AGF Management Limited (AGFB) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to the final market update webcast of the year. This is our 2023 outlook addition. Joining me is Kevin McCreadie, AGF's CEO and Chief Investment Officer; Bill DeRoche, Head of Quantitative Investing; Tom Nakamura, Vice President, Currency Strategy and Co-Head of Fixed Income; and Steve Bonnyman, Director of Equity Research and Portfolio Manager. Before we begin, I need to cover off a few administrative items, as always, related to our virtual event platform. Today's presentation will last no longer than 60 minutes. Those joining us live can submit questions any time during the presentation by opening the Q&A icon found along the side of the presentation screen today, and questions will be addressed near the end of the webcast. Additional resources for this session can be accessed in your attendee hub at the top of the page under the Resources tab. And then finally, please note, CE credits may be available for members of our Canadian audience. Okay. Kevin, we want to talk a little bit about 2023 today. So maybe you can get us started with your take on the investment climate heading into the new year, including some of the major issues facing investors.

Yes. Thanks, David, and thanks, everybody, for joining us this morning. I mean I guess I'd start where we're going is a look a quick look at where we just came from, right? A year ago at this time, we had just started to talk about raising rates, right, using the Fed speak from the fall of 2021. And here we are approaching the numbers in the U.S., which will be north of 4, Canada closing there, the U.K. at 3.5 probably by tomorrow in terms of short rates. And so we've had a massive move in rates to fight a massive spike in inflation. What was once transitory got sticky. And so as we move into 2023, I'd say it's a bit of the same story, but with a different pace of things. We're no longer looking at, I think, the inflation peaking story is what's the concern for the markets, is it? And if it does, what does that suggest for central bank policies? Certainly, it's going to be different from where you're sitting. And so the theme of the market, I think, from now is downshifting, meaning the hiking cycle or still hiking, but at a lower pace, starts to get replaced with when do we stop and that will be the theme and probably creates some volatility as we move into that place where "stop" hiking. I think probably the second piece for the markets to digest is that doesn't mean we're going to immediately start to cut rates. And so I think that's part 2 of as the market starts to look at where the central banks are, and they're all going to be doing different things based upon a very similar, but different backdrop, whether it be Europe, Canada or the U.S. And so again, I think the narrative is similar. It's inflation and interest rates. And now I think we've thrown 1/3 new equation this year, which would be -- and where, if any, does a recession show up. So I think that's where the markets are going to grapple with both equities and fixed income.

Okay. Guys, maybe we can -- let's pick up on this idea of central banks. We've got the Fed meeting later today, their next rate decision. So maybe that's a good place for us to get into this a little bit. And maybe, Bill, I'll start with you, but then we'll go around the horn a little bit. What's your expectation for the Fed today at 2:00 p.m. when it comes over this announcement?

Yes. The Fed doesn't want to surprise everybody. So I think it's pretty much known that they're going to go at 50 basis points. They've been very clear in their communications, and I don't think at this point, they're ready to surprise anybody. There really isn't any need to. Inflation, like we said, is most likely peaked, and I think they're going to continue to stay the course.

Steve and Tom, any thoughts on that?

Yes. I think they put it -- well, the team has put it well so far, knowing there's a serious lag in the implication between rate rises and actual impact on the economy, the Fed has done a lot of heavy lifting very quickly and very early on, and they're probably sitting back at this point, determining at what point you slow the process and wait for the flow-through to see it really coming into the economy. The first glimpse is about is starting. I don't think they want to get too far ahead of themselves.

Yes. And the other thing in terms of expectations is we do get an update to the Fed summary of economic projections today. So a lot of eyes will be on their so-called dot plot, where they expect things to be over the next several years. And in particular, interest will be where committee members think the Fed funds rate will be at the end of next year and at the end of '24. So looking for an uptick in those dots from the previous meetings, but how much and how diverse those opinions are going to be poured over by the market. And I think the market's priced in some -- the potential for a rate cut towards the end of next year. And I think that's going to be something that we'll have to see how the Fed addresses that. And there might be some discomfort around expectations of loosening a policy too soon. So whether that shows up in the dots or whether that's in the press conference, that's going to be kind of a key moment for us.

And then can open to anybody here, but -- go ahead, Kevin.

David, on that. I mean I think one thing I think I agree with what everything has been said by these guys. But I would add one other thing. I think it's also going to be the tone today, which is I think you've seen a fair amount of -- several times this year where the market has gotten ahead of the Fed in terms of saying what policy is and where inflation is, right? And so you've seen equity markets move ahead. You've seen interest rates drop in terms of the bond market. So there's been a fair bit of financial conditions easing over the last 6 to 8 weeks, whether it be the wealth effect from equities higher or again drop in 10 years, which has dropped mortgage rates. So if you're the Fed, you may want to stay a little hawkish and your tone today to keep people from pricing ahead of them in terms of what they're going to do. So I'd say that would be something I would add to what -- and to Tom's comment about repel last time, basically said, "Hey, we're going to slow down the pace of this, but we may have to be here longer." That's going to be the question how much longer? And where will you end the terminal rate. So I think it's tone and this idea of the terminal rate probably get a lot of airplane today.

And then adding on to that about tone and the signal about the moderation, is it possible that they do come out and actually say, we're going -- we went 50 today, but expect 25 the next time and maybe the next time, will they get that granular? Or will they try and keep that type of communication a little bit more general going forward?

I don't think in the statement, you're going to see that kind of granularity. I think the key will be whether they kind of indicate that they're more data dependent. But in the press conference, it's likely to be asked, right? I think that's where -- is this the first of the next step down? So I think there are some strategies out there that do you think that after this 50, that won't step down to 25. And potentially, that's it. So that's more on the double side. But I think I will be asked that question in the Q&A around what would the next step look like? I would imagine he's going to try to keep the door open to anything in that scenario. It could go back to -- they could come back with another 50. And ultimately, if the data inflation data gets worse, they could go back up to 75. So I think he's going to try to keep the doors open in terms of what the next steps are and really be watchful for the data.

And I think it's a -- you're going to see a similar tone of what you heard from the Bank of Canada, which is we need to be vigilant around inflation. And while we're cognizant we may have to back off here, but the greater danger is removing the hiking too soon and letting it get inflation to get embedded. And I think there's some of that, that seeps into this language as well.

And is that a message that the market is comfortable with at this stage, though, that this sort of caution -- or do they get a little bit spooked by that? Or does it make them rethink where they're at in terms of all of this?

Yes. I mean from my perspective, I've said we rallied this market a couple of times this year starting in the summer on the hope that there would be this tone change, right? And when it didn't come or didn't come to the extent that the market wanted to, it faded this rally. We've done that 2 to 3 time here. So I think the market has gotten ahead of its own. To your question, if you're actually asking them to say that the next move is 25, you're going to be disappointed. I don't think that that's in the market. But the market will start to say, all right, the next one will be 25, and that's where the potential disappointment comes in as we move into January and that January meeting.

One last question on the Fed in particular and the inflation rate. So are you surprised at all or any of you surprised that, that it's come down to the level that it has to this stage? I'm just wondering if there's -- if they're doing a good job.

Inflation is a rate of change, right? Whatever -- if this month, it could be a ridiculously high number on a single month as long as it's lower than last year's a month at the same time and you dropped that higher one-off, inflation is mathematically coming down. And so we've always thought, I think going from 8 to 4 was not going to be difficult. It's going from 4 to 2 is going to be the challenge. I think you would just looking at what the numbers that were in the mix last year that drop off, right, you could see a 4-ish number by late spring on headline U.S. And Canada is probably in the same place as we move to that. Europe is going to be really very different. You're dealing with rates that are still up north of 10, and that's just driven on the headline by a lot of the energy issues coming out of Ukraine, et cetera. So where it sits is going to be different, but I think that we're not surprised by the drop. It's just -- I think, as I've said, 8 to 4 isn't hard, 4 to 2 is going to be really challenging.

And I think it lends itself to the duration question is to how long we're going to stay at it. I think using the war analogy in terms of the war inflation, we may have had won a nice battle in terms of we've reached peak inflation, but there's still a long way to go before it's over. Unfortunately, I think when we see these quick rallies when people think the turning points are pointing to a quick end, I can see this extending out over quite some time to Kevin's point, to get down to the levels of inflation that they're all interested in getting to. So it wouldn't surprise me if next year, there weren't any rate cuts. I think that's the big question. It's somewhat by model. When do we turn the focus away from inflation and turn the focus on engineering, call it, the soft landing that everybody hopes can occur. And given the strength of the economy, the fact that things happen on the margin, I can just see it taking longer than people would like to see that whole hoping.

And that's certainly -- that's part of the risk and this idea of the head fake that Kevin is talking about, right, that maybe we're getting ahead of ourselves. Last question on central banks. And I'm going to ask you to put your forecast hats on a little bit here. But if you were to rank the major central banks, so ECB, Canada, the U.S., who pauses first? And then who maybe cuts first going forward?

Canada.

So Canada pauses first and probably cuts first too, right?

I wouldn't disagree with that because Canada was the first one in. There's a time frame lag. I'd say second, interestingly, could be the ECB because they're already tightening into an economy that's in a recession that feels like. And they can keep doing that, but I think that they too will start to downshift here, but a very different problem, headline inflation is much higher there. But I would agree Tom like Canada.

Yes. Again, Canada, remember, was also very aggressive in front-loading their rate increases and have been steadily ramping those down. So it does feel like we're close to at least a pause from the Bank of Canada. And I think we've seen in some of the economic data and a little bit more softness in the domestic sector. So that should be of concern for the Bank of Canada as we kind of look into the latter -- middle part or the latter part of next year. And I think the ECB to Kevin's point, like I think they've been they've -- it's a real tough choice for them, right, in terms of fighting inflation or safeguarding the economy. One thing that I think the ECB might be able to do is to move down to smaller steps and keep dripping those rate increases into the market to maintain some credibility. But -- and I think some of the data has started to show some signs of life in Europe as well. So I think they're hoping for a milder winter and hopefully, they can get through this into next year. But I probably agree, it seems like there is a chance that the Fed could surprise the market in terms of keeping the rate hikes going a little further than what markets are priced in.

Okay. Let's -- obviously, central banks are a huge focus for next year. But there's other stuff going on in the world that may impact markets. Again, around the horn, just a thought on what other things your events you're looking at as we head into the new year as potentially a tailwind or a headwind for markets? And Steve, maybe I'll start with you on this one.

Sure. I'm going to dive a little deeper because most of the world that I live in has a high physical component. But one of the things that we've noted over the last quarter has been a massive rebuild in finished goods inventories. So we had demand effectively pulled forward to restock all of those, be it consumer metals, producer inventory stockpiles that got drawn down through the pandemic and the supply chain challenges. That's going to be demand that's going to ebb and will probably show up through the first half of next year and may not be fully reflected in the market right now. I think a lot of people are looking to China reopening to solve for some of that. But as you look into some of the granularity of some of the pieces, it makes us a little more cautious on how things will play out in some of the more physical markets.

Okay. Bill, maybe I'll turn to you next. What are some thoughts in terms of some other issues beyond central banks?

Well, I still think the biggest issues you have to focus on is in terms of if we're going to end up in a recession, how deep is it going to be? So from my perspective, that's going to be the focus of next year. I know some folks who are hoping that we can avoid a recession, but I think it's somewhat inevitable. So from my perspective, we just need to figure out the depth and duration of that as we look forward.

And maybe we'll get back to that pill, there's lots of questions about this idea of recession, so from the audience. So we'll dive into that a little bit later on. But first Tom and Kevin, just some thoughts on some other issues that you're watching for over the next 12 months.

Maybe I can just quickly start. FX and fixed income so central banks are pretty central to everything, but I think what we probably shouldn't lose sight of here is that we've had a tremendous amount of normalization in rates markets. I think the average high yield, the high-yield index is yielding over 8%. If you take high-yield EM issuers in dollars, that's yielding over 10%. And it feels like this is kind of -- it's not just a spike up and that we're going to immediately rally back. It feels like these are kind of more sustainable yield levels. And really, I mean, I've been in this market for over 20 years. I don't think I've seen an environment like this. So these are fantastic opportunities and whether the entry point is today or 3 months from now or 6 months from now, I think in the long term, from a long-term perspective, I think there's an incredible opportunity brewing in rates markets and credit markets. And I think it really kind of sets up for a different tone in investment because you do have things that offer you actual yield. You do have cash that provides you with the yield. And I think that really changes some of the calculus that goes into thinking about investments and thinking about portfolio construction.

Okay. And then Kevin, maybe a quick comment from you. I'm just wondering from a geopolitical standpoint, if there's anything out there that you're...

2 major things, obviously, the China reopening and dealing with this burn through of COVID. And I'll use that word burn through. I mean, obviously, as you've seen, caseloads are now so frequent and large in terms of number of places that it's impacting that lockdowns won't really be effective any longer. So you're now at this place where you're going to have to let it burn through, which we think is something that runs through the spring. And the question would be, so far, we've managed the supply chain issues around that differently in a good way. But if, in fact, you had to have issues with supply chains, again, you may have, again, an issue with some of the inflation related to that, that we saw. So that's one. And 2, I'd say, obviously, Ukraine, Russia comes back to the 4 getting through this winter. We might get lucky in Europe with that. But then when it comes time to having to refill natural gas for next year, it could present some of the same issues. And the question really comes is when does the West gets tired of this. If it's, in fact, a cold winter and people have to turn their heat down and they have to make choices about these higher prices because of the Ukraine, et cetera. So I think that comes back into play as we move through the early part of January or February.

Okay. Let's get into some commentary on specific asset classes. So we'll start with equities. And Kevin, I'll ask you to weigh in on this one for us. And really, the question here, where do you see the best opportunities in the new year? And perhaps from a geographic standpoint, heading into the year? Where are we positioned? Or how should investors maybe think about positioning?

Yes. So on a broad basis, we're overweight equities by a little bit now, recognizing it's going to be a choppy ride. And we've compensated that by holding a little bit of cash. Cash is coming from being underweight fixed income, which is a position we've been significantly underweight over the last 18 months, which closed that gap dramatically. So a little bit of cash and we're using alternatives such as real assets. We have an anti-beta hedge that we use in the portfolio. So as we keep that overweight to equities, we have some offsets there. And then within the equity buckets, we favor Japan right now in the U.S., Japan. It's handled COVID very well. It is a reopening story. And with the currency this week, it's an export story. So a global growth if China comes back on and global growth can actually hang through this, and it's a mild recession, there's pretty good valuation support when you look at Japan and put all that in that context. And I'd say the next is the U.S., we think the recession there could be shallower. They're less sensitive from a housing standpoint today than they were in '08 to these higher rates. Housing market doesn't have some of the toxic stuff it didn't in '08 and if you don't like where rates are going and you have a 30-year mortgage, not only does it not get amortized over 30 years or you can stay in your house for 30 years or so. So very different sensitivity to these higher rates around that versus, for instance, Canada, which everyone's got a refi after 5 years. And so I think the sensitivity for Canada is probably much greater. So underway Canada, and we've talked about Europe, we clearly believe that Europe is origin a recession. So overweight Japan and U.S. underweight Canada and Canada and Europe.

And then quickly on emerging markets in China, in particular. I feel like there's a little bit more optimism about that area heading into the new year as well.

Yes. I'll start maybe, Tom, follow on that. But I mean, yes, I think the China story is actually -- well, there's going to be a lot of pain and suffering as they go through this phase of COVID. It's what you probably need to see to get this behind them for once and for all. They too are struggling with some other internally inflicted wounds. If you think about some of the regulatory and that they've used on certain sectors. They've got a large real estate problem. All of that means that they're going to stimulate that economy a fair bit, which should be good for EM. And I think EM really becomes sure about where the dollar goes on. And I think, Tom, if you believe that the dollar starts to flatten out here and EM starts to look pretty attractive both from not just the fixed income side, but maybe the equity side as well.

Okay. And Tom, I'm going to get your views on the currency and fixed income in a second. I just want to go to Steve first. And a lot of the stocks that we're talking about, they fall under the category of real assets in terms of what you do. I'm just wondering what's your viewpoint in terms of how real assets will perform in the new year?

Yes. We're taking each of the different pieces of the real asset universe and analyzing them separately because there's different dynamics playing out. Our largest exposure at this part remains energy, and we think we're actually in the mid game, if you will, for the energy cycle. This will not be a cyclic spike and collapse. We think we're into a much more secular change here. I think Brent is trading at $82 today. I think that's probably $18 to $20 too low on a sustainable basis and a rerating in place. I think the market continues to view these companies through the same lens that they did through the last decade, which is incorrect. Moving to other spaces, we see some neat opportunities in real estate, staying with what we consider short duration names, getting some interesting recovery trades through on things that are transportation linked or hotel linked. The specialties and the industrials are doing well. So we think that this group has not been fully valued yet. We think there's great opportunities. Remember, too, that notwithstanding inflation slowing, we're going to be in a positive real rate environment here, which is going to be different than the last few years.

Okay. And then Bill, I want to maybe ask -- let's talk a little bit about factors and styles of investing. Where do you see that kind of going? We've talked a lot about the growth versus value dynamic over the last couple of years. So just curious from that lens, where you see some opportunities going forward?

Yes. If you look at, say, low vol, low beta, that particular trade has done exceptionally well for the last, say, 12 to 13 months. High quality has also done very well. Those are areas that do well in a rising rate environment. what's interesting is they also do well when the economy is slowing as if we're moving to a recession. I think the bigger concern is because that trade has worked now for over a year, you're seeing a fair amount of correlation with that high quality, low beta, low vol securities with momentum. So the reality is you're getting a fair amount of risk from that trade if you're not careful. So I would suggest Tom was mentioning it earlier with regards to portfolio construction. You want to make sure that when you're -- if you're going to tilt your portfolio towards this area that you account for the fact that momentum is a big component of what you're actually getting exposure to. And I think Tom made another good point about there's a lot of attractive things out there at the moment. So yes, we do think it's prudent to stay with the high quality, low beta for the moment. But the answer is, by the end of the year, you're going to be looking to get more aggressive. There's going to be plenty of opportunity for that. So I think it's going to be a story of first half of 2023 versus the second half. And I could see the factor exposures that you have in the first half look very different from that second half as people look to get more aggressive, more risk on.

Okay. Definitely, it sounds like a tale of 2 halves in 2023. Okay, Tom, you're on. So you got double duty. I want you talk a little bit about fixed income and currency, obviously, very, very interconnected. But maybe a couple of minutes on both those asset classes for us.

Yes. So I think I'll start with the FX side. Our view is still for dollar strength to be maintained through the early part of next year and then start to top off, right? And I don't know if that necessarily means a large decline or just more of a grind lower into the end of the year. But a lot of it is going to hinge on how -- initially how the -- what the Fed does, but I think what becomes more important is how does the global economy do. So in a global growth slowdown or recession, the U.S. dollar tends to do well. And that's because you had a retrenchment of risk, the companies invest less. There's less FDI going on around the world. And I think that's really going to be the key in terms of how we think about global trade, how we think about the global economy and where we kind of look economically throughout the year. So I think there's still some tailwinds for the U.S. dollar, broadly speaking. I think Kevin mentioned Japanese yen, there is a currency that we do like because it has become extremely cheap. We look at a bunch of different indicators and the one that is unambiguously cheapest is Japanese yen. And partially for some good reasons, why it's cheapened up, but we do think that the environment is likely to be one that's more supportive for you. And part of that is the rates picture. So if we do think that the Fed will be able to stop next year, which I think we are hoping, they will be able to, and I think that's where the expectation is that should put less pressure on longer term U.S. treasury yields from -- to continue climbing. So we should start to see some moderation there, which should be supported for the Japanese yen. And if we do also have subpar economic growth, at least to start the year, that's also likely to be supportive of the Japanese yen. So that's the currency that we do like mostly from the valuation perspective, but I also think that there's a cyclical component that favors the Japanese yen as well. In terms of bond markets, I did talk a little bit about EM and credit. But I think the other side of it is just government bond yields in general. We have had a pretty sharp move, particularly in the first half of this year in terms of rising bond yields. And we'll see where we end up this year because it feels like we can move a lot in the next couple of weeks. But it does feel like we are set up to have a much better year for government bond markets next year, which is -- it's a pretty low bar for us to clear. But I think the other side of it is that because of the amount of care we get, whether it's 3% to 4% yields in most developed markets or kind of higher single-digit return yields in EM markets that you are getting some pretty attractive entry points in terms of just thinking about where the opportunities are even inflation-adjusted looking out over the next 5, 10 years. So I think there's an attractive opportunity from the pure yield side. And that kind of lends itself to being a good backdrop for the riskier parts of fixed income, whether it's credit, high yield, could look at EMs, could look at other parts of the market that may not have as wide spreads as we like, typically as we kind of face recession, but their all-in yields are very attractive. So if we are in a camp that we do think inflation will eventually moderate and get back towards normal, maybe not all the way, but at least towards normal. We can see these asset classes provide some really compelling real yields that we haven't seen in a very long time.

Okay. Great stuff, guys. I want to get to -- there's lots of questions coming in from the audience. So I want to get to those as soon as we can. But I did have one last question, and maybe this is for Bill and Bill and Kevin, in particular, but I do want to talk about this alternative space. So we've talked a little bit about equity, we've talked a little bit about fixed income. Alternatives have become a bigger part of people's portfolios are starting to grow. What's the outlook for that side of it? Are there opportunities within that broad space that investors should be looking at? And so Kevin, maybe I'll start with you first, and then we'll go to Bill.

Yes. I think what we've learned this year is that there is value in portfolio construction to having alternatives and not just things which are long-dated venture or things of that nature, but things that actually correlate a lot differently. So an anti-beta hedge that we use is up 15% year-to-date. When the S&P is probably still down at this juncture, I don't know, call it, 15-ish, 13-ish year-to-date. So the ability to use something like that inside of the portfolio to use something like real assets in a portfolio. If you think inflation is going to have a hard time going from 4 to 2, you're going to want that in the future as well. And then I think there are going to be pockets of things which provide you to either income like infrastructure. So a liquid infrastructure product that, again, we'll have an inflation component but also give you a fair amount of income. So I think the use of alternatives while parts of the market have seen dislocation from it, I think it's still going to be very, very valid. Even things like private credit, right, and despite what Tom said about the public fixed income market is probably looking attractive. There's still opportunities there as well.

And then Bill, just maybe an add-on on that?

Yes. I'd just dovetail that if you look at, say, the prior 10 to 15 years, you really didn't have to worry about inflation. The biggest issue was the fact that looking at global growth. So a portfolio with just fixed income and equities would do exceptionally well. Now that you've got to be concerned about inflation. It's not going away anytime soon. So you want to have something that reacts positively to higher rates. So there are alternatives that can do that. The other element that we tend to forget about, we've seen it in the U.S. is that volatility matters a lot. We've had people who basically were looking to retire. They're getting close to that point. They experienced a big drawdown over the course of, say, the last couple of years. And also now they have higher inflation, so that pool of retirement assets are much lower and the fact that they're going to need more cash flow because of inflation, and it's just a bad situation. So when vol gets higher, managing that volatility with some of the alternative products that can do that makes a lot of sense, so you don't have to deal with that sequence risk as you move on and get closer to the retirement. So I can see alternatives serving both of those purposes in terms of providing alternative return streams, but just as importantly, providing ways to mitigate some of the negative effects that come from volatility.

Okay. And just to be clear, we're not talking about a massive allocation to alternatives. I mean, a little bit can go a long way in terms of smoothing that ride for investors heading into the new year.

Okay. Let's go to questions. We've got tons here. So -- and thank everybody for sending those into us. So let's go back to the Fed and this idea of recession, and there's a couple here. So first question, simple one, maybe not so simple to answer, but it's a simple question. When the recession happens, how long will it be? So again, maybe a bit of a forecast that tough to answer, but any thoughts on that?

Yes. Maybe I'll start and these guys can jump. I think again, it's going to depend on where you're sitting. If you're in Europe, it could be longer, given the problems you're doing with the get inflation under control and the fact that they're probably in a recession already. If it's the U.S., it could be shorter given as we've said, the sensitivity to housing this time around is different, and it may be shallower in Canada. It could be earlier because we started earlier. And again, depending upon duration and severity, that one is a little harder. But -- so it's hard to pick. I don't think anyone on this call, and I could be wrong if I invite anybody to jump in, is looking at a severe and long duration of recession certainly in North America at this juncture, but I would defer to others.

The only thing I would probably counter with is just given the amount of extreme Central Bank policy that we've seen over the past decade or 2 with balance sheet use and such and the resulting kind of episode that we saw this year in terms of really high inflation and kind of persistently high inflation. I do think that there's going to be some reluctance from central banks to cut maybe not as early and maybe not as deeply as we might have seen in prior episodes. So I think that might be the small outside risk that you get, all else being equal, maybe slightly longer, maybe slightly a little bit more painful. But it's all else peaking, you close kind of a tough thing to gauge. So do you think that there's enough fundamental reasons why growth should be able to rebound in heal on its own. I think in the U.S., some of the factors that Kevin has alluded to. But also, I think there's been this longer term theme of -- I know Steve and I talked about a little bit about this, things that require investment irrespective of what kind of economic environment we're in, whether it's energy independence, whether it's dealing with climate change, whether it's rebuilding supply chains or reorganizing supply chains, those investments are unlikely to happen irrespective of what kind of -- how long or what kind of recession we're in. And I think that's going to help guide most economies through this.

David, I'd add 2 other points to this, right, which is you also -- this is not 2008, which was a financial system issue, right, a systemic issue with financial systems around the world, where we saw unemployment go to the high-single digits in the developed world, even in Europe, mid-teens, we're starting at very low levels of unemployment around most of even Europe, I would say, here. 2, we're dealing with the business cycle recession here, we're the classical raising rates too high. I think the difference is not the level of rates that were up. These are highly accommodated vis-a-vis history. It's how quickly we got here and the adjustment factor. And I think that's where -- I think it's -- so it could be a reaction to that. But this is not 2008 in terms of magnitude.

And David, I'd just add the normalization point that's come out. I think it's going to be a little bit of a different type of slowdown. We're probably or most likely in a recession in certain areas now, housing for sure. But I think you're going to see like some companies, their business models are just not going to work now with their cost of capital, having increased so much. But at the same token, you also have an economy that's been in very good shape. So you're going to have other companies that are going to continue to do well. So I definitely feel as though it's going to be a stock pickers type of environment. Think of a barbell where you're going to be able to find companies that are going to be able to handle this without too much difficulty, whereas there are going to be other companies given the increase in cost of capital, think of it as the normalization that their business model is going to have to change dramatically for them to continue going forward. So a little bit different than I think of your traditional, call it, business cycle recession.

Okay. Here's one on the Bank of Canada and it has to do with targets inflation targets. So do you think the Bank of Canada will stick with its 2% target? Or could they adjust to a slightly higher rate? The Fed has kind of done that to a certain extent, right? They don't have a hard target on 2% anymore, it's sort of near that 2%. So the question, I guess, would the Bank of Canada change there? And maybe, Tom, I'll start with you on that.

Yes. I kind of don't think it's likely in the near term. Certainly, there's a lot of things can happen over the next few years. But I think the bank -- and I think most central banks, one of why being reactionary and reacting to the current cycle because these changes should, in theory, persist through multiple cycles. So I do feel like there's going to be a silver look at this at some point because -- and I think Kevin has talked about this in the past, like that 2% is kind of an arbitrary decision that was made a few decades ago, just kind of thinking that seems about right, and a lot of central banks adopted it. Whether that still is appropriate for the current state of the global economy, certainly there's a lot of debate around that. And I think there is a potential for that to change down the road, but I just feel like Central Banks ought to wait until we're well passed this episode and take us over to look at it.

Okay. Steve, I'm going to ask you this question because you've guided the mix with -- as Director of Research, you're looking at a lot of different sectors and a lot of different stocks. One of -- so the question is one of the things we're hearing a lot about is the upside potential in small caps, especially on the growth side. What are your thoughts on what leads the way next year? So I guess a small cap, large-cap question a little bit, any thoughts on that?

Sure. I think Bill did part of the lead into this is through volatile environments, investors start looking for safety, they look for liquidity and they're trying to reduce risk as they reduce momentum. Smaller caps don't tend to offer that. So by and large, they've been ignored through much of the cycle, and that's resulted in valuation gaps and opportunity sets that are there. I think as the market becomes more risk tolerant or risk-seeking, then the opportunity will arise for small caps here. Certainly, anybody who's got a strong valuation by us will be naturally screening into that group and looking for the opportunity sets there because in some cases, you've got a couple of turns of valuation difference that you're trading off for the liquidity. I should probably pass that to Bill because that's there's...

Bill, did you have anything you wanted to add on that, too?

No. Steve, I would agree 100%. The only thing I'd add there is that small cap tends to need lots of capital to grow. And with the cost of capital much higher, you could see small caps continuing to struggle for a while here. But I think you hit all the big points for sure.

Okay. David, as Bill alluded to, we've got a duration change taking place in the market. We talked about it on fixed income a lot. But really, we're seeing it into the equity markets and those businesses, firms and opportunities that can be self-funding and more importantly, can return capital consistently to shareholders are probably in for a re-rating that's not fully taken place yet.

And because of that, when we come out of this, there could be a leadership change a little bit, right in the new bull market, we could be seeing new leaders -- new sectors leading the charge the next time around as opposed to what we saw is over the last sort of decade, right?

Yes. I think the good rule of thumb is whatever led you in the past is not going to lead you through the next cycle.

There you go.

Okay. Here's a good question, and it has to do with -- there's a lot of high-profile investors out there who have gone really, really bearish and you're selling off and they're waiting for the you know what to hit the proverbial fan. So the question is, why do you think 1929 type crash won't likely happen this time around?

Yes. I mean, maybe I'll take that, which is -- I mean, I know that's the Michael Burry, who is -- he runs a short time got -- he made great hay in '08 short in the housing market in the U.S., right, has been of that view. I think we've already wrung out a fair massive amount of speculation in the market already, whether it be the SPAC index, which is down 50% from its high, whether it is in crypto, which is -- and we've seen with the recent news around that. And then we can go through them, right? But there's been a real amount of access washed out of this market already. I'd say second, back to my point earlier, the economies are in pretty solid shape underneath this in terms of employment levels, et cetera. And we don't see a systemic risk issue out there at this level. So I do think you're going to see a slowdown, I think, because of the pace of what we just went through. There will be an effect of this. It will show up in the consumer. But as these higher prices start to roll over and rates start to price in a slowdown and come down, some of those pressures start to abate as well. So I think the 1929 scenario, if we hadn't taken some of the speculation out, yes, you would be worried. But frankly, we're getting back to normal, which is an adjustment. And if you're telling -- if we look at history and say a 6 handle on mortgage is high, that would be wrong or a 10-year bond that had a 4 handle on it, would be high that too would be wrong. And I would also lastly argue that now if you did run into a problem, and I agree with Tom, but probably not going to react right away, but you have the ability to cut rates again, which prior to this -- prior to COVID, we were at near 0 almost 15 years or whatever. And if we had run into a recession, we had no ability. So I don't see 29 as a scenario here because of some of the excesses that we've talked about being taken out.

Okay. I think the debate is as simple as one. There's a camp that says we're in a new bull market already, and there's a camp that says we're still in a bear market, right? And bear markets are 2 things. It's time and price. We've had a lot of price degradation. But have you really washed out everybody who wants to get out and that's the time function. So it could be a choppy first part of the year.

Okay. We've probably got time for a couple more, at least, maybe 3. A question again about China's reopening and whether that could drive the inflation back up globally, that reopening? Is there any concern there that all the work we've done to get it down is lost because of that reopening? Anybody?

Maybe I'll start, but I think it depends on what part of inflation. As they reopen, certainly, energy is going to be in demand again. And as Steve has educated us all over the years, this is a supply problem, mainly, meaning there's not a lot of new supply coming on. So that could be a place where you see it. The housing market is not going to recover to the same place. So some of the pressures that we've seen with raw materials around housing may not be there. But you'll see probably a pickup in commodities as they are a big consumer of things. Do I think we're going back to levels of things that we saw in COVID when the world was awash with cash, probably not. But it is a risk that as they reopen, but you will run into higher prices, but I don't think that we're looking at scenarios that we saw from 2-plus years ago.

As a following up -- yes. Following up on Kevin's comments earlier about the China restart, it's not going to be a toggle switch. It's not going to be a flip the switch and we're back to normal. China is going to have to work its way through a long burn of starting through COVID. And the classic case today is having seen a release of the lockdowns and you have the pictures that I'm seeing from downtown Beijing and Chengdu, nobody got the metal, right? They're either staying at home, so they don't get sick or they're staying at home because they're sick.

And at the end of the day, once they get through that burn through, the supply side should stabilize, right? So the bottlenecks that we've looked with for the past few years should diminish and disappear. So I think from that perspective, there's probably a bit of a soft between the supply side becoming more stable, contributing to lower inflation. You are going to have that demand resurface and pick up again, travel is going to be a part of that as well. So I think there'll be some pros and cons to that from the inflation side. But probably, by and large, neutral from the inflation picture, but probably good for general global growth dynamics.

Okay. One more, at least, maybe 2, depending on what the answer is to this one. So this is about the forgotten tool of monetary policy, quantitative tightening, QT. No one seems to talk about it, but the question is here, what is the impact of it, while everything else is going well, rates are rising?

Yes. I think I'll start maybe, Tom, we've spent a lot of time on QT for those in the audience. Again, it's literally unwind the bonds that we bought in queuing. All QE was basically David owned a bond. I was a government and said, I'm going to buy that from David, and he got my cash and he went out and bought stock house, other things. And when we do the reverse when basically, we're not buying David's bond, right? We're selling him bond, where he has got to sell something else. He's taking liquidity out of the market to buy that. And all central banks have to do this U.S. is unwinding at a pretty good clip as is Canada. This becomes a story about liquidity in the markets, if there are no marginal buyers. And I'll give you an example. The banks are classically large buyers of treasuries in the U.S. or even in Canada sovereign bonds. As depositors who sit on their balance sheet, have other places to put money now, they can go to a money market fund and get a real yield. And they actually, for the first time in 15 years, aren't probably leaving their money in checking accounts. And so at the same time, banks want to lend money to their customers. Their depositors are going for higher yield. They're going to be -- they're not going to be the buyer of those bonds that are going to be put up for sale. So liquidity is going to become the issue. It's not going to be solvency like '08, but you're going to see liquidity, which is going to basically force the different central banks at different points to pull back on it. And you're probably somewhere in the next -- in the case of the U.S., my guess is in the next 6 months. It will probably be a discussion point today in the Fed's conference call for sure. So yes, David, it's something we don't talk a lot about, but we should be more about liquidity than anything else.

Okay. If nobody has anything on that one, I will get to one last question. And it's an oil question, and it's related to carbon -- our carbon footprint. So with demand for energy increasing for the foreseeable future, how likely is the dependency on oil and therefore, our carbon footprint likely to decrease anytime soon? So a broad question, philosophical question about energy and our carbon footprint. Steve, maybe I'll start with you.

Sure, I'll dive in. I mean 2022 has been a great example of the interlinks between all of the different energy sources. We can't talk about oil and isolation. We can't talk about diesel. Let's use European energy or even more specifically the U.K. at the moment, right, which is suffering through extraordinary energy prices. They fired up the coal plants. They're importing LNG, they're burning oil. They're burning everything except the dining room furniture just to stay warm. And as we evolve from this and part of this is due to the issues coming out of Russia, part of it is due to overall demand growth, we're not going to solve it quickly. And even as we introduce increased renewables into the blend, they are really only making up for the growth in energy demand globally, which makes an incredible challenge to trying to reduce the use of fossil fuels rapidly and in a meaningful sense. It will happen, but it's not going to happen to the pace that people might like or that COP24 might prefer. But unless we get a meaningful change in the way consumers utilize energy and have real demand contraction, it's going to be very, very challenging to lower our footprint. And that's just reality.

Kevin, did you want to maybe...

Yes. I think we've talked about it. We are one of the large sustainable growth fund here. And it's always for us been about this idea of transition and transition is going to be a long-term thing, not an overnight thing. And you've seen economies as Steve referenced in Germany, for instance, where after the Fukushima nuclear disaster they shut down all their nuclear plants, right? And they became dependent upon Russia. It's natural gas, right? That wasn't probably the right transition. So I think it's a transition story over time that both of these exist into time until the technology and new innovation takes hold to actually get -- that is the solution to this is going to be a technological one. And you've seen some of the scientific advancements announced yesterday about nuclear fusion. All of those will play out over time, but have a technology driver to it. But it is about transition. It's not overnight.

Okay. That brings us pretty close to time. Kevin, maybe I'll just -- I'll give you the floor to just give us some final thoughts as we head into the last couple of weeks 2022 and get ready for 2023.

Yes. Clearly, we're not going to see the pace of rate hikes that we just went through. Now it's this adjustment factor in fine-tuning and grinding to where we stopped. I think the market has to get itself used to the fact that soft doesn't mean cut immediately to where Tom was earlier. And all of that will create volatility probably in the first half of the year, for sure. But you have to anticipate the Bank of Canada probably stops early winter, U.S. probably late spring, and it's a question mark on Europe, given the dynamic there in the recession they're already in. But that will end with some choppiness. Earnings revisions are going to play a part in this as you get into January and look at fourth quarter earnings. We've had a really strong dollar. Many of the U.S. companies are going to be hurt by that. If you look at -- if you're sitting in Japan, earnings revision has been pretty good because of the weak yen, especially if you're exporting into a world that's still growing. So I think the second part of this, getting back to normal is what has this done to earnings as we've had this higher levels of rates. And then I said that the back half of the year probably sets up okay as you get through even if we're in a recession and its mild, we know one thing about history, the equity markets will actually bottom into that recession and move out in front of it, while you're in it and price forward. So if we think about that, that means probably a pretty decent. And again, when I say decent, it's not a 20% type world, but you can probably see a positive single-digit kind of world toward the end of the year. And the normalization in fixed income, where I think today you're getting enough income to Tom's point, that the price changes here actually in fact, you get into a slowdown are going to benefit you on top of the coupon. But a back half story, Dave, with a lot of volatility in the front.

Excellent. I think people would take a single-digit return when it's all said and done by the end of next year. Okay. Thanks again, everybody, for your comments today, fascinating stuff. Always a pleasure, and that brings our discussion to a close. So thanks also to everybody who's tuned in today on behalf of Kevin and AGF's entire investment management team, we appreciate your time and support and look forward to sharing our insights with you again next year. And since this is our last webcast in 2022, I also want to acknowledge the AGF-ers who work tirelessly in the background to make these webcasts happen every month. In particular, thanks go out to Courtney, Sharon, Marisa, Jason and Lea, without you, none of this is possible. Before you go, please make sure to click the add session button in your attendee hub to register for our upcoming market update events, including our next installment taking place on Jan '18, 2023, when we'll dive even further into our 2023 outlook and discuss key investment themes to watch for in the new year. To complete your CE credits today, please complete the survey available to the right of your screen or at the top of the home page in your attendee hub. And please note, you may only submit answers for your survey once. However, you may have the opportunity to go back and edit responses, if needed. Be safe, be strong, and have a great holiday season, everybody.