Our happiness often depends more on what we do than where we are. It’s our actions—not our surroundings—that bring us meaning and belonging Adam Grant

Hi there, good morning!

It was a great weekend, seeing signs of spring out there!!! It’s wild to think that we are already into March 2021. I thought I’d start this week off with a book recommendation as I’ve found this particular topic both relevant in today’s and topical for those who are open to challenging the way that we think and how we learn.

Think Again, by Adam Grant

This book examines the critical art of rethinking: learning to question your opinions and open other people’s minds, which can position you for excellence at work and wisdom in life. Think Again is an invitation to let go of views that are no longer serving us well and prize mental flexibility over foolish consistency. Through the book, Adam notes that rethinking is not only a skill set, but it’s also a mindset and although we already have many of the mental tools we need, we just have to remember to get them out of the shed and remove the rust. Thinking again can help you generate new solutions to old problems and revisit old solutions to new problems. It’s a path to learning more and becoming wiser. A hallmark of wisdom is knowing when it’s time to abandon some of your most treasured tools—and some of the most cherished parts of your identity.

If knowledge is power, knowing what we don’t know is wisdom.

The curse of knowledge is that it closes our minds to what we don’t know. Adam Grant

And now….to the markets

We are starting to see some Bond market stabilization, the big theme in the market today. Phew!

S&P futures up 1.1% this morning after US equities came under pressure last week with growth and momentum meaningfully underperforming value and cyclicals with the backup in bond yields. Asian markets rallied overnight with Japan's Nikkei and China's Shenzen the standouts, both up nearly 2.5%. European markets seeing good gains. Treasuries mostly stronger with the rally in global sovereign bonds. Belly of the curve outperforming while long end weaker. Dollar firmer vs yen and euro. Gold up 0.9%. WTI crude up 1.5%.

We saw through the week last week, investors continue to be on edge about rising bond yields, which moved higher yet again over the past week. Anxiety persists despite commentary from U.S. Federal Reserve Chairman Jerome Powell who reiterated that any inflationary pressure this year is unlikely to force the central bank to change its approach around interest rates. Below, we discuss the Canadian banks which reported strong earnings results this past week, a potential reversal of trends on the virus front in North America, and reflect on the year ago period which marked the beginning of a tumultuous year for global equity markets.

Coronavirus Update

This week can be characterized as a minor setback in North America as the improving trend that had been witnessed over the past month appears to have stalled. Canada’s 7-day average rate of new daily infections rose modestly to nearly 3000 from 2900 previously, the first increase in some time. It was led by increases across British Columbia, Alberta, and Ontario, while case infection rates across Quebec, Saskatchewan, the Maritimes, and the northern territories all declined. Meanwhile, in the U.S., the 7-day moving average of new daily infections is near 63,000, below the 69,000 from the week ago period, but here too there are signs of slowing progress. The next few weeks will help clarify whether this is a temporary reversal of trend, or the start of something more concerning, and frustrating, like a third (or fourth) wave, which is anticipated to occur over the next few months.

Strong results from Canadian banks

The Canadian banks have performed well to start the year. That trend continued over the past week as they reported their first quarter earnings results for the period November through January.

The results unveiled two predominant themes. First, the credit issues that arose at the onset of the pandemic last year are now subsiding. Each bank reported significantly lower than expected provisions for credit losses. These are capital cushions of sorts that the banks set aside to absorb future losses from loans that consumers and businesses may struggle to repay. As banks believe they are adequately prepared and begin to anticipate lower future losses, they tend to provision less, and may even release and redeploy this capital. The second theme that was apparent from the results was the stronger than expected revenue growth across many business lines of the Canadian banks: commercial and retail banking, capital markets, and wealth management for example.

Investors are now left to wonder what to expect from the banks going forward? We foresee more of what transpired this past quarter. More specifically, we expect credit will continue to fade as a headwind, while the reopening of the global economy should act as a meaningful tailwind for revenue growth. This latter point will prove more significant as the year goes on with more businesses and consumers gaining confidence in their ability to invest and spend, thereby requiring the many products and services offered by financial institutions. Moreover, the rise in bond yields we have witnessed to date is a powerful tailwind to the banks’ net interest margins, a critical source of profits for the banks that measures the difference between the interest income they earn and interest expenses they pay. Overall, the operating environment has shifted meaningfully over the past year, and we expect revenue growth to be a driver of potential upside to earnings expectations for the sector.

On the dividend front, we expect key regulators to consider lifting the restrictions on bank dividend increases, potentially by the end of the year, paving the way for mid-single digit dividend growth to resume over the next few years. Investors should be left feeling more confident in this sector, particularly with valuations that remain inexpensive.

Reflecting on February 2020

The Covid-19 virus is widely acknowledged to have first surfaced in late 2019. But global equity markets began to take it very seriously in late February 2020 after the first fatality from the virus in Italy was reported, which then led to a broad outbreak across Europe and ultimately throughout the rest of the world.

Global equity markets initially fell by over 30% between late February and March 2020. But, one year later, most equity markets have made up the lost ground, with many now trading at new highs. There are a host of reasons why, from governments and stimulus, to central banks and low rates, and promising vaccines.

The investing experience over the past year serves as a useful reminder that while it is easy to fall victim to human emotions and panic at the onset of a crisis, it is not helpful and can be detrimental to outcomes. Instead, having a proper plan, staying level-headed, employing a disciplined process of rebalancing and due diligence at all times is a strategy for long-term investing success.

Our long term plans are always evolving and we are constantly revisiting this with clients. As we head into March, remember as Adam Grant suggests, our plans and our identities are open systems, and so are our lives. We don’t have to stay tethered to old images of where we want to go or who we want to be. The simplest way to start rethinking our options is to question what we do daily.

We can all improve at thinking.

Good judgment depends on having the skill—and the will—to open our minds. Adam Grant

Be well, enjoy the moments & keep your mind open

Derek