Episode 86: Back to school—studying three investment themes

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Macan Nia:

Commentary is for general information purposes only. Clients should seek professional advice for their particular situation.

Nervous Nelly is an easy one. I was thinking of trying to think of a name for... Optimistic Owen?

Kevin Headland:

Stick in your lane man. Let's not try to be creative with... It's not your strong suit.

Macan Nia:

Usually at this time of the year, parents are thrilled with the idea of their kids going back to school while the kids don't share the same exuberance. It's time to iron out those first day of school clothes, sharpen those pencils, and to dust off the old three ring binder. It's time to get back to school and hit those books. And as always, there's a lot to study.

2023 has been an interesting year for investors. Equity investors are getting great marks. While all that studying hasn't yet materialized for bond investors. As we prep for the rest of the year, what should we expect? In this episode, we highlight our three investment themes for the remainder of the year, which are: One, prepare for near term equity volatility amidst uncertainty. Two, buy bonds, but buy the right bond. And lastly, position your portfolio for tomorrow, not today.

Malcolm Forbes said it the best when it comes to education. The purpose of education is to replace an empty mind with an open one. In this episode, we present our three key themes for the rest of the year with the hopes of keeping our minds sharp and flexible. Listen on, this is Investments Unplugged.

Welcome to Investments Unplugged. I'm your host Macan Nia, as always joined here by my partner in crime, my work spouse, Kevin Headland.

Kevin Headland:

Better half. I like that one.

Macan Nia:

Better half is maybe somewhat accurate. I guess it depends on who you ask, but I bet you compliance is going to take out the work spouse thing. But let's leave it in there anyways. But welcome back. How's your summer been Kev?

Kevin Headland:

Not hot enough. It seems like it's flown by despite not doing much. It's been an okay summer I would say. That's my summed up version. How about you?

Macan Nia:

Wow, Debbie Downer or over there. It's been an okay summer? My summer has been pretty good, Kev, short as always. But I was reading something, is as you age, your summers in your mind become shorter and shorter because when you're, let's say our kids' ages, five to seven, two months out of five years seems a much longer than two months out of what I don't even want to say our years are, 45... How old are you Kev?

Kevin Headland:

I just turned 47.

Macan Nia:

Woo, getting to the fifties. But anyways, we've already digressed. We haven't even started.

So the goal I guess, this podcast we're going to focus on, we're going to take a back to school theme. At the time of this release September 11th, a lot of our kids are already probably a week into school, so we thought that we would take that kind of theme in terms of our views for the rest of the year.

Kevin Headland:

Sorry mac. And we used this theme before the last couple of years I would say. I think it's a great way to characterize the view going into the rest of the year, is this back to school theme. And I don't know about you, but I'm ready for my kids to go back to school. I think it's a 10 out 10 to get them back to school in terms of my rating, 1 out of 10, looking forward to them getting back and giving me a bit of peace and quiet while I'm working.

Macan Nia:

I truly appreciate, and for those of you that are our age will recognize that commercial. Remember the Staples commercial where, "It's the most wonderful time." And that dad's just on cloud nine because it's that time of year.

But we thought that we would highlight, and I think we're packaging a bunch of thought leadership around this, is our three main themes for the remainder of 2023. And what we've done is we're going to record this podcast, we're going to release an investment note. And you'll see multiple LinkedIn posts from us focusing on the three themes for the rest of the year.

So before we get started, let's actually say what the three themes are. So I'm going to go over them quickly, Kev. So theme number one, investment theme number one, and these are in no particular order, but investment theme number one, prepare for near term equity volatility amidst uncertainty. Investment theme number two, buy bonds, but buy the right bonds. And last but not least is our third investment theme for the remainder of 2023, and that is positioning your portfolios for tomorrow, not today.

Now before we get started, let's set the global backdrop as we're in September because I find that there's been some disconnects along the way.

Kevin Headland:

Yeah, I think it's also important to talk about these themes, are these are the investment themes. It's not the macro landscape. We're going to talk about that. But these are really about what do you do in terms of an investment philosophy or theme given our views from the macro perspective, equity, [inaudible], everything. So it's really about a more investment themes than overall, not including macro. That's additional to the macro view.

Macan Nia:

Yeah. And I think we've been talking about it a lot is at this time of the recording... So we're recording this at the end of August to get this out in a couple of weeks. And it feels like the markets are priced for perfection. And what I mean by that, you look globally from an equity perspective depending on the equity, so TSX is mid single digits, US equities, mid-teens. You've seen bonds sell off, especially over the last month. You've seen bonds sell off.

And I think this comes through. The markets are priced for perfection. What the narrative has happened over the last, I would say six to eight weeks is two. The whole narrative between no landing, soft landing, and hard landing. We have gone from yes, we're going to get a recession, a mild one, to one that markets now are pricing in no recession. And the second one I think that has driven the rally is also expectations by the market in terms of what central banks will be doing next year using the US as an example. As of today, they're pricing in six cuts for next year. Kev's waving his head at me, no, but I'm telling you Kev, look at the work.

Kevin Headland:

I'm looking at work right now. You're looking for the full year you mean, for a full year next year?

Macan Nia:

Yes.

Kevin Headland:

Okay, sorry. Yeah, I'm looking at a different mindset. It only has till July. So we'll get three rate cuts between now and July.

Macan Nia:

Yeah, you're looking at the spreads and I'm looking at the futures.

Kevin Headland:

I'm looking at the OIS, you're looking at the futures.

Macan Nia:

So generally they're going to be cutting, they're going to be cutting aggressively. And we feel that that in the short term provides some potential for uncertainty and weakness over the next couple of weeks, months.

Kevin Headland:

I think going back to that, I think the idea is our base case remains economic weakness, recession. A lot of other sell side shops, analysts have, even the Fed has taken off their recession call. And I think when you talk about markets priced for perfection, is this notion that anything that perhaps points to the not perfect scenario, so not aggressive rate cuts, avoiding recession, economic data improves, could be downside risk for the markets. And I think that's what we're saying here is where, and you saw it not too long ago, two weeks ago, you saw a bit of the data come out a bit weaker than expected and the markets have sold off since then. I think today is the first day of a meaningful rally over the last two weeks. And I think that's the key is when everyone thinks everything's great, it doesn't take much to turn that momentum to the downside.

Macan Nia:

Yeah. And so you're pointing to that, the retail sales number that came in stronger than expected. Look at the news out of China in terms of the slowdown in the Chinese economy. Surprise, surprise, we have another Chinese real estate developer that is in trouble. That has added to sentiment. When markets are priced for perfection, it just takes something small for the market to wake up from its, let's say complacency.

And this is a tough one, Kev, in the sense of the recession, in terms of how quickly the narratives have changed in terms of we're having one, we're having a mild one. From our team's point of view, we haven't changed our view from a recession. Has it been delayed? Absolutely. But when we look at our typical signs, like leading signs of a recession. So I'm just going to quickly go through them, yield curves, senior loan officer surveys, ISM new orders, money growth, mortgage rates, new home sales, corporate spreads, initial jobless claims, they for the most part, the majority of them are flashing either yellow or red today. And yes, some of them may not be as applicable this time relative to other cycles, but when you take them from a holistic point of view, it's very hard for me to sit here and say the majority of these are flashing yellow and red, but we're not going to get a recession. I wouldn't feel comfortable at night sleeping if I do, we came out with a no recession call with all of these flashing yellow or red.

Kevin Headland:

I think it's important not to necessarily look at, or even try and time the recession, but we've said it multiple times in the past, and I think the framework that we look at is really important, is where do the balance of risks lie. And when you look at the data, how can you say we're getting better and the balance of risks are to the upside? I think a lot of this, as you said, a lot of this weakness has probably been delayed. And we're only perhaps seeing the first cracks in the labor market with initial jobless claims. Jolt surveys are starting to turn, job openings are starting to turn.

So again, the data speaks very loudly. And we've said in the past as well, the history doesn't repeat itself but it rhymes. It's hard to go against the data right now and celebrate or pop the champagne so to speak, we've avoided recession and everything's finding in the clear. Well the data says otherwise right now and we have to follow that data.

Macan Nia:

And what happens if we don't get six cuts next year, when the markets realize we may not? I know Jackson Hole is this Friday?

Kevin Headland:

Correct. Yeah.

Macan Nia:

And we'll get some more... I say we're going to get some more clarity but we're probably not going to get any more clarity. But what happens if we don't get six cuts? And our view has not changed where yes, we believe they're getting towards the end of this cycle in terms of tightening, but unlike previous cycles where they're back to cutting materially within seven months, we just don't see that because inflation is still above their trend. Yes, it's coming down, it's not going to be a linear fashion. We've seen that in some of the data points. And if they go anything less than six, that's going to, the market as its price for perfection is going to be vulnerable to that.

And we're entering a historically very volatile month for markets, September. When you look at the US, the S&P 500, it is the only month of the 12 that has a negative return. You are positive I think 40% of the time, which is by far the lowest ratio. And I think you're just more prone. Look back to last year though in terms of, I was thinking about how quickly things can change. September of last year we were in the midst of a nearly 15% selloff, but within October we had almost taken all of that back up. And we're not suggesting that's going to be the narrative this time around, but if there's any weakness, we are going to be the first to begin to add to equities at that point, when they are not priced for perfection. So something we'll be following closely.

Do you want to talk about equities first, the first theme?

Kevin Headland:

Yeah, of course. I think the first theme as you talked about, a bit of a backdrop, we talked a bit about the equities as well already, saying they're priced for perfection, and this idea of our theme of prepare for near-term equity volatility amidst uncertainty is again really this idea that markets have rallied year to date, topped out a couple of weeks ago at the highs, really on this sentiment of positivity, a bit of euphoria around AI. And the top [inaudible] cap names driving 80 to 90% of the SP 500 market moves. So it's been driven that way. and it's been a lot of momentum.

And when you have these momentum upside, again that back to this, any indication of uncertainty, any indication of maybe things aren't as good as we might think they are, creates this sense of doubt and momentum can quickly swing to the downside. And listen, we're not saying 10, 15, 20% drawdowns from here, but we would expect choppiness throughout the rest of this year, where it's much more about individual security selection, and earnings growth, and about the fundamentals. The market might not go up materially from here, but that doesn't mean there's not opportunities individually to take advantage of opportunity that exists currently. It's just that perhaps it's not the right time to take on undue risks shall we say?

Macan Nia:

Yeah, this would be a good time I think to maybe... So tech has rallied on AI but mostly I would say has rallied because of the rate cut expectations. Now maybe a good time to maybe take some of those profits off the table and rotate them into maybe higher quality businesses. When we look at the most recent earnings cycle, they've been terrible, just terrible. That's kind of what we expected. We've been talking about earnings are going to be challenged based on the metrics we follow, manufacturing's a good one.But even to your point about security selection, those companies that had not as bad earnings, still bad earnings but not as bad, the market has rewarded them.

So I think that theme continues moving forward. So in the short term Kevin, the view is we're prone potentially for some downside from these levels, but any downside we believe is an opportunity for investors who either have cash on the sidelines or who are underweight equities to rotate back into equities. And I know depending on the sell off, the amount that we will be doing that within our illustrated portfolio.

Now let's transition to theme number two, buy bonds but by the right bonds. Now this has been... I was talking with an advisor, I did a call with an advisor group today. And they're like, "We're waiting for the party," right? It's like you're in anticipation of this great party, it's going to be this great bond party, mid to high single digit returns, and we're still waiting. It's as if the door hasn't opened yet. We're still waiting in line and the bond party is potentially happening inside. And over the last month you've seen bond sell off significantly, really from the past couple months you've seen them sell off significantly.

Kevin Headland:

Really out of the treasury market, the 10 year yields being stubbornly high and moving higher. And I think a lot of that has to do with the positive economic data, the surprise upside for the economic data. So the bond market had been expecting weakness and it didn't get it, so it moved higher. It's actually surpassed its most recent peak, so it's actually broken out when you look at past economic cycles. So that's been a surprise too, but I think it is again delayed, just like the economic weakness is delayed, a recession is delayed, the party is still there. There's still opportunities within the party. And this is why we're saying by the right bonds.

One of the questions we get a lot of times is do I go short duration or long duration? And I think if anything year to date has proven that this environment is not right for that bifurcated decision or binary decision. It's not short or long, it's being tactical. And right now we think the sweet spot is investor grade bonds. You're getting a very attractive yield, upwards of five plus percent, even higher than some investor grade bonds individually in both Canada and the US, so extremely attractive yields. And the average price for the US investment grade bond index right now is sub $90, call it $89. The maturity tends to be par of a hundred dollars. That means you have upwards of 11 to 12% capital gain potential over the life of those bonds.

That's something we haven't seen in almost 15 years. That's why we're excited about this bond market. Unfortunately it doesn't happen as quickly often as equities, but that doesn't mean the opportunity has gone away. It's just as you said, delayed, I think. I hesitate to say it's a party. I don't want to get too excited about bonds, but on a relative basis it's much more exciting than it has been in quite some time

Macan Nia:

And you need both of them to join the party. The party is better if there's a recession for the bonds. It doesn't mean even if the recession doesn't unfold, it doesn't mean that your returns aren't going to be, let's just say low single digits, mid single digits. But the party really happens when and if that recession happens.

Now let's quickly talk about the reasons that yields have increased. You talked about the US growth picture, which is absolutely true. Look no further than real yields. Take out the impact of inflation. That is your true sign of, for me anyways, okay, yields are rising because of a better US growth picture. You're taking out the inflation dynamics of Covid. Now, other aspects that have driven yields higher, some of it has to do with liquidity from the summertime, no doubt the Fitch downgrade of US debt that we saw, we've seen yields increase on the back of that.

Something that I think goes unnoticed is that shock from the BOJ. So the Bank of Japan with their yield curve control, the change in that policy, where before they were overtly saying, "We're going to control the yield curve," surprisingly I think it was the end of July, they came out and said, "You know what? We're going to loosen that." And we get questions like, "What's the implications of it? And why are yields in the US potentially going up higher because of that?"

Because a couple reasons. Number one, I think this is one of the main ones, is Japanese investors have spent more than $3 trillion offshore in search of higher yields, $3 trillion. And people are not worried but mindful of the fact if some of that money comes back home in terms of higher yields they can get back in Japan, that's less money in the US going to the treasury market in a time where we're hearing a lot about these bond supply dynamics. The demand for US treasuries may be decreasing while the supply of them is increasing because of multiple policies by the Biden administration, they have to raise money, saying it nicely.

So those are some of the reasons that yields have increased. But I think you're right, Kev, I think the bigger driver of that is a better US growth picture.

Kevin Headland:

It's always a relative decision. When you think about global investors, they're looking for the better risk return opportunity. And if you think that perhaps there's other opportunities where the US treasury market from a sovereign bond perspective is not the only game in town, then investors are going to require a better yield or are less we to pay a higher price. And I think that's why you're seeing some movements up there.

But when you talked about things have to work in recession, this is the idea of when we talk about things. And we've talked about this since this time last year, this idea of the three phase approach to fixed income. And when is the right time to move from phase one, to phase two, to phase three? There's no perfect time but it will have a sense of transition. And that phase one is clip the coupon, take on your opportunity with invest grade bonds, clip the coupon as well as the capital gain opportunity. Phase two is embrace duration, and that means going to longer duration sovereign bonds. That's the opportunity, is when the recession or economic weakness starts to get priced in. That's when the yields start to fall and you benefit from being long duration. We're not there yet. We thought we were getting towards that. Again, that's just been extended. It's not to say it's over, but that's going to the next opportunity.

Then the third phase, once we get this recession or the capitulation in the markets, high yield spreads will blow out, will widen materially as default risk increases, and that means prices go down, and then you want to embrace that risk. Right now, high yield spreads are way too tight we believe. We think it's probably especially lower quality bonds have been a great trade, a great opportunity to risk on just like equity markets. But again, just like equity markets, we think it's probably not the right time to take on risk in high yield right now, in this opportunity where spreads are under 400 base points and way too tight.

Macan Nia:

Yeah, that's an interesting one too, is where's the balance of risk today in high yield? Spreads are extremely tight. The markets are pricing in a pretty decent economic environment. What do you need for those spreads to compress even more? You need a bonanza. You need GDP north of 3%, 4% to even tighten even more. And I'm a simple person, Kev, and for me it's just-

Kevin Headland:

We know.

Macan Nia:

... On the backdrop of higher rates, you're already seeing earnings being impacted by it. I look at going back to those leading economic indicators, or leading indicators of recessions, they call it the SLOOS. I'm going to get this wrong, but the Senior Loan Officer Opinion Survey. Oh, I got it.

Kevin Headland:

Good job, good job.

Macan Nia:

Thank you, thank you, thank you. It's loan officers at banks basically approving loans to medium-sized businesses, small business, so on and so forth. Historically, a very, very good leading indicator for recessions. It makes sense too, Kev. If I'm a senior loan officer and I'm not lending out as much, credit is the blood of an economy, or the oil of an economy or of the machine. And they're already pointing to negativity, then I feel more confident with that. So again, where's the risks lie? And if you're in high yield and you get a recession, or even a slight slowdown and spreads increase by a hundred basis points, which is nothing beyond the realm of probability, then you give up that 9% yield very quickly.

Kevin Headland:

Yeah, there's a lot of downside risk. And there's some nuances to the high market right now where some of the high yield issuers extended their maturity date when they were issuing debt at low rates over the last couple of years. Because that's what companies do. When rates are low they try and take the longest maturity possible on debt. And when rates are high, they take the shortest. So the maturity wall is still pushed out a little bit. Refinancing risk is still lower.

You also have a notion of the lowest quality issuers have also gone to private side, so it's not seeing some of the defaults you would've already. But we're already seeing defaults start to pick up, not materially, but they're starting to already look higher relative to they were before. Actually Visual Capitalists just put out a great chart showing bankruptcies over the past calendar years. And filings as of July... And right now going back to 2010, so filings of July bankruptcy, so not actually defaults on high yield debt, just bankruptcies with companies. We've had 402 filings and that is the third highest since 2010. 2020 was 407 by July, and 2010 was 530 by July. So think about that pace. We're already ahead of schedule for 8 of the last 10 years.

So again, that economic weakness, companies are feeling the pressure. They're feeling the difficulty in cutting costs. They know the pressure on inflation and wages. And they're feeling it. Perhaps it's going to come, that shoe's going to drop, and we're going to see how the market realize the risks, and the compensation they require to take on that risks, and they haven't just yet.

Macan Nia:

Yeah, and I think there is near term weakness, but I think it's important to take a step back and realize it is unlikely to lead to much bigger things. Because when you look at the leveraged loan maturity wall Kev, a lot of it, the vast majority of it happens in 2025, of the leveraged loan market.

Kevin Headland:

The leveraged loan market.

Macan Nia:

Yeah, 20-

Kevin Headland:

That's the biggest risk right now actually, leveraged loans. That's one where-

Macan Nia:

Right. And some of that, I think at the near term there is some risk there, but the fact that the maturity wall is so far out in 2025, and one would think that rates will be lower at that point, well that's two years away. So near term risk, but unlikely in our view to become really a credit risk type of event.

Kevin Headland:

No, for sure. And even going back to some of the data we look at, we did a chart showing the leading economic indicator index from the US conference board relative to high yield spreads. And at these levels of the leading economic indicator index, which is roughly minus 8% or so, high yield spreads have typically been in the 8 to 900 base point levels.

Macan Nia:

We're half of that right now.

Kevin Headland:

Yeah. So it's just, again, when we look at the data and say, okay, where the balance of risks lie, is this too good to be true, or is the data wrong? Eventually one thing is wrong. Is the data going to turn and everything's fine, or are the markets going to start pricing in the reality of the weakness of the economic data we see?

Macan Nia:

Yeah, that's a nice way of saying the reality of the economic data that is coming through.

Now let's transition to the third investment theme, and that is position your portfolios obviously for tomorrow, not today. What does that mean, Kev? You know what? To be honest, I hate questions like this because it ultimately depends on the asset allocation of your client. The answer is very different if your client is already overweight equities versus bonds, or vice versa. But let's just talk general, in terms of a balanced investor who is potentially 60/40.

Kevin Headland:

Sorry, I think the idea here was that, how many portfolios are, when we say positioned for today it means, you've been, I don't say ignoring, but perhaps just letting your winners run, letting your equities go from 55% or 60%, maybe they're 65 or 70% already. It's possible. So making sure that we revisit portfolios and see where they are today relative where they need to be for your client's risk posture.

Or also within the fixing of an equity portfolios, maybe they're overweight growth, maybe they're overweight tech. Maybe it's not just their retirement savings accounts or other accounts you're looking at, but what about individual securities? Looking at the entire investment portfolio and where they are from a risk perspective, and maybe it's something that you should be looking at to say, "Listen, going forward, maybe we don't need this much risk. Maybe we've got to reallocate." And it's a good time to revisit the portfolio, especially this notion of back to school, it's kind of like, "Okay, we had a great summer, we had some time off, relaxed, enjoyed ourselves. It's back to the grind, back to looking at our studies and whatnot." I think it's important now, if you're just not in school anymore, it doesn't mean you shouldn't be going back to the books and looking exactly what we need to educate ourselves on.

Macan Nia:

Yeah, And I think a bigger thing for us, I know we and you have discussed it with our own illustrated portfolio, is the balance of risks specifically in tech sectors, and how that has changed in terms of are you aware of how much US tech or technology in general you own within your equity sleeve? We know given the rally in anything AI linked tech that the S&P 500 I think today is close to 35%, top 10 weights are 35% of the S&P 500. We know investors generally invest in three vehicles. So they'll have the passive ETF, which has now an increasing tech weight, active managers, which generally have overweighted tech, and individual security selection. And we know that advisors generally pick the tech names in the US just with familiarity.

So are you really aware of, maybe it may have been 10, 15% at the beginning of this year, it may have jumped to 20 25%. And that in itself is not a big deal, but are you aware of it? It might be a big deal for some clients, and for other younger ones it may not be. So I think that's important. But sorry, Kev, you were going to say something?

Kevin Headland:

No, I was going to say, going back to your point earlier and talking about the quality of earnings, and looking at other areas of the market to be invested in, one of the things we talked about for tomorrow, we've been talking about for quite some time is, perhaps it's a good idea to diversify US equity exposure to midcaps. Perhaps US midcaps could be an opportunity for maybe the next leg of performance, where as we get this economic slowdown, that area of the market tends to rally or perform better early stage of an economic cycle. So when we look at tomorrow, maybe this is an opportunity to start preparing that portfolio for the opportunity there. Again, it's not necessarily next month or next quarter, but tomorrow meaning the next 12, 18 months. That could be opportunity as well. I

Macan Nia:

I look at tech and I will push back on myself and say, well Macan, of course the valuations for tech are higher. They've always been higher, and there's a reason for it, and we know the reasons. But even despite, even with that said, when you look at, let's say for tech for example, information technology in the US. Today, it's trading on nearly 35 times. In the last 10 years, so assuming in the last 10 years you've had that premium for tech, it was still only trading in the high 20s. And the last five years it's been high, 28, 29. So despite, yeah, always paying a premium for tech, you're paying even a bigger premium today than the premium we've paid over the last 5 and 10 years.

And that's all based on AI. And we've gone through this. Yes, AI is going to be transformational, go through all the things, but we really don't know how it's going to play out with earnings right now. And right now investors are willing to pay more for those earnings, not really knowing how it's all going to really shake out.

Kevin Headland:

It's also been a lot of momentum and sentiment driven. It's been a popular area to be invested in. And momentum is a powerful force for both the upside and downside. And I think the key for us again is going back, we don't necessarily think it's going to be a material downside. Are these big mega cap weights due for a material correction? Not necessarily. But are they going to continue the same trajectory upward from where they have been earlier this year? That's where the confidence is less for us. And again, maybe they're a hold right now, maybe take some profits. Just reevaluate where you're taking on the risk in your portfolio and whether it's warranted if you still believe that we do, that the balance of risk for economy is still to the downside, not the upside

Macan Nia:

Bonds or equities?

Kevin Headland:

Oh, right now, on a risk adjusted basis, it's bonds all day. I think we're in our illustrated portfolio, we're 50/50, so we're underweight equities relative to a 60/40 balanced portfolio. It's hard to justify the opportunity in equities versus fixed right now. And I think we'd rather take that profit, which we did in end of June, and reallocate to fixed income and protect against that potential risk. Some shock can come out of nowhere. And I think we said it, I don't know 30 times, this is priced for perfection. I can barely say it, price for perfection. The shock can come out of anywhere and you might not see it coming. And that's what's going to happen or could happen to the downside, or create volatility.

Macan Nia:

I think for us too, it's okay, equities upside from here, maybe let's just say 5 to 8%. And it's hard to even-

Kevin Headland:

To the end of the year?

Macan Nia:

Yeah, I think I'm being very optimistic too in that sense from these levels, because you're not going to get the supportive earnings. You're probably not going to get the supportive valuations unless the markets are pricing in 10 cuts and economic activity. You know what I mean? So the balance of risk for 5 to 8, but I'm going to be aggressive and just say 5 to 8 from these levels.

But where you can also see the upside for bonds, let's just say 5%. I feel, and I think we feel much more comfortable in the path for bonds or the visibility in bonds than we would in equities as of right now. Now if we get a further correction, we're down 10%. I think we're down 3% from the peak because we've rallied the past couple of days, we'll be adding to equities, because yes, we're short-term cautious, but we're still very long-term constructive.

Kevin Headland:

I think that's really important there. It's like, yeah, the idea that we have had a bit of pullback recently, but not enough. And again, that last couple of weeks has just shown the potential risks, that you get some headline data out of China, you get some stronger moves in the 10 year yields, and you get this weaker equity market. So it's about positioning, it's about understanding where the risks lie. And it's a relative trade, relative decision. And I think right now it just makes sense not to just jump on this risk on train, and be a bit more mindful about the potential upside.

And yeah, people say, "Oh 8% equities, I'm going to be way better than 3 to 5 in fixed income." But also what's the ride? Is the ride big swings up and down, up and down? That 8%'s going to feel a lot worse than 8% in the end if you have a lot of volatility from here in the next six plus months.

Macan Nia:

In a nutshell, I think the executive summary would be the global macro backdrop. We think the recession's just been delayed, don't pop the champagne, it's just been delayed. As a result, economic activity or the likelihood of a recession, it's still there, which means that the Fed is going to cut. We're getting towards the end of the cycle. They're going to cut, but they're not going to cut in our view to the degree that the market is expecting. That goes along for our first investment theme, prepare for near, near-term equity, volatility, amidst uncertainty. The markets are priced for perfection today, and it just takes a little bit of a surprise and it changes sentiment very, very quickly.

The second theme is buy bonds, but buy the right bonds. You've highlighted and we've highlighted ad nauseum, the party has just, again, been delayed. And there's going to be three unique phases for this. We are in phase one, soon to be in phase two, we believe by the end of the year. You want a bond mandate that's going to be flexible to be able to take advantage of that.

And then last but not least is the investment theme, position your portfolio for tomorrow, not today. And for our view, that is an overweight to bonds versus equities. If you had to dollar today, for us it would be bonds. Now that question could be very different... The answer could be very different in two months time, but as where we are today, markets ripping, optimism galore, we believe that there's more likelihood of Negative Nelly coming around than Joyant John. I just made that up. The word that goes with Jubilant John? Nervous Nelly is an easy one. I was thinking trying to think of a name for... Optimistic Owen?

Kevin Headland:

Oh god. Stick in your lane, man. Let's not try to be creative with... It's not your strong suit.

Macan Nia:

Well, Optimistic Owen is a pretty good one.

Kevin Headland:

You haven't met my son then.

Macan Nia:

Well, if he takes like his dad, then he's a pessimist.

Kevin Headland:

Realist, realist.

Macan Nia:

Realist, a pragmatic.

Kevin Headland:

So anyway, the third one, the third investment theme. Wrap it up.

Macan Nia:

I said. I said position your portfolio for tomorrow, not today.

Kevin Headland:

Perfect.

Macan Nia:

So based on this back to school, we have this podcast. We have an investment note that's going to go into these three themes in much more details with supporting charts, supporting data. Reach out to your sales representative for them. Or follow Kevin and I on LinkedIn. I find advisors ask, "What's the best way to get the content that you and Kev put out?" It's LinkedIn to be honest. So if you are on LinkedIn and we're not on your contact group, please add us. We post weekly, we post things that are changing. And then also on each territory we're hosting back to school webinars for advisors only. If this is something that you want to be a part of, it's a great opportunity to ask questions, reach out to your Manulife sales representative and ask when your respective territory has the call.

Kevin Headland:

And don't forget that also our monthly email that you can subscribe to. So reach out if you're not on the list, reach out to your wholesaler or to us directly and we'll add you to the list if you want to receive a monthly commentary from us as well as links to all the publishing we do on a monthly basis.

Macan Nia:

Yeah, And we're going to publish. I know in the summertime we've gone a little bit of a lull with the podcast, just a lot of things going on, but we will be back to regularly publishing or producing a podcast moving forward. If there's topics you want us to cover, send us a note on email or send us a note on LinkedIn. Tell us what you want to hear about. We want to give you the information that you're looking for, not just talk about what we want to talk about. Because if that was the case, we'd be talking about sports, geopolitics, all the good stuff.

But I think that's a good place to pause Kev. I want to thank everyone for listening. We really do appreciate everyone tuning in. And we look forward to the next one. On behalf of my better half Kevin Headland, and myself, thank you for listening to Investments Unplugged.

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