Ruth Saldanha: Recent headlines have been dominated with news like Brexit, trade disputes and military conflicts, all international events that don't directly impact Canadian investors but do impact the stock markets. How should you react to this information? Virginia Au, Portfolio Manager at Invesco, is here to discuss this with us today.
Virginia, thank you so much for being here.
Virginia Au: Thank you. I'm delighted to be here.
Saldanha: You manage a global small-cap fund. How do you react to these international events?
Au: Yeah. There's definitely a lot of balls in the air right now and as a global fund manager I get a lot of data points around the world and also all kinds of prediction with probability from many experts. What I find though with many years of experience and also reading a lot of research paper is that forecasting macro event is a bit fruitless, similar to forecasting the weather. So, the forecasts say rain clouds are coming in and we should just get a manageable drizzle. But the problem is, if the wind blows a little stronger than we expected, we might end up with a full-on thunderstorm. So, at the end of the day, there is not much you can do but to bring an umbrella.
So, while I think it's really important to have a good sense of what's going on in the overall environment, it is useless to predict individual events. And the best umbrella I see right now at this point is to think long-term.
Saldanha: What are some of the events that you are keeping an eye on in 2019?
Au: Yes. I think one of the things definitely worth keeping an eye on is the speed of growth, economic growth, for the U.S., because so far, we've seen a major slowdown in Europe and Asia due to some of the macro events that you've mentioned earlier. But right now, in the U.S., we've only seen a mild deceleration. And part of that is due to – it was very strong last year, we're just decelerating from the peak and also, there have been some short-term challenges such as the U.S. government shutdown. At the same time, business confidence and employment are still very strong. So, the biggest risk is that this deceleration ends up being deeper and larger and lasts longer than what we expect.
Saldanha: Finally, what should Canadian investors do right now?
Au: I think there are a lot of things the investor can do. For one, similar to what I was talking about is thinking long-term. But to do that you really need to understand what you are buying, the company, the businesses you are investing in. So, for us, what we do is we make sure that we hold only 25 to 35 companies, so that gives us the ability to do a lot of extensive research.
The second suggestion I would make is don't put all your eggs in one basket. Think global. A lot of times I see investor have a very strong home country bias. And so, they have a large portion of their investment in Canada. To put things in perspective, Canada actually only accounts for 2% of the global GDP. In terms of stock market, they are less than 5% of the MSCI Global World Index. So, that's a very small part of the world. And to make matter worse, the Canadian stock market is also quite narrow. If you look at TSX Index, two sectors alone account for half of the TSX Index and that's financials and energy. So, you might annoyingly have a high exposure to interest rate and energy prices.
So, I think it makes more sense to look outside of Canada, because once you do that, you have a lot more options. You open yourself up to the number of sectors, economic drivers, and also sheer number of companies out there. So, I think it makes a lot of sense to incorporate global companies in everyone's portfolio.
Saldanha: Thank you so much for joining us with your perspectives, Virginia.
Au: Thank you.
Saldanha: For Morningstar, I'm Ruth Saldanha.
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