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The Russia-Ukraine war continues to have a ripple effect on global markets amid a humanitarian crisis, country sanctions and corporate boycotts. Scotia Wealth Management’s Chief Investment Officer joins the Perspectives podcast to discuss this recent bout of market volatility and what investors should keep in mind.
Click here for the transcript.
Transcript:
Stephen Meurice: I'm Stephen Meurice and this is Perspectives.
For almost three weeks, Canadians and the world have been watching Russia's invasion of Ukraine. We see the headlines and disturbing images day after day. Ukrainians fleeing for their lives or fighting back. We feel anxious, helpless, even scared. Then there’s the economic alarm bells; sanctions, boycotts, trade disruptions, sky high oil prices. It all adds up to stock market volatility.
Andy Nasr is no stranger to guiding clients through economic uncertainty. He's the Chief Investment Officer at Scotia Wealth Management and he's here today to talk about how best to approach the kind of market swings that happen during global crises. The kind that can cause some investors to panic. Maybe he can even give us a little peace of mind.
Now, before we begin, I just want to mention, we'll provide a link in the episode description and on our Perspectives page to where you can donate to help the people of Ukraine and also has information about what Scotiabank is doing to help relief efforts. Let's get started.
Andy, welcome to Perspectives.
Andy Nasr: Thanks for having me, Stephen.
SM: I wish we could have you on the show under slightly different circumstances. But I really think you'll be able to help our listeners out today. You have long experience doing this at various levels in the bank. You're now the Chief Investment Officer. So, I'm gonna try and pull out some of that experience and knowledge that you have so we can help listeners as much as possible. I used the expression earlier ‘market volatility.’ Maybe we should define what that means. Markets are always going up and down. What constitutes an unusual or scary amount of movement? When do you start getting panicky calls?
AN: We're getting them. So, volatility can be characterized as fluctuations in asset prices. Volatility is measured by how much equities have bounced around up or down over the last year. And there's all kinds of things that can affect market volatility. It could be concerns relating to what's happening with the economy. Those typically tend to be more fundamental in nature as a business cycle progresses. In this case we're dealing with an exogenous event. So, a shock that is unforeseen, that's reverberating around a globalized economy. We have a world leader that has access to nuclear weapons which has invaded the capital of a neighbouring country. So, there's a lot of uncertainty and that uncertainty leads investors to react. And typically, what we're seeing is a lot of selling until we've got a little bit more clarity about how things settle down.
SM: And how does this type of event, which has lots of unknowns—I guess most sort of unexpected emergencies or crises have lots of question marks around them. But how does this one differ from your average economic downturn or any other kind of crisis?
AN: Well, this is a humanitarian crisis and again, it's created all kinds of uncertainty. It's very impossible to predict the time and the cost of resolution. And so, when we think of what's happening today and the implications on consumption, inflation and commodity prices, there are a lot of question marks. These aren't things that traditionally fiscal and monetary policy can address because usually in times of crisis, if we're worried about the economy and it looks like things are slowing down, we always see policymakers react just like they did in the health crisis, just like they did in the global financial crisis and that tends to smooth things out. Fiscal and monetary policy is not necessarily going to get us through this. So, in some regard, the uncertainty is warranted. However, it's created near unprecedented volatility, volatility in financial markets and equity markets is at a one year high.
SM: Can you explain that a little bit more? What does that mean, exactly? A one year high in volatility?
AN: So that means that we've seen markets bounce up and down and trending more down lately, a tremendous amount just in the last little while. So, when we look at how much they've gone up and down, we end up with a bit of an outlier. The current level of equity market volatility—looking at US markets—volatility is at a one-year high. And it's in the top 10% of its historical range dating back to the 1940s. So, this is a bit of an outlier event and there's a couple of key takeaways. When volatility is this high, things usually happen. So, several months later, the market typically bottoms. And then after that they end up registering a median return of 15% one year after the fact. So, these kinds of reactions that we're seeing, these sharp selloffs are usually followed by appreciation several months later, typically a year later and it can be significant. Now that's the norm and that looks back at every time volatility has been at a one-year high. In this case it's due to geopolitical events. So, it could drag on a little bit longer and things could certainly get worse. But that's why it's very important for investors to have a plan and be long-term oriented because trying to time these things on a short term basis is very, very difficult.
SM: You mentioned how in other types of situations governments have tools that they can use to help, you know, rebalance the economy, whether it's raising interest rates, fiscal or monetary tools that they can use. This is to a large extent out of their hands. So, a different type of situation as you explained. So, what are you telling clients now? What's the advice that you provide people during a situation that is even more uncertain and unpredictable than the average market downturn?
AN: Well, it's not too different than what we were telling them at the beginning of the year. At the beginning of the year, we were worried about what was going to happen with interest rates and inflation and how global growth was going to moderate and normalize and now we've taken all those concerns and we've amplified them by this war of aggression. The conclusion is the same. Investors need to be diversified. They need to have a high-quality bias in their portfolios. And when we say diversified, it’s diversification by asset class, diversification by geography and make sure that there is some element of their portfolio that can help them preserve capital so that when we start to see that disconnect between what's happening to the economy fundamentally and how people feel about it—sentiment—they can hopefully take advantage of it tactically. Redeploy capital and compound returns at much higher rates. So that's what we're telling people. That's what we were telling people at the beginning of the year. Unfortunately, the downdraft that we're seeing is not related to policy, interest rates going up or you know, the economy experiencing some bumps in the road as we kind of came out of the health crisis. It's due to war, and that makes it a little bit more uncertain. But nonetheless, you know, once we do have resolution and a ceasefire, things will go back to normal. And then we can go back to worrying about the things that we were worrying about.
SM: One specific thing that you said there was around having some portion of your portfolio in things that are more stable that can be redeployed at a later point. What are some examples of that? What are some things that people should be trying to bulk up in their portfolio that's more stable.
AN: The two major asset classes are equities and fixed income. Those are the two biggest ones. And then we always tell people to be diversified within those asset classes. So, to the extent possible, make sure that you don't have an overly significant home country bias. And on top of that, make sure that you've got exposure to sub asset classes within equities and fixed income. And a great example of that, if you think of the fixed income asset class is government bonds versus corporate bonds. Government bonds tend to be the haven asset class. It's what people try to get a hold of when there's all kinds of uncertainty, because we know governments don't have a hard time printing money and getting themselves out of a jam. And so now we're seeing people stockpile government bonds, which has pushed longer dated yields down—medium to longer dated government bond yields down—in investors portfolios that can act as a bit of a haven, can help you preserve capital. The other alternative asset that's done really well has been gold. And we've seen a lot of investors buy gold, which does have diversification benefits and can help you improve risk-adjusted returns. That concept though is very important, when we think of risk-adjusted returns. You know, we often look at markets we’ll say that they're up or they're down, but we often fail to take into account how much risk we're taking to achieve returns in portfolios. So, it's that diversification across asset classes and even within asset classes that can help you preserve capital.
SM: Do you get more of the sort of worry or even verging on panic from people maybe closing in on retirement or in retirement already who you know, have less of a time horizon to rebuild their savings after a dip and is your advice to them any different?
AN: The advice is always similar in the sense that if clients need the money, if you need the money within the next month or the next couple of months, you should really think twice about how your portfolio is positioned. Probably not the best time to be doubling down on risk. Again, that's where a plan and talking to a wealth specialist or an advisor can really help. If you are on the verge of retirement or you've just retired, just about the worst thing you could do is pull money out of the market when it's down this much. Because you're not benefiting from, you know, how markets typically appreciate or compound over longer periods of time. So, manage the cadence of withdrawals and be mindful of where you are in the grand scheme of things with your long-term plan. That would be the advice to the retirees or the post retirees.
SM: Going back to the economy more broadly, one question about commodities. Canada being a commodities economy to a significant extent. Oil and gas, agriculture, mining, etcetera. What's the impact now and the outlook for those parts of the Canadian economy and how does that impact investors?
AN: Well, we'll put things in context a little bit. Russia's the second largest producer of crude oil behind Saudi Arabia, it’s a major producer of copper, nickel and aluminum in addition to wheat. So higher commodity prices will improve the outlook for resource producing provinces and countries. However, income is being transferred from the world's commodity consumers to producers. So, the near-term economic benefit could be offset by higher inflation and interest rates and that could put a bit of a damper or a dent in consumption. It’s also dangerous to compartmentalize what’s happening in other parts of the world. I mentioned that the global economy is very deeply integrated and while Russia and Ukraine are a small part of it, those higher oil and gas prices could push parts of Europe into recession and that could undoubtedly exacerbate global growth concerns. So, all the buffers that were built up during the health crisis, the increased household savings rates, strong corporate balance sheets, they might get put to use if this lasts a little bit longer. So, it’s tough to say that there's a, you know, sustainable positive impact over a short- or medium-term time horizon because the longer this drags out, the more likely it is it'll start to crimp global economic growth.
SM: So, before we wrap up here, I just want to ask, you know, things are unstable, maybe even a little bit scary right now. Is there a simple bit of advice that you tell your clients during times like this?
AN: The single biggest mistake that we see investors make is trying to time things. The reality is that taking money out of the market and trying to put it back in when you're going to have a bit of a binary outcome here, means that you could miss out on some appreciation that will occur if we do get that ceasefire. And just for context, if you were just going to miss the 10 best days in the S&P 500 or the TSX in the last 15 years, you'd cut your returns in half. And you could have one of those best days occurring if all of a sudden we're less concerned about what's happening with geopolitics.
SM: Maybe I'm asking you to be a psychologist with this question, but the banks, advisors, have been giving that message forever. You know, don't panic during the downturns. Don't sell everything when things start to go down, you'll miss that bounce back. Why does it keep happening? Why do you keep needing to repeat the same message over and over again?
AN: Because it's easier said than done, Stephen.
[both laugh]
That's why, right? I mean if I told you the market or stock was going to go down 10% and then you should buy it, you might think, okay, I'll just wait till it goes down 10%. The reality is, on the way to 10 people start worrying about it going down 15 or 20 and so you tend to climb a wall of worry. And that is why—I mentioned this earlier—but it's the separation of fundamentals versus sentiment. When I said fundamentals, what we try to do, what every investor tries to do is ascribe fair value to assets. And you typically do that by discounting the income that those assets produce. In times of uncertainty, it’s hard to figure out what discount rate to use. It's hard to figure out what income looks like on a sustainable basis. And so, people tend to sell first and try to figure it out later, ask questions later or while all this is happening. The best kind of discipline investors can have—and that's why we say to be focused long term—is to think of, what are the fair value of the assets in my portfolio? Has there been a disconnect from what they're really worth versus what people are saying they're worth today? And that helps you realize where the opportunities are and where to plunk that capital down.
SM: Well, I think we'll leave it there. Andy, thanks a lot for coming and talking to us today. It was very interesting and I think you've provided some sound advice for many people.
AN: My pleasure Stephen, Thank you.
SM: I've been speaking with Andy Nasr, Chief Investment Officer at Scotia Wealth Management.
And once again we'll provide a link in the episode description and on our Perspectives page to where you can donate to help the people of Ukraine.
