3 Key Questions on Markets in 2023

2 June 2023

Markets are providing plenty of food for thought for investors in 2023, with central bank policy and upheaval in the banking sector having a significant impact on stocks and bonds.

In this discussion, Beutel Goodman’s Senior Vice President and Co-Head of Fixed Income Derek Brown joined Vice President, Canadian Equities Vim Thasan to discuss the different factors affecting securities markets this year. In conversation with host Linda Watts, Vice President, Client Service/Business Development, Derek and Vim outlined how this investment climate is impacting their thinking, focusing on these 3 Key Questions:

The banking scare in March brought comparisons with the early days of the Global Financial Crisis. Has this affected how you assess banks now from an equity and fixed income perspective?
Monetary policy has been a major driver of market performance over the past year. How has this new interest rate environment affected your portfolios?
What are your views on the current valuations in the fixed income and equity markets?

This recording took place on May 30, 2023. The following transcript is edited for clarity.

Note: The information in this transcript and recording is not intended, and should not be relied upon, to provide legal, financial, accounting, tax, investment or other advice. This is not an invitation to purchase or trade any securities. Beutel, Goodman & Company Ltd. does not endorse or recommend any referenced securities.

Linda Watts: Welcome to the latest in our 3 Key Questions series. Today we will focus on some of the major developments in securities markets so far in 2023. Thank you all for joining us. I’m Linda Watts, Vice President of Client Service and Business Development at Beutel Goodman. Today I have the pleasure of speaking with representatives from our Fixed Income and Canadian Equity teams — Senior Vice President and co-Head of Fixed Income, Derek Brown and Vice President, Canadian Equities Vim Thasan.

Following our 3 Key questions, we’ll have a short Q&A with Derek and Vim and we invite you to contribute by typing any of the questions that you may have in the Q&A section at the bottom of the screen. It’s been an interesting year so far in equity and bond markets and that’s to say the least, with rate hikes and bank failures a concern for many. With that in mind, I’d like to begin with the first of our 3 Key Questions, which is:

The banking scare in March brought comparisons with the early days of the global financial crisis. How do you assess banks from both an equity and a fixed income perspective?

Linda Watts: Derek, let’s start with you.

Derek Brown: Thanks Linda, and good morning everyone. I guess the first thing I would say is that in our view, the comparison with the banking crisis in 2008 versus 2023 is not really a very good one. In 2008, what we saw was most of the banks globally, specifically in the U.S., were holding these bespoke, ultimately toxic, assets on their balance sheets. They were completely illiquid, nearly impossible to value, and it made it very difficult to unwind that situation. In 2023, banks, and specifically U.S. regional banks, ran into liquidity issues where depositors were pulling out their deposits and the bank couldn’t ultimately raise cash fast enough. But the thing is, this time around the vast majority of the assets on their balance sheets are U.S. Treasuries and Mortgage-Backed Securities, which are generally agency protected or effectively U.S. government-risk assets. So, these are highly liquid and very easy to value. This made a very big difference when it came to what government support they would see. The Federal Reserve quickly created an asset swap program. This assumes, obviously, full repayment from the U.S. government, which I don’t think is a big risk. And what it did was allow the banks to effectively swap bonds that were valued at $90 for $100, and to get that money very quickly, effectively instantaneously, and pay their depositors.

It has been a very powerful tool and it has really kind of stabilized the U.S. regional banking sector for now. So, from that perspective, we don’t think that 2008 is that applicable. We also think that the 2023 situation [in the U.S.] is not that applicable for Canada either. There’s a variety of reasons for that, primarily regulatory and the way business models are run.

So, we haven’t really changed our view on the Canadian banking sector at all. Our fixed income portfolios typically have a very significant allocation to Canadian banks. We continue to see tremendous value in their franchises. We really like the diversified business models and from a fixed income standpoint, they have very conservative balance sheets and that is something else that we like. The Canadian banks are also the largest issuers in the corporate bond market in Canada. So, they’re very highly liquid and issue across the seniority spectrum, meaning they have senior debt, subordinated debt and what’s known as junior subordinated debt or AT1s. This allows our fixed income team to increase or decrease the overall credit risk to the portfolio relatively quickly by moving up and down the credit risk spectrum throughout the banking sector.

And this allows us to buy strong balance sheets, strong issuers, and we can avoid the less liquid, let’s call them the weaker issuers, in the fixed income market. So, this situation hasn’t changed our view on Canadian banks at all. If anything, it’s further emphasized how different and unique the Canadian banking sector is and highlights its value.

Linda Watts: Thanks Derek, what about you Vim? What are your thoughts?

Vim Thasan: Thanks Linda. Well, why don’t I take a step back and talk about what banks do. Banks allow the economy to function because it’s a system that takes in deposits and other funds, pools them together and lends the funds out to those who need credit. So, it is the key foundational building block of the economic engine.

Two questions come into the debate with the regional banking crisis. One is, will the U.S. regional banking crisis contagion spread to Canadian banks? And the second is, will there be a broader recession as a result of this? Now on the latter part, we are not macro investors on the Canadian equity side, so we do not make calls on a recession or timing. However, this clearly adds another element that may restrict credit flow, which can slow growth through tighter lending conditions. But let’s talk specifically about Canadian banks. Now, with Canadian banks, this is not their first rodeo for external events. We have gone through, as you mentioned, the Great Financial Crisis. We’ve gone through the energy collapse in 2014–15. We’ve lived through periods of elevated Canadian housing prices and leveraged consumers, and now through the regional banking crisis in the U.S.

And similar to what Derek shared, the Canadian banking industry is resilient and supported by a number of factors. One is conservative regulation — think of the underwriting risk with recourse mortgages in Canada rather than the U.S. A second is — and it’s a very important part — it has a very attractive industry structure. The U.S. market may be ten times larger, but it certainly has more than ten times the competition. So this oligopoly-type structure in Canadian banking allows for a much more fluid and balanced structure to not take on as much competitive risk as you would see in other parts of the world. The final thing is around diversification, and this is beyond being a bank in Canada, but also the different business lines. What you would have noticed in some of the U.S. regional banks is that there was more concentration risk, either to single industries like technology, or very much focused on different asset classes, and that caused them some pain. When you wrap this all together, what you do see is that Canadian banks earn a higher rate of return (ROE) as a function of some of these very attractive structural characteristics.

With the U.S. regional banking crisis, there are a few specific questions and concerns that have come to light. One is deposit flight risk, with people withdrawing capital from Canadian banks, and we’re just not seeing that. In fact, big banks generally benefit when clients are looking for a flight to safety. The second thing is around the marking to market of available for sale assets, including things like bonds, that happen with the U.S. regional banks. Canadian banking regulation requires all banks to mark available for sale bonds to other comprehensive income for capital purposes. So, this is not an area of concern for us. And finally, the concentration and risk management practices that we’re seeing are much more prudent in Canada and that allows for the resiliency of these banks.

As we know, the market will always shoot first and then ask questions later. We believe that select Canadian banks offer attractive risk-adjusted returns, including two of our largest positions of Royal Bank and TD. When you look at the Canadian banks, the most pronounced impact year-to-date has been with Canadian banks with U.S. exposure, for the same reasons that we’re talking about with the U.S. regional banking crisis. Specifically, it is TD, because they have an ownership stake in Charles Schwab, and now there’s the voided deal of First Horizon. We are generally comfortable with its liquidity position, which reflects some of the rules written after the Great Financial Crisis, as well as its asset quality, because Canadian banks have been very prudent lenders with stringent income tests and higher loan-to-value ratios. So, there may be near-term earnings pressure and we’re seeing that as Canadian banks start to report some of their earnings. But over the long term, we believe they have a solid capital position, which will help buffer on the downside. The valuations have compressed, and in the example of TD, it’s probably about 25% of its long-term historical average. So, we do believe these select franchises can compound value over time.

Linda Watts: So glad to hear that there’s some agreement there and some common themes with Canadian banks being solid and well capitalized. Let’s move on to the second of our three key questions.

Monetary policy has been a major driver of market performance over the last year. How have you adapted in this new interest rate environment?

Linda Watts: Vim, let’s start with you.

Vim Thasan: Thanks Linda. Well, the short answer is we have not changed the way we assess or value businesses in this new higher rate environment. And broadly speaking, with higher rates, there’s two things that we think of — how does it impact growth expectations? And how does it impact valuations across different sectors? The most pronounced examples may be in highly levered sectors like REITs, where you had interest rate costs go up and then a reassessment of cap rates. You’re also seeing it in the consumer sector because of the impact on consumer behavior from higher rates and how does that feed through to discretionary spending? Another impact has been that rising rates have created some issues for asset classes that maybe had speculative bubbles through cheap money. As you know, at Buetel Goodman we invest in companies with sustainable free cash flows trading at a discount to intrinsic value. So that has not been an area that has impacted us as rates have risen. On growth expectations, we assess each company on its own merits, which is on earnings and free cash flow over a three- to five-year time horizon. And why that’s critical is that we can look through to see what normalized earnings will look like, as opposed to making a call on the impact of higher rates or on a recession.

On the valuation front, there are many distortions that are being created by higher rates, and in some cases, there are companies trading at very cheap valuations on the assumption of peak earnings. But again, we look through the noise, we look for normalized earnings. We do use a discounted cash flow model as part of our overall valuation process, but we have not changed our discount rate assumptions. We did not change the discount rate assumptions when rates were going down, and we have not changed it on the way up because our discount rate assumption is generally very conservative to begin with.

I think the key message is that our process remains consistent in all rate environments. Our hurdles remain the same, where we need a 50% total return over a three-year time horizon to add a name. What changes with these higher rates is that there’s going to be a lot more noise, there will be a lot more uncertainty, and that’s going to create more volatility. But as a value investor, that creates opportunities to pick up really great franchises that are out-of-favour in the market or have been distorted with things like rising rates.

Linda Watts: Thanks, Vim. Derek, as we all know, rates are the primary driver within fixed income. How has the team adapted over the year?

Derek Brown: Well, the past year has been the most aggressive interest rate hiking cycle we’ve seen in the past 40 years. Central banks across the globe really attempted to bring down inflation. As Vim mentioned, that’s a significant impact on all asset classes, with fixed income, as you mentioned Linda being the most directly impacted. So, we have to kind of step back a little bit and try to figure out what our goal is as a bond manager. What we try to do is to position the portfolios in anticipation of future interest rate moves. It’s kind of like the old saying of Wayne Gretzky, who used to say, “skate where the puck is going to be.” So, we’re trying to do this on the fixed income side; trying to position ahead of time for what we think is likely to play out over the next six to twelve months. To accomplish this, we first have to understand what the decision function is of global central banks. The decision function means effectively, what are they trying to accomplish this cycle. This cycle, they’ve been actually quite transparent about it. Their goal is to bring down inflation as fast as possible, down to the 2% target and hopefully avoiding a recession. Again, that’s not their main concern here. The main concern is to bring down inflation. What this meant is that central banks needed to hike aggressively.

In 2022, CPI was running well above 7%, and it also meant that they were going to have to hike higher than the last interest rate cycle. There’s a variety of reasons why CPI was running so hot. Partly the central banks made some errors in judging how quickly and how stubborn inflation would be, but there was also a variety of other issues with supply chain issues and obviously the Ukrainian invasion. There were a lot of reasons that pushed inflation higher. Gauging that, not only are interest rates going to go up rapidly and aggressively, but also they’re going to go higher than the last [hiking] cycle. That was really the most difficult part for most market participants across asset classes, whether it was equity stocks or private assets. It was quite difficult for us as well. So, it is about trying to understand what that [central bank] playbook would mean, stepping back and looking at what happened before, and having an understanding that interest rates have to be restrictive enough to pull down inflation.

Generally, it means interest rates have to be above the headline inflation number, which we have finally just seen. So, for most of 2021 and 2022, knowing this, we maintained a short duration bias in our portfolios. This means that our interest rate risk was less than the benchmark that we have. And specifically, we overweighted our position in cash and 30-year bonds. So, that blended duration of long bonds and cash tends to outperform in interest rate hiking cycles as the five- to ten-year part of the curve, specifically five-year bonds, take the brunt of the impact of interest rate hiking cycles. We also reduced our credit exposure, specifically in higher beta Financials and cyclical issuers. The rationale behind this is that if you take another step back and look at what the central banks are trying to accomplish by hiking so aggressively, they’re really trying to drastically slow down the economy. Obviously, this has negative implications for cyclicals and certain financials, as Vim mentioned with REITs. And so when you think of it from a lending perspective on subprime borrowers and lenders, we really want to make sure we have no exposure to that type of weaker lending markets, which is why, again, we like the Canadian banks, as I mentioned in the first question.

However, as we move forward, we have to be projecting or anticipating where the world is going. From an interest rate perspective, as we entered 2023, we flipped our duration to long and this means we’re actually having more interest rate risk in the portfolio than our benchmark. We believe that core inflation is going to remain sticky around 3%, but at the same time, we also think that global central banks for the most part are going to win their battle with inflation during this cycle. This means we effectively expect central banks’ hiking cycles to end in 2023 across the globe. Maybe not in Japan, where they might go into 2024, but the Bank of Canada, the ECB, the Fed, Bank of England, all of them should have only a few hikes left. There may be one hike left for Canada and maybe one in the U.S. over the course of the summer, but ultimately, we do feel that we’re very close to the end. So, as we expect the interest rate cycle to end, as bond managers we have to anticipate the next leg of that, which is eventual interest rate cuts.

We currently expect these to begin probably in early 2024. It might be late 2023, but we do expect interest rate cuts. So, not only do we have this long duration bias, which is [having] more interest rate risk than our benchmark, we’re also now flipping the positioning of our yield curve exposure to targeting an overweight in five- to ten-year bonds. As I mentioned before, they bear the brunt of the pain, I guess you should say, in a interest rate hiking cycle. But they also normally benefit the most from the cutting cycle. At the same time, we remain defensive on credit spreads. They typically widen into economic slowdowns. We do see some pockets of value, specifically, Canadian bank senior debt looks quite attractive at current levels.

Linda Watts: Thanks, Derek. And now to the last of our three key questions.

What are your views on the current valuations in the equity and the fixed income markets?

Linda Watts: So, Vim, let’s start with you.

Vim Thasan: Thanks, Linda. When you look at the overall valuation for the market, sometimes it won’t tell you the whole picture because the market is a composition of different sectors and companies. So as bottom-up value investors, we spend less time on the aggregate and spend more time diving into individual industries and companies to understand what those valuations are telling you. And this is where our independent research-driven process can truly add valuable insights. Let me share some observations on the outlook from what we’re hearing at a higher level. The consensus view and management commentary is calling for a slowdown. It’s being called different things, it’s being called a soft landing, a mild recession, a softening or deterioration. But generally, there is a cautious approach to guidance, to hiring and to investment. Now as it relates to valuations and when you unpack the market valuations, what you’re seeing is that the sentiment embedded in market valuation is pretty negative on Consumer Discretionary stocks, on the concern of a consumer recession, on resource stocks, excluding gold, on bank stocks, partly from the U.S. regional banking crisis, but broader concerns around the macro too.

Some of this is predicated on peak earnings, with a fear of where the economy is heading. And therefore, economically sensitive areas are offering much more attractive valuations compared to some areas of safety like gold or Consumer Staples. Now, what we do at this point in time I think is critical. What we’re doing is we’re building our wish list of names. We have several files in progress and we’re letting our disciplined process and our work guide our decisions, because these markets will go through cycles of fear and greed. And you’re seeing that now for various reasons. As value investors, we’re just using it as an opportunity to find these quality businesses that are going through that cycle of fear so we can take advantage of it. And this is reflective of what we’ve seen over the last three years. We’ve had substantial volatility created by factors you couldn’t predict — the pandemic, the Russia-Ukraine war, the elevated inflation and higher rates. This volatility will continue to create opportunities and that’s very much what we’re focused on.

We’ve added eleven new names in the large cap portfolio across a number of sectors during these periods of volatility, and we suspect that more volatility will bring more opportunities. I think what’s more important is that our disciplined process will ride through these different cycles of different opportunities and different aspects that may impact the market at any point in time. We’ll continue to look for that 50% upside over three years. We’ll continue to do a one third sale when a stock hits our target price. And right now, we are seeing good prospective returns in our portfolio. And you can just look at the top ten holdings in our names and see that there’s very attractive returns, in some cases greater than 50% in individual names. So, the prospective returns for the portfolio looks very attractive As stock prices dislocate, we will recycle capital into more attractively valued companies and away from companies that are more in greed stage of the cycle. But our process remains consistent through all rate and economic environments, and it’s a very disciplined system to capitalize on these cycles of emotions that will be driven by different factors, whether it’s a U.S. banking crisis or whatever the future may bring.

Linda Watts: Thanks, Vim. Derek, how about valuations from a fixed income perspective? Could you comment on that, please?

Derek Brown: Thanks, Linda. So, first and foremost, as Vim has reminded everyone, it is important to note that Buetel Goodman is at its heart a value shop, and that includes fixed income too. We just do it a little bit differently. Interest rates are the primary driver of fixed income returns, so that’s how we value things. Our current view on interest rates right now is that the 10-year yields in Canada and the U.S. both peaked in late 2022, so around 3.75% in Canada and around 4.30% in the U.S. Why we focus on the 10-year yield is because it is really going to determine the total return from a bond fund. It’s not so much what the Fed and the Bank of Canada are doing; yes, there are repercussions across the curve from their actions, but for total return to investors, the 10-year is really what you want to be focusing on. To reiterate, we expect the Bank of Canada and the Fed are likely to be done with their hiking cycle soon, but we wouldn’t be too surprised to see one more hike over the summer from either of the central banks.

We expect core inflation, specifically service inflation, to remain sticky and stay above 3%, probably until we likely get a recession. Service inflation is mainly driven by wage growth, and I think we’ve seen a lot of headlines over the last six to twelve months that wages are very sticky, and wages continue to go up. We’ve seen some strikes and things going on in society and that’s not really going away just yet. So, the central banks are really targeting wage growth and service inflation because they need that to drop if they’re going to get their headline inflation target back down to 2%. They keep referring to it in the media or in press conferences as the need to create slack in the labour market. This is really code for a higher unemployment rate. They just can’t really say it, but that’s really what they’re trying to do. They’re trying to drive the unemployment rate higher. This means that they’re likely going to look through minor economic weakness like we saw back in March with the banking situation in the U.S. The Federal Reserve still hiked during that process and then continued to hike afterwards.

They’re going to do what they can to just keep rates higher than people expect, and then over time, ultimately they want to make sure inflation expectations and inflation itself moves back towards the 2% [target]. This generally means that the unemployment rate will need to rise by at least 1% over the next six to nine months and potentially as high as 2%. And it’s possible that even with that happening, that the Canadian and U.S. economies do avoid a recession due to the large government spending programs we’ve seen in both countries, a huge amount of immigration in Canada, and generally relatively high energy prices — $70–$75 a barrel is generally good for Canada. But even in that soft landing, no recession narrative, that narrative still requires the unemployment rate to go up at least 1% from its current all-time lows in both North American economies. So, the issue, from our perspective, is with the soft lending narrative — in Canada and the U.S, we’ve never seen a rise of 1% in the unemployment rate without an accompanying recession. That contradicts the narrative that says, effectively, the unemployment rate goes up a little bit, inflation falls, and everything’s fine again.

We’ve just never seen that happen, and while this is a unique cycle, it’s just not our base case at this point. We ultimately think a weaker labour market will weigh on consumer spending, which is actually quite weak when you look at it from volume terms and you are adjusting it for the increase in prices. Most of the data we see on retail sales or even revenues are nominal if it includes the price increases and the inflation in those numbers. Ultimately, when you look at it from a volume perspective, the amount of units actually being bought, those numbers are actually quite weak.

We expect the combination of higher interest rates and slightly higher unemployment rates, combined with weaker consumer demand, should significantly lower inflation in late 2023 and into 2024. It doesn’t necessarily mean we get back to 2%, but we’re going to be in the 3% zone. This should allow central banks to begin lowering their interest rates towards what they call their neutral rate, which is roughly 2.5% in both Canada and the U.S.

Now, as all times, and as Vim alluded to before, markets are going to do what they’re going to do. They’re going to overreact most of the time. We do expect bond yields to overshoot any material rally. If there’s a signal of interest rate cuts or a slowdown in the economy, we expect the Canadian five-year and ten-year bond yields to fall, probably below the central bank neutral rates of 2.5%, most likely sometime in 2024. Whether that’s down to 2.0% or 2.25%, we’re not fully sure at this point. But we do expect a material rally, which would be over 100 basis points from here, which obviously bodes well for total returns on bonds.

From a credit valuation perspective, looking at where are credit spreads on corporate bonds, they’re somewhat attractive from an outright level. Historically, you would say current levels look pretty good, especially in high-quality, short corporate bonds. So, anything under three-, four-, five-year maturities, some of these spreads look pretty attractive. However, considering we expect an economic slowdown and are likely to be entering into contraction over the second half of 2023, the riskier parts of the credit spectrum, like the weaker balance sheet, illiquid investment-grade issuers, high yield leveraged loans, or private debt, they really don’t look attractive at this point. They’re not offering enough spread compensation for where we expect the economy to be going and what that means for their balance sheets.

So, we do expect credit spreads to widen over the next year as the economy slows down and the consumer spending weakens. But we don’t expect a dramatic widening. We don’t expect a 2008 or a COVID 2020 widening that we saw in credit spreads. We expect something a little bit more along the lines of what we saw in 2001, 2012 and 2016. If you were to look at those spread movements, historically, we would expect that credit spreads likely need to move another 30 to 50 basis points from current levels. This has negative implications for total returns, which is why we’re being defensive and really high grading the quality of the corporate portfolio and taking down the weight of the portfolio. Not only do we expect spreads to widen, we think they’ll kind of have to stay there and stay wide for a while until the central banks ultimately signal that they’re willing to cut interest rates and not just cut them a little bit, but down to an accommodative interest rate level. So that’s going to have to be 3% or lower. Ultimately, we remain defensive on credit, but we do see opportunities along the yield curve, specifically in five- to ten-year bonds, Canadian bonds, specifically in provincial bonds, and we really like being overweight duration over the next twelve months. So again, that’s having more interest rate risk in the portfolio, as we expect yields to fall over the next nine to twelve months.

Linda Watts: Thank you both Derek and Vim. In terms of Q&A, we’ve received a number of interesting questions, but I’m looking at the time here and we’re pretty close to time, so let me just see if I can at least cover one or two. After a really tough year in 2022, the Canadian bond market and equity markets have delivered positive performance year to date. To what do you attribute that turnaround? Vim, why don’t we start with you?

Vim Thasan: Thanks, Linda. To your point, 2022 was a very challenging year for the markets, and that followed a really strong market in 2021 where the TSX was up over 24%, and it was broad based; I think ten out of the eleven sectors were actually positive. Fast forward to 2022, and the TSX Composite was down about 6%. This was driven by the Russia-Ukraine war that fueled inflation and tightened supply chains and led to the rate hikes that had no end in sight for a certain period of time. That caused concern about an impending recession, so the market was down. But it’s interesting that when you unpack that and look at what was happening under the market, Technology was the worst performing sector in Canada, down over 50%, but Energy was up over 30%, which is kind of counter to what you’d think of in a normal kind of down-market scenario. Now let’s fast forward to this year. In 2023, essentially, things weren’t as bad as the market expected at the end of 2022, and so the sentiment and valuation shifted.

Part of the market return is probably more multiple expansion and expectation shifting than actual earnings, which are a little bit more muted. And we believe some of the factors that have helped 2023 returns year to date is, as Derek mentioned, a more resilient consumer and it’s being supported by better jobs and better spending than you would have expected, as well as inflation starting to recede and maybe some optimism that we’re closer to peak rates. There certainly was some optimism that started at the end of 2022 around China reopening, and we saw that in a number of our companies talking about the move away from zero-COVID policy and what that means to underlying earnings from some of the regional exposure. And the markets reacted accordingly. So, in 2023, the market started off with a bang. In January alone, the Canadian market was up 7%. And interestingly, after the U.S. regional banking crisis in March and now the U.S. debt ceiling, the market still remains strong. But when you unpack it, it’s quite fascinating what’s happening there as well. Technology is the best performing sector in the U.S. and Canada, and Energy and banks are some of the worst. So, this is reflective of some of the underpinnings of industries and sectors that the market is really focused on now.

Our view is that every year, including 2023 or 2024, will bring different sets of challenges and opportunities. And it’s really hard to predict, as we talked about. Some of the factors over the last three years that really distorted the market — no one picked a health pandemic, no one picked a war, no one picked surging inflation. And quite frankly, as we look forward, who knows what it’s going to be next? Maybe it’s the 2024 U.S. elections, maybe the war ends. At Beutel Goodman, we’re very much focused on finding attractive businesses. So, we’re not trying to predict these events, but inevitably these events will create distortions and our process and doing work on these individual companies will offer some opportunities. So, this hopefully gives some context around what’s happened so far in 2023 and how we’re thinking about it going forward.

Linda Watts: Thank you, Vim. And Derek, I will give you just a quick opportunity to comment. We’re right up on time here.

Derek Brown: I’ll try to keep it quick. So fixed income’s return profile is in the name — it’s a fixed income that you receive over time. When you have the quickest, most aggressive interest rate hiking cycle in 40 years, the coupons just don’t keep up with where outright yields are going. What we’ve seen in 2023 is how markets overreact, so they overreacted in 2022 and they kind of pulled back here in 2023. In addition to that, the coupons have reset dramatically higher. You’re getting over 4% yield and that’s really paying investors on top of that. So, it’s a combination of the market going a little bit too far in 2022 and the coupons resetting higher and ultimately, finally providing income again in fixed income. So those two things have really kind of driven the return so far this year.

Linda Watts: Thanks, Derek. Thank you both for taking the time to discuss these important topics with us. There’s a number of questions we received that we’re not going to get to today, so if you’d like to send your question to a Beutel Goodman representative, they will follow up with you directly. You can also visit our website at www.beutelgoodman.com where you can find regular insight articles, white papers, as well as our previous webinars. They cover a diverse range of investment themes. We hope to see you again for our next 3 Key Questions webinar later this year. Thank you.

Beutel, Goodman & Company Ltd.

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