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Narrator: Welcome to TDAM Talks, the podcast that brings you expert insights from TD Asset Management to help you navigate the ever-changing investment landscape. As we turn the page to 2025, this episode promises to be one of the most insightful and impactful yet. Ingrid Macintosh is sitting down with TD Asset Management's chief investment officer, David Sykes, to explore the opportunities and challenges that lie ahead in the markets this year.
They'll take an asset class by asset class look at investment markets, and review everything from inflation trends to global growth and market volatility. This episode is your guide to understanding the forces shaping 2025 and how you can position yourself to thrive.
Ingrid: Hello, and welcome to TDAM Talks. On the podcast today, we have one of our favorite events, our biggest podcast of the year, a look at the year ahead for 2025. And this is the podcast where we hold Dave accountable to give us a view and a prediction on the year ahead, and we talk about some of the things that are going to drive the market performance. David, welcome.
David: Thanks, Ingrid. Great to see you.
Ingrid: So before we start looking through the windshield, we're going to look through the rear-view mirror. And as I said, we ask you to make predictions. And of course, by doing that and recording them, we have them. Last year, at the start of the year, you said you were looking forward to positive markets in equity and fixed income, in that 4% to 6% range. How did we do?
David: Well, if I was going to be self-critical, I would say I was correct on the positive, but I was definitely wrong on the magnitude. And so just to frame that, looking at North American markets, up somewhere between 25% and 30% on equities. And Canadian fixed income was up about 5 and 1/2%, and US fixed income up about 3 and 1/2%. So directionally correct, but magnitude, I was way off.
Ingrid: So with all of that behind us, how are you feeling? That much head of steam we came into the end of the year with, how are you feeling about the year ahead?
David: Yeah, so a lot to talk about. And I know we will, but to summarize it, I think cautiously optimistic. Earnings growth looks pretty good for North America. I think equities continue to see positive returns. Fixed income has probably had its run. And now you probably get returns in line with yields. And on the alternative side, feeling a little bit more optimistic about Canadian real estate, and still continue to infrastructure and mortgages.
Ingrid: So that's a good set of feelings that can hold you a bit more accountable, having just released the latest wealth-asset allocation view. Maybe let's take it asset class by asset class. We'll start where everyone starts, equities. And maybe we'll start right here at home, in Canada. What's your outlook for the year ahead?
David: Yeah, so overall, within equities, we would be positioned modestly overweight as we head into the new year. And I would say on the Canadian side-- it was a very, very strong year in Canada, 20% plus returns if you include the dividend. And I would say going forward, it looks like the worst of loan losses are behind the Canadian banks. Also, looks like Canadian energy companies have significant cash flow. And I would say the optimism for Canada is pretty good as we go into next year.
Also in Canada's favor, relatively affordable valuations, if I can phrase it that way, trading at about 16 times forward, dividend yields around 3%, at a broad-based market level. So modestly overweight, the Canadian equity market, as we head into the new year.
Ingrid: Well, let's travel south of the border. And we'll stick to the fundamentals for a moment because I think we'll have a separate conversation in a moment about the political landscape there. You just said 25% to 30% in 2024, but on the back of a small handful of companies. What does the US market look like for 2025?
David: Yeah, so in the US, earnings growth should be quite strong in '25, up something like 13% to 15%. The big story obviously, in the US, is the Mag Seven. They led the market until about July. And around that point, we saw an inflation number, a CPI number, that came in a little bit weaker than expected. And you started to see a rotation out of the Mag Seven and into everything else.
And so if we continue to see declines of inflation, continue to see declining rates and strong earnings, I think you're going to have another positive year in the United States. There's clearly going to be ups and downs. But I think a lot of people are just fixated on the fact that the market is not historically cheap, which is factually correct. That's right.
But if you look at the S&P, we're probably trading at 22 times forward. If you look at the median stock in the S&P, it's probably 19 times. Again, not super cheap. Not saying this is the buying opportunity of a lifetime, but feeling good about the combination of earnings growth with a declining central bank. And so that should produce positive returns next year.
Ingrid: So tailwind, tailwind. Love it. Global. Let's go outside our borders.
David: Yeah, so I would just say on global, we divide it up, roughly speaking, into Europe and then the rest of the world. On Europe, clearly, there's some challenges with industrial growth and GDP growth. There's clearly some issues that they may face around US public policy and tariffs. So a little bit concerned about EPS growth in Europe. And so we would be modestly underweight.
And then in China EM, clearly some issues around domestic housing sector in China. Clearly, China-US relations, if I can say it that way, will be challenged in the new year, and so again, a modest underweight position there. So overall, modestly overweight equities. But again, not saying that equities are the buy of the century. But we'd have a modest overweight position because for sure, at some point, you're going to see some choppiness in the equity markets.
Ingrid: OK, let's turn to the other side of the capital structure, and look at fixed income. You said a moment ago that you thought fixed income had had its run. So let's talk about that. Let's talk about the yield on fixed income portfolios currently, and what you see.
David: Yeah, so on the fixed-income side overall, we would be modestly underweight. Again, we do think fixed income holds a great place in every portfolio because of its defensive characteristics and its diversification benefits. But I think it's fair to say, at least in Canada, inflation is now at the 2% range. Yields on a five-year are probably 3% ish. That's probably an expectation for a return as we go into next year.
If you look at the United States, depending on what happens with public policy, rates may have a little bit further to go, but maybe not a ton. And so we would expect yields in the US could get you 3%, 4%. And then as we work our way up the capital structure, if you look at investment grade, spreads are very, very tight. Again, probably not the buying opportunity of a lifetime.
But US corporates are very healthy. And I think it's fair to say you could expect 5% to 6% returns out of IG. And then if you look into high yield, again, spreads are tight. But if you look at an all-in return, it's sinking, high single digits for high yield as we head into next year.
Ingrid: Also, within our toolkit has an alternatives business and specifically, real estate infrastructure, mortgages, private debt. Can we talk a little bit about that sector of the investing landscape?
David: So alternatives, as you mentioned, has different sub classes. But if I take real estate first, I think looking forward, fair to say that we're very positively predisposed toward multi-unit residential and industrial and retail, for that matter. The one area that has been weak has been office. You are starting to see a concerted effort by many companies and governments to have a return-to-office policy. And so I think we're feeling better about that.
But as we look into next year, you are starting to see some positive net operating income growth. And you think you could probably expect mid-single digit returns for real estate. If I turn to our commercial mortgages, this is an area that is just incredibly steady and stable because of the short duration and income nature of the product. And it just consistently produces 4%, 5%, 6% returns. And I would suspect 2025 will be nothing different, so probably something in that 4% range.
And then if I look at our infrastructure product, the world has such a huge demand for energy transition, for wind, for solar, for battery storage, for traditional infrastructure, ports and roads. We saw high single-digit returns this year. I suspect we'd see more of the same for next year.
And then finally, rounding that out would be our private debt offering. Really like private debt for the fact that the yields and the spreads that you can get are much more favorable than in the public markets. It's hard to say exactly what returns will be like there, but we would probably suspect mid single digits to high single digits.
Ingrid: And really important for our listeners to understand, we're not saying equities or alternatives, or fixed income or alternatives. It's and, and, and. And I think alternatives, to your point, really add that diversification and that buffer, if you will, in terms of return streams over time.
David: I think what people will find, and I can prove empirically, is that over time, you don't want to make all-or-nothing choices. The conversation and the debate in portfolio construction is, how much Canadian real estate, how much US equity, how much Canadian fixed income. And we're talking about shading, moving 3, 4, 5 percentage points either way. It's not an all-or-nothing decision. And I think what people have to remember is that you must stay invested to reap the benefits of diversification and compounding over time.
Ingrid: I'm going to touch on one last asset class because again, here at TD Asset Management, we added a commodities capability a couple of years ago. We've recently had Hussein and Humza on our podcast with the outlook, there. Do you want to touch a little bit on the outlook for commodities for 2025?
David: Yeah, so commodities for me-- the best part about commodities is not necessarily the return, but it's the very low to negative correlation with other asset classes. And so when those other asset classes aren't working, commodities does work. And I think it's fair to say that as we look out into '25, there has not been a lot of new mining activity. CapEx in the space has been low.
And if we do get central banks around the world continuing to reduce rates, and you start to see some stimulus coming out of places like China, coming out of Europe, as their economic struggles continue, it's probably a very, very positive environment for commodities. And so again, I don't want to predict a commodity return, but I do think it's important to again, as a diversifier, when nothing else is working, nice to have commodities as a stabilizer in the portfolio.
Ingrid: So I think the story that's really dominated the market for the last three years really, has been the inflation, the rate environment. Where are rates headed? We all know directionally, where they're going. What's your outlook on how far, how fast? And what does that mean for the markets, generally?
David: Yeah, so a lot of things have changed with the presidential election in the United States.
Ingrid: Oh, I'm going to get to him.
David: So I think obviously, if we're thinking about things like tariffs, tax cuts, potential changes to immigration, deregulation, some of those are incredibly stimulative. Some of those are inflationary. I think with the best information we would have today, it does look like inflation continues a slow grind lower. You continue to see energy prices fall.
WTI in North America is now somewhere between $68 and $70. You're slowly, slowly seeing shelter costs are finally starting to roll over. You're also seeing goods prices come down. Services remains a little bit elevated. But overall, that combination probably puts inflation in North America-- so that's Canada and United States-- somewhere in the 2% to 2.5% range. And I think then, the debate will be, will the Fed be willing to accept a 2 and 1/2% inflation rate? Or are they really, really committed at getting it to target, at 2%?
Ingrid: You raised the subject of the election. So I was saying, you want to push on that a little bit further. Depending on when listeners are listening to this, but obviously, in recent days, a lot of language around tariffs, particularly for Canada and China. Can we go a little bit deeper on what that does or maybe doesn't mean? What are some of the sectors? How do we think about that realistically, from an investment lens?
David: So it's tough to analyze something that the president-elect sends out social media broadcasts on because what you actually need is real policy with detail, to actually analyze.
Ingrid: Executed.
David: But I do think it's fair to say-- and I think most would agree-- that the president-elect views tariffs as a threat. And I think his clear agenda is, he wants to restore the industrial greatness of the United States. But he also doesn't want to necessarily hurt the consumer in the United States either. And so I suspect there'll be a more balanced approach than what the headlines would dictate. But it is fair to say that the president-elect is very unpredictable.
Look, we send something like $500 to $600 billion worth of goods to the United States every year. And if there's a 25% tariff on that, that is not a good outcome for Canada. That is going to slow our economic growth considerably. But on the flip side, it probably also doesn't help American prices either. And so I do think this is more of a threat to try and again, focus on American industrial policy, make business great again in the United States.
But at some point, you can do significant harm to the consumer if tariffs are in the range of 25% against Canada, 25% against Mexico, or 60% against China. I do think there is a bit of a line to walk there, to get that balance right.
Ingrid: Can I scratch on that a little bit further? We think about the trade balance with Canada and the US. Is there specific sectors most meaningfully impacted in that scenario? Because I don't think it's equally distributed across.
David: No, so the vast, vast majority of that is energy. Energy products heading to the US is hugely important. And then it's autos and agriculture. And so those prices at the pumps, prices at the showroom, that's something that consumers are going to feel, and probably feel immediately. And so it very much is tilted toward energy, agriculture, and automotive.
And I think on all of those, again, the president-elect wants to put his nation in the best negotiating position. But I think you do have to be careful because if you get a situation of a 25% tariff, let's just say, for argument's sake, Canada retaliates, and then the US retaliates, before long, consumer prices could be right back to where they were. And sure enough, President Trump is smart enough to realize a lot of his votes were based on the fact that people were unhappy with high prices. And so he's going to have to pay attention to that, as well.
Ingrid: That's natural resistance. What about Trump on deregulation? What kind of impact will we see from that? What sectors?
David: Yeah, so again, the interesting thing about these four main areas, whether it's tariffs, taxes, dereg, or immigration, it's one thing to say something, but it's another thing to-- what are you actually going to do? And so let's find out which agencies will receive new leadership. How quickly can those agencies institute change? How many regulations will be removed for every one added? All these things actually have to go through Congress-- not necessarily. Trump does have a lot of executive power. But there's going to be a lot of back and forth, here.
And so I do think deregulation overall is going to be a positive. A lot of business-confidence sentiment surveys in the US say business is feeling good. Someone's talking their language, finally. You're going to see real movement on this. But again, how far? How fast? What's the priority? That will be difficult to judge.
But I do think it's fair to say, in a dereg world, I think M&A activity will pick up considerably. And one of our strongest views is that capital markets and a lot of large institutional brokers in the United States will benefit greatly from really increased M&A activity, which has been missing for many, many years as the US executive branch, at least, has been very, very punitive towards corporate America.
Ingrid: Look at some of the things that we haven't talked about. Before we have these podcasts, we talk to our listeners. We talk to advisors. People write to us about things they want to hear about. Can we touch on some of the other opportunities or themes maybe, we haven't considered yet? So first of all, AI.
David: So in my mind, a lot of people in the market are worried that AI is a big hype, and it's not real. From my reading and my talking and my studying and my understanding, AI is real. And it's an amazing, amazing innovation and technology.
Is it possible that we've seen some real froth in valuation in certain semiconductors or certain industries related to power that are a byproduct of AI? Sure. But I think at the end of the day, the one thing that I'm convinced about is that 3 to 5 to 10 years from now, AI will make productivity higher and will make corporations more profitable.
And it doesn't take a lot. If you can improve your net margins by 10, 15, 20 basis points, that's a pretty considerable improvement. And I think about a lot of the redundant, repetitive tasks that factories around the world undergo, that financial institutions undergo, there's a lot of processes that can now be turned over to AI. And I think that's going to make a lot of productive resources able to focus on something else even more productive.
And so I do think AI is real. There's been some hype, for sure. But I think this is something that is a game changer. But it's not going to be done overnight. As I say, I think in the next three to five years, you'll start to see the impact.
Ingrid: I know that we do not partake. But what's your outlook on crypto? We've just recently seen it go through a hundred thousand.
David: Crypto, for me, is a bit of a fascinating one. So if I'm going to analyze a company or assets, generally speaking, those companies or assets should have revenues and expenses and they should have net income and they should have cash flow and free cash flow.
Ingrid: I sense a theme coming, here.
David: But of course, crypto does not. And so in my mind, it's interesting that president-elect Trump is pro crypto, because depending on the extent of tax cuts, depending on the extent of deregulation, there could be a real impact to the deficit in the United States and debt to GDP.
Clearly, that's an environment. If we're assuming that debt to GDP skyrockets, that's very positive for crypto. Probably not great in the confidence for the US dollar. So in my mind, crypto is something we'll watch from the sidelines. It's not something, as fundamental investors, that we believe in. And it's not something that frankly, our clients have asked us for.
Ingrid: Last year, we saw gold up over 30%. And we're either side of $2,700 as we're recording this. What's your outlook on gold?
David: So gold tends to do well, in my mind, in two scenarios. One, if there's a large geopolitical uncertainty-- and goodness knows, there are several. So if we had a saber rattling between China and the United States, perhaps gold does well. But the other one is real rates. And the real competition for gold is the fact that if you can get a real rate of return elsewhere, then maybe gold isn't as attractive.
Real rates have come down a fair bit. So my outlook for gold would be in and around the range, plus or minus 5%. But I think really, gold, in my mind, is that safe haven in times of discontent. And who knows? With his own social-media channel, we may get a lot of discontent. We'll see. But not a rip-roaring outlook for gold, but obviously, you want to have in your back pocket in case of some geopolitical tension.
Ingrid: I think you've touched on this a little bit when we talked about the increasing breadth in the marketplace. But what's your outlook for the Mag Seven, going into next year?
David: Yeah, so this year, if you look at the market up-- let's call the NASDAQ up 30%-- about 2/3 of that has been multiple expansion, and one third of that has been earnings. And so I would not expect to see that type of multiple expansion next year for the Mag Seven.
I think the Mag Seven-- amazing companies, capital light, not a lot of debt, generating unbelievable cash flow, and returning a lot of that cash flow, in some cases, through dividends, to shareholders. But I don't feel like you're going to get the valuation rerate yet again.
I would expect that the Mag Seven would underperform the rest of the market, that other 493 that frankly, don't have the valuations that the Mag Seven has. And for once-- in the last two, three years, it's all been the Mag Seven. But now, if we get lower taxes, if we get deregulation, that's going to benefit the smaller companies, and It's probably going to be their day in the sun.
And so if we could generate a little bit of earnings growth out of those companies and a little bit of multiple expansion, I do think an equal-weighted basket or a basket less tilted to the Mag Seven should outperform in '25.
Ingrid: So just about everything I've thrown at you today has come back with something that's biased to the upside. There's a lot of optimism, even on the heels of a really terrific 2024. What's the black swan? Or what's the thing that you're worried about in 2025, good or bad? What might we be missing?
David: So I know you've asked the one thing, but there's probably a couple. So the one thing that is possible is that the new president really does believe that tariffs is a beautiful word, and that a country or a region challenges him, and then they do a retaliatory tariff. And of course, then there's a retaliatory tariff on the retaliatory tariff.
And we get into this inflationary spiral, which will clearly not be good for growth, would not be good for rates, wouldn't be good for corporate profitability and profit growth. So that's always a concern. I don't know if that's realistic. It's a possibility. I don't know how high the probability is.
The other one that worry a lot about is just the United States' place in the world. There's a lot of hot spots. There's a lot of things that have popped up that we just didn't expect to hear about. And so those are concerns.
But on the flip side-- and we tend to always look at black swans as negatives-- on the flip side, what if this pro-business sentiment in the United States spreads, and people start to think, maybe we should have a priority around productivity and investment, and we should have a priority about job creation, and AI does continue to expand margins, and we can put capital and human resources into more productive areas?
Maybe, just maybe, earnings growth is higher than 15% and multiples stay where they are and they stay flat and inflation does decline and we're all shocked and surprised that we're up another 20% on the equity markets next year. Again, I don't know how high a probability you put on that. But I do think sometimes we tend to look out, and just think about, what are all the things that can go wrong? And not think about, what are the things that can go right?
Ingrid: So you mean, instead of the Mag Seven, we might have the S&P 7,000? Is that what you're saying?
David: That would be something that I think a lot of people would say is very, very far fetched. But I think you have to put it out there as a possibility. And at the end of the day, in my mind, what drives stock prices is the profitability of corporations. Right now, corporate profitability is very high. But I would tell you also, a lot of companies are talking about the amount of money they're spending to get more productive, to drive more revenue, to drive more expense reduction and more profit.
And if we saw an upside there, all it would take is China being a little bit more pro-cyclical in their own economy, a few changes in Europe, and if you had a synchronized global upswing in growth, that could really, really help profit growth over the year.
Ingrid: OK, my last question, I promise. Having heard all of this, you're a listener. And you're going to go out and try and make the perfect decision. What would you say to that investor who's listening to you and then trying to time the market somehow?
David: So I would say that if you are into speculation, feel free to go do that. But if you're into investing, which is looking to grow your money consistently year over year over year for many, many years, I really think you have to be careful about making these all-or-nothing decisions. Predictions, for me, are fun. They're relatively simple to make. But they almost never work out.
And I think what does work out is this notion of diversifying across fixed income, equities, alternatives, a little bit of cash. It's about tilting and shading the portfolio with a fundamental view to how you think things will evolve. But it's not about, gee, let's sit in cash because cash rates are 4 and 1/2% or 5%, and I'll wait it out.
I mean, at the beginning of this year in the United States, everyone, myself included, thought that the Federal Reserve would cut seven times. And there was a huge debate about whether we'd be in a recession or a significant slowdown. That didn't pan out. Equities are up 30% to 35% to 40%. And people have missed out on that move. And I'm not saying you have to be 100% into that move, but you should have a diversified portfolio so that a portion of your portfolio can participate in that move. And it's just not an all-or-nothing. Please, please, please, have a balanced view on all of these things.
Ingrid: Yeah, and contrary to popular belief, you don't have a crystal ball, do you? You just have years and years and years and years and years of training and really good judgment.
David: Well, and right now, people are saying, well, equities is the whole show and diversification doesn't matter. Frankly, diversification wasn't your friend this year. Fixed income didn't do incredibly well. And real estate didn't do incredibly well. But there will come a time when the cycle will turn, and all of a sudden, you'll see more modest equity returns, and you'll really be glad you had those stabilizers. Again, I sound so repetitive. And I apologize. But it's not the all-or-nothing decision you want to make. It's the steady, consistent.
Ingrid: I think that's a great note to end on. David, thank you. Plans for the holidays as we are recording this just before at the end of the year?
David: Hopefully, some significant dog walking, hopefully, time with my kids, and probably a fair bit of movie watching, as well.
Ingrid: Oh, there you go. And to our listeners, hope you had a wonderful holiday season. I look forward to supporting you in the new year. And as always, you can follow us on tdassetmanagement.com or on Apple, Amazon, or Spotify. Thanks, and have a great day.
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