Présidence de Joe Biden : Perspectives d’investissement

TRANSCRIPT: 

(Français sur demande) 

MATT: Good morning, ladies and gentlemen. Welcome to the "After the vote: what comes next?" conference call hosted by BMO. I would now like to turn the meeting over to Mr. Brian Belsky, Chief Investment Strategist, BMO Capital Markets. Please go ahead, Mr. Belsky. 

BRIAN: Thank you, Matt. Good morning, everyone, on behalf of BMO Financial Group, and, of course, BMO Capital Markets, thank you for joining our call today. We say what we mean and we mean what we say. Last Wednesday we were on a call and said we would schedule another call when we knew what the result of the election was, and over the weekend, obviously we heard news that candidate Joe Biden turned into president elect Joe Biden. So we’re here today to provide guidance from BMO Financial Group with respect to what comes next in terms of, not only the U.S., but also Canada, specifically, in terms of the economy, the bond market and the equity markets. Joining myself today will be Deputy Chief Economist Michael Gregory, Head of Fixed Income, Commodity and Currency Strategy, Margaret Kerins, and myself, Brian Belsky, Chief Investment Strategist at BMO Capital Markets. We will be doing Q&A, as well, so please, queue up your questions while we speak, and with that, I’m going to hand the ball off to Deputy Chief Economist Michael Gregory. Go ahead, Michael. 

MICHAEL: Sure thing, thanks Brian. Well, in addition to president elect Biden that you mentioned, the Senate and House races some key ones there are still continuing, but according to the Wall Street Journal and Associated Press, it’s sort of 48-48 in terms of the Senate count, but with 2 republican candidates leading in their respective races, so presuming that they end up getting those, you’re looking at a 48 to 50 Democrat versus a Republican split. The key here is that in Georgia, both the special and regular Senate races are going to be heading to a run-off on January 5th so we’re not quite sure yet exactly what the effects of the balance of power in the Senate, which is critically important for assessing the economic and policy implications of a Biden presidency at least in the very near term. That said, of those 2 races in Georgia, we know that the Republican had a slight lead in one, and in the other, the Republicans actually split the vote, so it’s looking pretty low odds, at least at this stage, one would think of the Democrats winning both seats and therefore getting a 50-50 split in the Senate, which would then give the deciding vote to president-elect Harris, so you know. And in the Senate, of course, sorry in the House, it does look like the Democrats will hold on to their majority, albeit with a slimmer margin to the tune of about, they lost about 5 seats, it looks like, balanced to the Republican. So basically we got a new president and I guess an old congress in terms of at least as a political party makeup. So we can think a little bit more seriously now about the policy and economic implications. Obviously the most important thing here is what kind of a fiscal stimulus package we do get in the near term if not in the lame duck session early in the new congress. It’s interesting, on Wednesday newly re-elected Senate majority leader McConnell said that passing a fiscal stimulus package was the first order of business, but after Friday’s employment report, he did say that he would sort of favour something, again, on the smaller side. Before we went to break before the election, the Democrats were still touting their package of 2.3T. The last we had in terms of McConnell favouring something was a 500B dollar package that the GOP was pushing in the Senate, so it does seem that there’s a pretty far gulf there between the two. We do think, our working assumption is we’re going to get a package that is running a little bit closer to a trillion, up to a trillion for the simple reason now with a second wave of COVID-19 unfolding before our eyes, that will present a sufficient headwind for the economy. We do think that congress will step up. I mean, there are 3 major elements of a package we expect to be in there. Firstly, the pandemic unemployment is just the pandemic emergency unemployment compensation programs expire at the end of this month, at the end of December, sorry, and there are still, according to lay figures, more than 13 million Americans still on that program, sorry, those programs and they will lose their benefits if those don’t get extended. The other aspect, of course, is the pay cheque protection program. It’s already closed, we expect that it’s going to be reopened with a little additional funding to help many small and medium sized businesses get over this second or at least withstand this second wave. Although we do think there will be a little bit more stringency involved in sort of PPP second version of it for the simple reason of all the reports of some fraudulent activity going on in select quarters. And then, finally with state local governments now in battle yet again against COVID-19, extra funding for those jurisdictions, so again, roughly pushing upwards to about a trillion dollars. In terms of other policies, we might expect with a split congress and a Biden presidency, obviously a lot of major things aren’t going to get passed, the notion of big spending and tax heights have been quashed for now and, you know, the administration may have to rely on executive action to get a few things done on its agenda and, in fact, the representatives of the Biden team have indicated, in fact, that’s their game plan, including getting America back on the powers treaty on climate change, which by the way, America officially exited on Wednesday after the delay of indicating they wanted to leave. And also, for example, changing regulations on the U.S. leading the World Health Organization and also on the restrictions on dreamers and of course on you know, rolling back where they can various environmental and regulatory policies that sits within their agenda. We don’t think there’ll be enough there to really either dent our economic projection much or rather bolster it at the same time and we still are holding to our view for about 4% average growth for next year following a 3 and a half per-cent average decline for this year. For those of you that look at things on a fourth-over-fourth basis, that is 3.4% growth for next year after a 2 and a half per-cent decline for next year. Now, if we end up with a fiscal package that is pretty skinny, say, well under that 1T mark, you know, pushed closer to that 500B or less, that would obviously be a near term hit to growth, something bigger than sort of the close to 1T that we’re expecting would be a positive. Now, of course, it’s not only the prospect for a fiscal package, either in the lame duck session, or early in the new Congress that’s going to matter how things unfold, it will also be the unfolding of the COVID-19 pandemic. We saw on Friday that new infections, the 7-day average, topped 97,000, will likely top 100,000 when the figures for the weekend are finally added up. Now the good news from that perspective is, and we saw that with a Pfizer’s announcement this morning, that sort of the 3 criteria to really put this thing behind us in a material way as far as the economy is concerned, an effective, safe and widely available vaccine. It seems like we’re making a little more headway on that first tranche, that effective vaccine with Pfizer’s notification that it looks like it’s about 90% effective, good news that obviously caused the stock market to rally this morning. That said, we’re still you know, some ways away between the, you know, the safety it has been proven as well as it becoming widely available, so we still do have sort of an autumn and winter season that is looking a little bit bleak and, therefore, you know, we are expecting that we will get, that’s the reason why we will get that fiscal stimulus package in the next few months. Finally, quick implications here, by the way, another avenue, I think, that may help the economy a bit here, in a new administration we’re likely to get a new treasury secretary and a potential for less stringent rules being applied to the Fed’s various lending facilities. Of course, as everyone knows, that treasury has provided capital for those lending programs and the stringency of those lending programs over borrowers and lenders has been one of the reasons why some have argued why they have not been a stronger take-up and, of course, we didn’t see much from the Fed last week, not surprisingly, given we’re in the middle of a pretty contentious election, but the talk of an extending term of their asset purchases continues to be, you know, very much on the table and likely to provide some support, going forward, if they do go down that path, and I’m sure Margaret will have some more comments on that in a second. Finally, with respect to Canada, obviously, you know, prospects for continued U.S. growth is the number one benefit here for Canada and, of course, we’re going to have a potentially less rancorous sort of trade environment, at least within North America, which also you know, is definitely a slight positive, but, you know, over the weekend officials from the Biden team didn’t reindicate that they plan on pulling the permission of Keystone XL pipeline, which, of course, doesn’t bode well for Canada’s energy sector. And another, I think, factor, too, which, is, you know, the other implication is that it being unlikely that a Biden administration will be able to pass a meaningfully higher corporate taxes at least over the next 2 years, that does limit the scope for Ottawa to manoeuvre on that front, as well, from a relative perspective. I’ll leave things at this point for now and I’ll turn things over to my colleague, Margaret Kerins. 

MARGARET: Thank you, Michael. Thank you everyone for calling in today, we really appreciate it. I know the market with the volatility and everything going on, it’s difficult to dial in. You know, first of all, the way that we’re looking at the market, the world does remain in grips with this global pandemic with a rising case count, as Michael mentioned during the lockdown, but over the past week, we have made substantial progress on several hurdles and, of course, the hurdles are the U.S. elections, the pandemic, the economy, stimulus vaccine progress and the fundamentals of the economy. So, 3 things basically happened since our call last week. First, of course, the election has been called in favour of Biden over the weekend. While President Trump is challenging the results and not expected to concede the election anytime soon, that was kind of expected by the market and the market is looking past it. Also, a divided Congress is sort of being priced like a Goldilocks situation in Washington, so that splits to the market. Second, of course, the big news with Pfizer’s announcement on the vaccine front with preliminary results showing a vaccine providing more than 90% of the COVID infection, which moves us closer to clearing the next hurdles. The main market implication with regard to the vaccine, like Michael mentioned, you know, is it effective, is it safe, is it widely available, and we’re passing, apparently, the effective hurdle, which is a big deal. So that moves us much closer to moving on to the safety production and distribution and public trust hurdle. Third, Friday’s employment report was stronger than expected. We have private payroll gains of 906,000, basically just under a million, the unemployment rate falling to 6.9%. Over the past 6 months, the U.S. economy has gained back 12 million of the 22 million jobs that were lost and now we still have the 10 million to go and the pace of gain has been slowing, but it’s so remarkable that we had 55% of the lost jobs regained, which is bringing some positive momentum to the market. So those 3 things, clearing the election hurdle, moving great progress on the vaccine hurdle and continuation of positive news on the economic front have all supported the market momentum here. And as we were watching the market this morning, we are seeing 10-year yields stacking up to the pre-election results level where we hit a level last week of 95 and a half and we’re basically there again. And one theme that we, you know, had been really discussing over the past several weeks is where the market was heading into the election was going to be our pivot point for what we expected after the election, and that’s exactly what we’re seeing playing out right now. The bearish underpinnings are there and we do continue to expect a move toward 1%, which you know, clearly isn’t as big of a deal now that we’re back at 95 and a half versus, you know, when we were in the 70s last week, but that’s what we are continuing to expect. Some people are obviously the marketplace questioning whether or not we’ll see an earlier side lift off that will start getting priced into the front end a little bit more and we’ve had a little bit of a back-up, nothing meaningful in twos and in terms of the front end of the curve, we dismissed any thoughts of an earlier lift off, as I said on the back of a stronger economy data, or the, you know, positive employment report from last week and this is really based on the reality that as time marches forward, the impact of aging demographics and the increase entitlement spending will continue to drag on economic growth. And, you know, one of the themes we talked about quite a bit is that the non-discretionary spending as a percentage of total spending over the past several decades has really increased quite dramatically and that reduces the flexibility that any Congress and administration might have, going forward, with regard to trying to cut deficits. So we do expect the slide to remain on hold and the front end to be pegged down and the curve to steepen on the back of that. Another thing that we spoke about last week on the call was credit spread and what we are seeing this morning is credit spread continuing to narrow by 4 to 5 basis points and we are now at new post-pandemic type, the IGN index is around 112 basis points, that’s about 20 basis points wider than the January type, but, of course, substantially tighter than the wide reach in March and we do continue to expect record type next year as the economy recovers and investors reach for yield in a very accommodative side environment. I can pass it now back to Brian Belsky. Thank you. 

BRIAN: Thank you, Margaret, great comments and Michael, as well. With respect to equities both in the U.S. and Canada still on a big bull market. The construct of the bull market may change a little bit with a president elect Biden and a split Congress, but keep in mind too the key thing is we still don’t know about the Senate. Michael is spot on with respect to where the poles are, again it may be too early to make those decisions and the big thing as Michael said and which everyone is going to agree on is this notion of taxes and spending changes dramatically if indeed we do have more a blue wave in Congress but we’ll cross that bridge when we get to it, that’s why we continue to stress with clients that you really want to be more tilted toward quality. You do not want to make binary decisions in the marketplace. Today, obviously, is a huge momentum type of move, which most of 2020 has been, quite frankly, and when we wrote our report on Friday and talked about unprecedented moves in the market, they’re unprecedented again today. So 2020 has been a year of unprecedented behaviour in terms of fundamentals, the economy, stocks in general, so we don’t think that’s going to end anytime soon, and given days like this, you don’t want to base your investment strategy on a day like today, you don’t want to tilt your quality in increasing that side in terms of higher quality. Number one, number two, you don’t want to make a growth per-cent value call I think today, you still want to make a stock market call meaning the stock market is a market of stocks and you want to, again, increase your quality tilt in a portfolio, but also have a balanced approach with respect to looking at structural growth, cyclical growth and secular growth on the kind of the 3 engines of how companies grow. And so whether or not you’re being a growth or value investor, I don’t think you have to make a binary type decision, so too in terms of cyclicals and/or small cap versus large cap. So what’s applied to today’s great market, let’s not jump on today’s winners and sell today’s losers, let’s be disciplined in our portfolios. We still believe in our 36-50 target on the SMP and 38-50 for the next 12 months. In terms of Canada, 18,200 on the TSX and 18,700 for the next 12 months. Michael brought up a great point in terms of Ottawa and what that means. Indeed, we do see a change in the Senate, but again, let’s cross that bridge when we get to it. I believe the market clearly, as Margaret brought up, is sniffing out a Goldilocks scenario, which we had most recently in 2019 in the market, and if you kind of go back in history, clearly one of the most dramatic and popular ways of looking at Goldilocks was looking at 1995-1996 in the markets, we continue to believe that North American markets in general are the best position equity markets in the world in terms of assets, meaning the best companies in the world, and we still believe that this big bull market is alive and driven principally in the U.S. by technology communication services, consumer discretionary very select retailers, select consumer retailers, consumer select retailers, I’m sorry, select healthcare, which you’re seeing here today and then very select big money center banks that have scalable assets. And with that, Matt, we will hand it back to you to queue up questions and then I will throw a question to someone on the line. Go ahead, Matt. 

MAT: Thank you, Mr. Belsky. We will now take questions from the telephone lines. If you have a question and you’re using a speaker phone, please lift your handset before making your selection. If you have a question, please press star-1 on your device’s keypad. If at any time you wish to cancel your question, you may press the pound sign. Please press star-1 at this time if you have a question. There will be a brief pause while the participants register for questions and we thank you for your patience. 

BRIAN: I just remembered, a reminder, I’m sorry, for everyone on the line that content is available to you at bmocm.com, or reach out to your relationship manager, all of us on the line here today have published a tremendous amount of research over the last several days and it’s all available to you as a client of BMO, so again, it’s bmocm.com or reach out to your relationship manager. With respect to a question on the line, Margaret, on yields in particular, and pick a timeframe, short and long and in the curve, does the amount of stimulus matter and how would you change your projections based on the size and timing of stimulus, quite frankly? 

MARGARET: Thanks, Brian. You know, the stimulus does matter for the yield curve in terms of the economic recovery and the support for the recovery and part of it you know, with regards to timing is the sooner in the face, of course, on the rising infections and the shutting down of different areas. The longer it takes to get the stimulus package, the greater the ultimate package has to be to offset the economic damage that’s done while we’re waiting for a package. So the timing matters, the size of the package matters, we need it to be large enough to support the areas of the economy that are most impacted and, of course, to support the consumer. And so it needs to be large enough to accomplish this, but not too large to be wasteful. And so both of them do matter for yields and the sooner we get it I think the better, well, I guess it depends on which way you’re positioned whether it’s better of worse, but the sooner you get it, I think, you know, it supports the bearish underpinnings in the marketplace. Again though, if it’s a trillion dollar package of a 3T dollar package, you know, the impact on that is probably limited to, you know, 5-6 basis points, if we’re talking, you know, on the long end because the reality is it’s a bridge, right, the fiscal package is a bridge to get us through this pandemic period and the reality at the end of the day is what does the employment situation look like and the health of the consumer and the health of the economy. So it matters with regards to timing and size, but it’s probably only worth a handful of basis points in the long end and nothing in the frontend. 

BRIAN: Great, thank you so much. Matt, with that, do we have any questions on the line? 

MATT: We currently do not have any questions, however, once again, please press star-1 on your device’s keypad if you have a question. 

BRIAN: Thank you. With that, I’ll ask Michael a question. With respect to Ottawa, how does the situation between the United States change if any with respect to policy? What are the one or two biggest items that you would kind of earmark from an economics perspective with a split Congress versus a democratically controlled Congress, Michael? 

MICHAEL: Sure. Thanks, Brian. Well, I mean, the first thing is that one that does not require Congress is the pulling of support by the administration, the new administration for Keystone XL pipeline. That was having issues anyway getting through the various regulatory and other channels in the U.S., but without sort of support from, you know, the highest level, that is likely to fade pretty quickly. So that’s the immediate. In terms of with a split Congress now, and as I mentioned earlier, the chances of getting big spending, which would arguably be positive for growth and therefore positive for Canadian exports to the U.S. and therefore positive for Canadian growth, that’s a little less likely. That’s not to say the U.S. economy is not going to be supportive of the Canadian economy, but not to the same degree if we would have, say, had that blue wave, which you mentioned before and the same thing on the tax hike side. On the tax hike side, you know, Ottawa is desperately looking for ways in which to, you know, write its fiscal ship once we get passed the pandemic and design both spending and tax measures eventually and, you know, if we were to get a move towards higher taxes in the U.S., that would provide a little bit of cover for Canada to do that, which, of course, is probably not going to be there, again at least for the next couple years, but the other aspect of it too is, and again, this might not require Congress and probably doesn’t given the authority of the president on the matters of trade is that we’re likely to get the sort of the rancorous sort of environment where, you know, powers, say, for example, on aluminium get put in without any sort of discussion beforehand as to, you know, why potentially Canada’s aluminium exports are surging in one particular category. And so I do think there’d be a little bit more discussion and to the extent that the administration would need some support, again, on not only from a North American, but also a global perspective on climate change. That’s also a very important aspect of the Canadian federal government’s posture and therefore I suspect that we will get, you know, perhaps a little more cover for Ottawa to move more meaningfully on measures with respect to climate change north of the border. 

BRIAN: Thanks, Michael. I’m going to check with Matt one more time to see if there’s any questions from the line. 

MATT: Please press star-1 at this time if you have a question. We’ll have a brief pause to register for questions. Thank you for your patience. 

BRIAN: Great. In the meantime, I’d like to share some of the questions that we’re receiving from our clients around the world here this morning and it really centres around, I think, the big thing is is it time to sell the tech stocks or the stay-at-home stocks or the mobile society stocks as we like to call them and I would say the answer is no. Again, going back to our formal commentary with respect to not making any binary decisions in the momentum laden market, this is clearly a momentum laden market, we are reacting in a very positive light with respect to the virus and from a common sense perspective, we need to take a couple steps back and say we’re going to take time to unfold. As Michael and Margaret very definitely said with respect to the economy, we are still in recovery mode, there are still questions to be answered in terms of how we’re going to grow, going forward, and what that looks like with respect to the interest rate scenario so the next couple of quarters are key with respect to the U.S. economy and then obviously how that works in terms of stock market performance if we’re going to start to see a broadening out of the market. Remember, fundamentals drive market’s longer terms, fundamentals don’t change in a day just because of a virus, the market obviously is a discounting function, but if the virus continues to increase its strength, clearly the likelihood of additional stay-at-home orders and lockdowns increase, therefore the fundamental demand for the stay-at-home 0 stocks that really drive that in communication services for that matter from a fundamental demand aspect will only increase. So, again, we think it would be too early to be selling these stocks from a longer term perspective with respect to building and maintaining these in your portfolio. With that, Matt, we’re going to check one more time for any questions. 

MATT: Once again, please press star-1 on your device’s keypad if you have a question. 

BRIAN: I think we answered everything. That’s what I’m kind of feeling. On behalf of BMO Financial Group and BMO Capital Markets, I want to thank everyone, of course, Deputy Chief Economist, Michael Gregory, and Head of Fixed Income Commodity and Currency Strategy, Margaret Kerins, for joining us today. Just another quick reminder that all the content that you heard here this morning was contained in research reports that all of us have written and all of our colleagues in global markets with respect to equity research, fixed income research, commodities research and, of course, our great economic team over the last week or so, all of this is contained at bmoca.com. You can also reach out to your relationship manager. With that, thank you so much for joining us, we are here for you, if you have any questions or need additional things from us, please reach out, please stay well and safe and thank you very much. 

MATT: Thank you, Mr. Belsky, the conference call is now ended. Please disconnect your line at this time and we thank you for your participation.