CHB - Brad Simpson: Investing In An Era Of Divergent Global Growth

2023-11-03 02:22:00 ET

Summary

• Divergent global growth and the implications for investors.
• U.S. interest rates: Higher for longer than originally thought?
• Outlook for investors in an era of uncertainty.

Even as the U.S. economy shows its resilience, other global economies are beginning to falter under the pressure of high interest rates. Brad Simpson, Chief Wealth Strategist at TD Wealth, discusses the investment implications of divergent growth in the global economy.

Greg Bonnell: The prospect of higher for longer interest rates has many investors considering what it means for the markets and their investments. Well, our guest today says that picture is further complicated by global economies that are becoming increasingly divergent. Joining us now to discuss, Brad Simpson, chief wealth strategist with TD Wealth. Brad, great to have you back on the program.

Brad Simpson: Thanks for having me.

Greg Bonnell: All right, so let's talk about your-- you just published your portfolio strategy quarterly report. The title is We. What does that mean for investors?

Brad Simpson: Yeah, well, I think what it means for investors is I think we are increasingly hearing these words along the lines of what a period of dramatic change that we're in the middle of. And I think sometimes we get, ah, here that goes again. But I think when we go forward 20 or 30 years, I think historians are going to look at this time and go this kind of 2020 onwards was a pretty pivotal moment.

And I think a part of that is, I think, about the conversations that we have about the global economy. And we'll say the global economy. What's global inflation? What's global interest rates? What are global markets doing?

And I think that if you went back and found the origins of that, that really started during the Clinton administration in the early 1990s, where you had the US really adopt this idea of free trade and globalism and the spread of democracy around the world. And it was like a 30-year ambitious effort that we became accustomed, we heard about. And unfortunately, that we're now in a period of one of our long-term themes, which is deglobalization.

And so we first started writing about this in our portfolio strategy quarterly in the spring of 2022. And I admit, when I was writing it, I wasn't feeling great about it. But the reality is when we are looking at investing, we have to be very careful of the words we use because that guides our thinking.

And so really, the starting point is I want us to start thinking about terms of less about we, and thinking about how are we doing, and think about it more in the opportunity of saying we've got to break the world down into blocks or think about in different regions and start thinking about that, because if you look at the world today, we have a lot of different-- we have countries that are functioning in a very desynchronized way. So not exactly functioning right, not all simultaneously with one another. And I think that is going to pay ramifications for how we allocate capital going forward. And so I think I brought a chart--

Greg Bonnell: Yeah, we have a chart that I think shows because you and I have discussed over the course of the past year this idea of economic cycles. So if we're not talking about we anymore, obviously, there's different parts of the world in different parts of the cycle.

Brad Simpson: Right. And again, even that, where are we in the cycle, and how do we allocate that? Well, I think the starting point of this is we're going to have to look at it and go, well, where are we in the cycle? Well, the answer is we're not necessarily anywhere in that cycle.

What we are is in a place that says that we have to look at it in terms of where are each of those nations. So let's start the first one on the far left here. Where is China? Well, China is an early stage in the economy. Right? So when you're an early stage, it impacts what investments are going to be moving there.

Now, we also have to think about when we look at China, where are they in the economic cycle, they are really into about month nine of opening up after COVID. They were the last major nation to do so. And we got really used to kind of up until 2020 talking about this huge growth, 7% and 8% growth there. And the story was going to be when they open up again, it's going to be that way again. Well, it's not. They're growing at 4% to 5%, and they're really having a hard time getting things going there. So they're early-stage, but it's not robust.

Then you look over, and the next one over is Japan. Japan's at the peak of their economic cycle. You and I could have probably talked for the last five years, nobody even mentioned Japan, right? But during this last year and a half, two years of a changing interest rate cycle, and with inflation hitting, and all of a sudden, Japan's starting to kind of come to life again. And so when we're looking at them, we have to think about, when we're allocating, where are they in the economic cycle. And we'd say they're peak and kind of moving into the next stage.

You look over the next one-- and I'm going to leave the US to last-- you look at Canada, Canada is kind of going into that late stage, teetering, unfortunately, kind of on a recession. Some people would say we're pretty close to a technical recession right now. But let's just say we're slow.

And then when we look over at the furthest way down is the eurozone. And the eurozone, if you look both their services and their manufacturing, both of those are in contraction. They're in a world of hurt there. And so if you look at, like, say, an investor, for example, I'm going to invest in the eurozone because it's really inexpensive, I mean, it's dirt cheap if you want to buy an index there. But they don't have a whole lot of growth that you can see the companies moving towards over the next coming quarters. So you have to think about how I'm going to allocate there. And I think if you start looking at the world like that, it's going to change your perspective. And I think it's also going to have a great deal of change in how you should be allocating capital, and not thinking that the whole world is just moving like one big economy, because it just isn't. And if anything, this trend, we think, is going to continue.

And I think one of the things I showed in the article I wrote is I took what world trade looks like over the last 18 months. Now, this is cyclical, right, but what it showed is world trade just did a nosedive. And what I was trying to show there was saying, while this is a cyclical reality of what we're in the middle of, it does have me quite worried that this is going to be more secular than it is cyclical, and that we're going to have to think about it in those terms, too.

Greg Bonnell: If we take a look at that chart again, because obviously we walked through what we have on the screen with the last part, is intriguing in terms of the landing. We got soft landing, we got a middle ground, and we have a hard landing. This is the unknown that a lot of investors are wondering about, where do we resolve ourselves.

Brad Simpson: Right. And one we just didn't touch on is so, first of all, no one knows, right? And I think you have to look at what's the most healthy part of this. One would, if you wanted to gauge out, if you said what was your highest chance of a hard landing, you'd put Europe in that camp and say-- that's not a call, but saying, but if you look at the trajectory, that's certainly where, especially when you have Germany, which is the engine of their economy, has issues both on their manufacturing and contracting, but they also went through the same real estate buildout that we've seen here in North America, and they haven't seen a lot of the repricing that we've seen yet. So you think they're already in difficulties, and that's happening, that's a concern.

You go over the looks at this is to say the big one here is the United States. And the big one is-- and this is a good news story. And the good news story on this is that the United States, if we went back a year ago-- and I'd say we're accountable for this-- we would be saying United States is going to be slowing. And there's a potentiality that the United States could see a recession by the time we got to the end of 2023. We're nowhere near that here, and we're getting close to 2023.

And so one of our mantras and principles when it comes to investment is this idea of what we call our philosophy of risk priority management. I know I've said that to you before. But one is that you've got to adapt. Like people who stick and say, you know, I have this decision, and I'm never going to move off of it, clearly, the United States, when you look at the health of that from the consumer side of it, from a manufacturing side, today, in September, we saw the manufacturers come out. So ISM, it surprised the market at 49. Saw that came out today, I think it was 47, two or three or something like that.

So taking some of that away, but at this stage, if you were going to be moving into a hard landing, you'd see manufacturing just falling off the table. And if anything, you look at that manufacturing and then you start looking at the service side of the economy, and you look at it in those terms in the United States, you increasingly start to see this idea of that we may get the soft landing.

Now, at the opening of your show, you were talking about an article that Beata wrote. And what she's talking there is R-star. And it's just to look at what is your real growth in an economy and how do you think about it in those terms. And I highly recommend it. It's a great article.

And the basis of this, ultimately, is that the Federal Reserve Board was thinking about setting interest rates to slow things down. And what she's suggesting is that, because of the change that's going on inside the economy, that the measures they're taking aren't slowing things as quickly because of the way they've been measuring it. And so maybe even almost by a little bit of a chance, they thought they were causing a certain amount of slowdown, but it might have been a little less. But by doing that, they took some of the bluntness out of this instrument.

And maybe the United States is turning around and starting to move closer to an early stage. And there's a lot of economic indicators that would start pointing to that. And so that's super interesting. But more is it super interesting, it then mandates my team, and as an organization, our asset allocation committee and our policy committee to go, well, we have to start thinking about how are we going to allocate in a world that's starting to look more like that. So it's a pretty significant change for us right now.

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