Christopher Davis: Hello, I'm Christopher Davis with Morningstar.ca. I'm here with Kevin McCreadie. He is the President and Chief Investment Officer at AGF. He is joining us on the eve of your one-year anniversary, is it passed or not?
Kevin McCreadie: It's just recently passed, Chris.
Davis: Just recently passed. So, congratulations and thanks for joining us.
McCreadie: Thanks for having me.
Davis: I thought we would just start off talking a little bit about the market and where the market stands today. Morningstar analysts talk to portfolio managers all day long and most of them tell us one of two things: “Everything is expensive, I can't find any good values” or “The market is expensive but stocks are the best game in town.” Do you take one of two sides or do you have a different view?
McCreadie: Yeah, I would probably have a slightly different view about this right now, which is, really if you look at the developed markets, they are really on the back of having a tremendous run. So, if you look at the recovery post '09, the markets have generally doubled. But you're in a place now where a lot of that was multiple expansion and while the economies around the world are starting to heal and there is a difference of pace where the U.S. is moving toward a tightening game and the Europeans and Japanese and now the Chinese are really in an easing game. You have these different speeds of the global economy. So, with that we’ll come where opportunities may be different in different parts of the world.
Clearly, in the U.S. with the size of the run the U.S. markets had and with the Fed about to tighten someplace in the fall, you're going to see volatility increase. So I think you'll see that the markets are probably really going to need earnings growth and probably more importantly, revenue growth to drive further growth in stock prices in the U.S. When you take a look at Europe, probably again somewhat behind the U.S. and valuations have moved ahead given the easing that's coming. And so stocks are already pricing some of that in, but we think there's probably more room to run there. And if you take a look at Japan, obviously, a lot of easing yet to come, the weakness of the currency and some of the reform issues, we think actually those markets still look pretty attractive from a cheapness standpoint but also have pretty good potential.
Davis: Do you think all the political uncertainty going on, in Europe in particular, whether that allows much of a margin of safety in European stocks?
McCreadie: Yeah, the political issues are obviously now with – I don't know which round of Greece debate is this, but this is going to be the third bailout. And it's really the rhetoric and noise that leads up to this that creates the damage as you saw in the last few weeks. From here there's still some work to be done but you have definitely had now some bit of a fracture among some of the different leaders, between the French and German leaders, about how harsh Greece might have been treated. But essentially, you kicked the can down the road and I don't think there is a political problem that stops markets here. But markets now will respond to the fact that at least we've put Greece over here for now and can get back to the central issue with Europe which is, can they start to work their way through and start to grow at a normalized pace, which we think again, normalized for Europe, is this year probably something greater than 1%.
Davis: Well, we had you last here about six months ago or so, and you were talking about the growth opportunity in all of North America, with a focus on the most northern part of North America, the Canadian market. You said that Canada would benefit from growth in the U.S. But the first quarter, or at least by some folks’ readings, we actually saw negative growth in Canada. The Bank of Canada has had to step in and lower interest rates to stimulate the economy. Where are we in the Canadian growth story?
McCreadie: Yeah, a lot of great debate about whether the central bank needed to cut rates yesterday or is it really just an emergency boost. If you look at the U.S. market first and I'm going to bring it back to that northern part of Canada – you look at job growth in the U.S., you look at the unemployment rate in the U.S., clearly the U.S. is reigniting and the Fed is really signaling that they will start to normalize rates on the back of an economy that is now growing probably closer to 3% versus the 2% growth it experienced on average over the last several years.
If you think about where the Canadian dollar is today to the U.S., probably 77-ish, and the fact of the proximity to its largest trade partner, the U.S., which is healthy, you hopefully will start to drive some export growth. Second to that, we probably think that oil here, despite the issues with Iran and potential supply, starts to bottom at this level. In fact, as you move toward the back end of the year you'll probably see oil moving back into the mid-70s on West Texas Intermediate.
So, again, the combination of strengthening commodity backdrop, strengthening U.S. economy, weakened currency, probably starts to at least grind the Canadian economy forward as we move into the back half of the year. But clearly, you've got an emergency shot in the arm yesterday with the rate cut.
Davis: Is $77 enough for Canadian oil producers who are relying on really high oil prices to justify the cost of production at new oil sands and such?
McCreadie: Yeah, I actually think that what happens when you get these kind of corrections and the speed at which we have, costs get taken out of the system pretty quickly. New technologies are brought to drive productivity. So, the cost curve bends and so I think at $77 you are probably in a place where many can make it. Some of the tar sands may be a little harder pressed. But $77 is definitely today, versus if I said $77 five years ago, is a much more competitive cost to place for many producers, especially in North America.
Stay tuned for Part 2 of our interview with AGF's Kevin McCreadie.
