw yields move up about 48 basis points, you look at a 10-year Treasury, it was about 25 to 30 basis points.
And in bond market land, those are big moves, right, and giving back much of the returns that they saw in kind of the early part of the first quarter. And so what that means is that the tone where there was very little concern in the market– and if you recall, what we were saying is this is the time you should be buying this protection there, buying these hedging strategies here.
Now, I’m not saying they’re incredibly expensive to do so. No, they’re not. We’re still, I would say, kind of in this early stage of this. But I think it is a way of looking at allocating in portfolios today that is important to keep looking at these two extremes and then how are you going to manage through it.
Anthony Okolie – OK. Now, you also say that China is a good example of this perception-versus-reality issue. Walk us through your thinking.
Brad Simpson – Yeah. One of the things in our Portfolio Strategy Quarterly that we wrote an awful lot about was China. And the reason we did so was that one of the things I think that happens being in North America, particularly now, is we’re so dominated by US media. And so I kind of do this in the evening– I make this route where I go, and I watch a BBC update, I do a Fox update, I do a CNN update, I do an MSNBC update, and you kind of go across the board.
And it’s striking when you do the BBC one, what they’re talking about, which, primarily, is Israel and Gaza is really where they’re focusing And if you look at the American networks, and CNBC as well, if you go through those, there is a brief snippet– oh, and this is what’s happening in Gaza– and then back to Trump and what’s going to happen in the election.
Anthony Okolie – Political landscape.
Brad Simpson – And the political landscape. And it’s stunning. Now, the issue with that is that for financial markets, there is the rest of the planet and rest of what’s going on. And in particular, there is China. China is the second-largest economy in the world. And while the allocations that we have as an organization are quite low, in economic terms and in geopolitical terms, it’s incredibly important, which has an impact on what financial markets are going to do.
And so we said, look, let’s try to take a step back from this kind of North American bias that we have and drill into what’s happening in China and here. And, really, what we wrote about is that we think they are in the middle of a– what I would say, if it isn’t a complete shift, it’s a really significant shift away from what they were doing from the past 30 years to a whole new plan of what they’re going to be doing the next, let’s call it, 30 years. Or at least the next upcoming five years, at any rate.
And so that, we think, is really, really important for us to frame. And if we even look at what that impact is on the short term here, if you looked at these two, if you put the United States in China side by side, this duality or different way of looking at things really jumps at you. And first and foremost is the government spending.
Despite whatever you’ll hear on the media talk shows, you’ve had enormous fiscal spending in the United States with the CHIPS Act, and bringing manufacturing home, and the support for that, right–
Anthony Okolie – Onshoring.
Brad Simpson – –and all that onshoring going on. And in China, typically, when you’re getting a slowdown, like they’re in the middle of, you would see then the government getting really active with fiscal policy and moving in and doing that. That’s not what’s happening there. They’re modestly going through a process like that, but nothing like you’ve seen in the last– what would have happened in, let’s call it, pre-COVID era and backwards again.
Then the second thing is you look at the consumer and you look at the incredible activity of the consumer in the United States. And then you look at where the consumer is in China. Look, I think it’s roughly– and I might get this wrong, but 26% of somebody’s personal profile or balance sheet in the United States comes down to their real estate portfolio or real estate holdings.
Anthony Okolie – I think we have some charts that–
Brad Simpson – Yeah, right? And in there, it’s 41% in China. Now, I think we all know about what the property situation looks like there. But I think on average, your average holder of that is down somewhere between 20% and 40% on their real estate holdings there.
And you think about that impact that has on the consumer and their ability to go out and spend. So when we’re looking at the American economy and where they are today, you can kind of check off and go, consumer’s in pretty darn good shape still, still really active and spending and keeping the economy going, where we’re seeing in China an incredible reluctance for the consumer to go out and spend.
We can also look at that in the same thing, then, that goes into the business community. The business community looks, of course, at that spending and says, well, wait a minute, people are putting their wallet away. I’m not going to be spending in my business because they’re not spending.
Anthony Okolie – The domino effect.
Brad Simpson – Exactly And, of course, when you’re looking over into American public companies, and you look at the rate of what they’re spending on their businesses, it’s extraordinary. And then if you look at what happened even in the last week and a half here with announcements from the Apples of the world, and Microsofts of the world, the Metas of the world, of their share buybacks, you almost get taken aback at the size of flows that you’re seeing there.
So a very, very different feel there. And, of course, you wrap all this up with this ongoing property crisis, and you have a distinctly different environment there. And the last part of it, which we wrote about pretty extensively, is that I really do think that the portfolio manager community, the analyst community, and I think the greater public at large haven’t come to terms with that this is a different government in power there today. And they have a different fiscal policy. They have different monetary policy than they used to. And we need to adjust our thinking based on that.
And why I think we need to look at this and keep our focus on this is that, as we’ve talked a lot about here over the last, I guess, it’s a couple of years now, as one of our ongoing themes is this idea of deglobalization. And we continue to really hold on to that. So we think it’s imperative on to us to go and look at, OK, let’s look at what’s happening around the globe and what that looks like.
And even if you looked at– if you sat down with any investor and said, well, what’s a long-term trend in the United States you’re comfortable with, it would be immediately, AI, tech, feel great about that. If you look at government policy in China towards their technology community, I mean, they’re stifling that community.
And so if you look at what you think your trends are going to be down the road, and you look at the policy there, and look at the difference that you’d have in the United States, they’re pretty significant. And so that, ultimately, has an impact on both your portfolio and how it should be allocated. But, of course, this also has an impact on, potentially, what inflation is going to look like.
Now, the last part on this is that we– of course, we were writing this in April. And, basically, while we were writing this, the Chinese equities market started to go on a bit of a tear. So everyone went, oh, there you go, right? And we said, well, first of all, this is a long-term structural deal.
And the second part I’d really point out to this is that I hear a lot of the old trader equity folks that I grew up around when I was a kid, and one of the things I think you have to be a little bit mindful there of what you may call a dead cat bounce. And that is the valuations are really low. There is a little bit of fiscal and monetary policy pickup in the last few weeks there. So you’ve seen those moves into the market there.
But we don’t think that’s sustainable. And we think our neutral allocation there and our very low allocation there continues to make sense.Original Post
