So I'll start with you, Sharmeen. Tech has gone through something, a
rollercoaster ride. It was the leading force in the markets
for quite some time now, not quite so much, whereas tech right now and its
effect on the markets overall. It's actually a bit of a misconception
that tech stocks were the driver of this entire bull market.
And clients ask us that question. What happens if we don't get the kind of
earnings growth and we don't get the kind of price appreciation?
So we did an exercise for our clients looking at an equal weighted index and a
market cap weighted index. So, for example, if you're thinking
about Apple and Microsoft as an example and you're looking at stocks where the
market cap weight is about 6 percent, Microsoft a little bit less than that.
And then you look at Exxon and Coca-Cola, where one is a little bit
above one percent market cap. The other one a little bit less before.
And you actually gave them equal weight and looked at the returns.
They're nearly identical for the last five years and last 10 years.
So it's a bit of a myth that you need the technology sector to drive equity
returns. So we're actually telling clients that
at the margin, tech stocks are a little bit overvalued.
It's not so overvalued that people want to take a reverse position and be sure
that market. But we actually think it's a little bit
right now. Five plus 10 percent overvalued, but not
that significant. And we're not pricing the kind of
earnings growth that people had for the last five years, for example, especially
because of the pandemic. So, Laurie, if tech isn't the buzzword
that it once was. What is when you talk to your clients,
what are they talking about today? If it's not tech?
So I would say one of the more interesting discussions we have with
people is sort of what's going to lead when we come out of this economic
challenging period. Whatever you want to call it.
And there's a general agreement that the economy is going to be pretty sluggish
and we're not going to be roaring in terms of growth again.
And so you want growth stocks, but what are the growth stocks of the future?
I think certain parts of techs, software, for example, cyber comes up a
lot. I think that will give you some of those
longer term secular growth tailwinds. But a lot of people are talking about
industrials restoring near shoring automation and kind of everything is old
is new again. You know, kind of that theme coming
back. Are we going to get those growth engines
from kind of these older parts of the economy that are going to get
reinvigorated? And so that's probably the most
interesting debate is just kind of where do you want to be over the next three to
five years in terms of some of those longer term sector drivers?
So, sure, we want to hear about on shoring and near shoring.
I think about geopolitics. I think that's driving some of that
force. I think right now.
What about the question of geopolitics for an investor these days?
One of the questions our clients are asking us actually is given how much.
Non U.S. economies, non U.S.
markets have lagged the U.S., whether this is the time actually to go
overweight Europe, to go overweight emerging markets, in fact to go
overweight China, and our response to that is, well, on the surface, it looks
like these markets are very cheap. So, for example, if you're look look at
price to forward earnings, it looks like China is trading at a 35 percent
discount to the U.S.. So everybody's so interested given the
zero Covid policy having been abandoned. But once you actually adjust for a
sector wait, it's nowhere near as cheap. It's maybe about 11 percent discount.
That's not enough to take on all the geopolitical risks associated with
China. So when we go through the geopolitical
risk for clients, we go through first Russia, Ukraine.
And you talked about that earlier in the program and we say there's risk of
escalation. We go through U.S.
China relations, risk of worsening, less likelihood of getting better.
Then you go through North Korea and their ballistic missile.
So we go through these. These are tail risks, but it doesn't
mean you can position our portfolio for these Taylor Riggs.
You can't be out of equities given our expected upside return or out of bonds.
So we want clients to be aware of these risks, but we actually don't recommend
shifting the portfolio significantly for that purpose.
Laura, I'm aware that you are U.S. equity strategist for RBC Capital
Markets, but what do you think about the U.S.
versus non U.S. question?
Well, it's a great question. I got an earful about this in December.
I was spending a lot of time outside of the U.S.
meeting investors, and I found that European based investors were really
high on Europe. And really, you know, for reasons you
mentioned were, you know, said the U.S. is expensive.
It's the growth trade. We like value.
And, you know, the U.S. were uncertain about the fundamentals of
the U.S. and I kind of pushed back and I said,
well, I understand the valuation component.
I said, but then it gets into, what do you really want to buy?
Do you really want to buy European financials?
Do you really want to buy European energy companies?
And they kind of recoiled a little bit on that.
But I you know, I think the issue for me as well is even though we do have a bit
of uncertainty in the U.S., I do think the fundamental backdrop is still
stronger here when we look at what companies are saying about the China
reopening. I think they think it's going to be a
bit more complicated than investors have been assuming so far.
So I've still been in the U.S. camp, but I certainly understand, you
know, the valuation concerns people have shown me.
I'm curious, do you see a certain chauvinism on the part of investors,
whether they're in Europe or the United States?
We tend to look close to home. Well, there's always a bit of a domestic
bias. People know the companies very well.
They're more comfortable. But our view of U.S.
preeminence is not actually driven by the fact that we are all based in New
York. It's actually very international group.
We have colleagues all over 23 different nationalities on the team.
So there's not that domestic chauvinistic bias.
It's just that if you look across metrics and for people who are
interested, we recommend looking at our outlook presentation, the report,
because we show 16 different charts where U.S.
is so much more dominant and preeminent relative to other parts of the world.