At the beginning of the year, Laurentian Bank’s chief strategist Luc Vallée made a bold recommendation that turned out to be a great call. While investors were cautious, he was bullish, telling investors that now was the time to put cash to work and buy stocks. Several months later, the S&P/TSX Composite Index had advanced 16 per cent year-to-date, closing at a record high on April 23.
The Globe and Mail recently spoke with Mr. Vallée to get his market outlook for the balance of 2019. Here are excerpts from the conversation, with an expanded version available to subscribers online at tgam.ca/inside-the-market.
According to a report issued in May, you are targeting the S&P/TSX Composite Index to reach 17,500 before year-end and 19,000 by the end of 2020. What gives you this strong conviction?
Donald Trump is using the same strategy as usual – one step forward, then two steps backward, then two steps forward and we don’t really know how to dance with him. The World Bank reduced, again, its global growth forecast for 2019 and 2020 and most of it is based on trade uncertainty. So if he continues along this path, he is going to create so much [economic] slowdown, and there is a risk that this slowdown would touch the United States. That would make his re-election much more difficult because no president has ever won an election during a recession.
The thing that bothers most Chinese is that we have put a stick in the wheel of their two initiatives for their long-term development: “Made in China 2025,” which aims to dominate the high-value-added manufacturing sector within a short-term horizon, and the other one is the “Belt and Road” initiative; the horizon for that is 2049, 100 years after the Chinese revolution. The idea of that initiative is to deploy technological and physical infrastructure globally, outside of China, to increase its influence economically and politically over the planet. That is the concern of Donald Trump.
The Trump administration wants China to play by the rules of international trade, which is don't steal technology, don't steal intellectual property, reduce your tariffs, allow us to have direct foreign investment into China and reduce non-tariff barriers.
Now, Trump is going to meet with President Xi in Japan at the end of June and I think suddenly we are going to be very surprised – we are going to see that everybody agrees.
There is going to be an agreement, I don’t know if it’s going to be final or it could be negotiated. I think what is going to transpire are two things: The Chinese will agree to buy more goods from the U.S. and they will agree to change the rules of the game so that they behave more in-line with all the other players on the international trade front.
In order for that to happen, what [the] Americans have required is that the Chinese change their legislation to make it binding. I think that the Chinese will yield so that we leave them alone on their two initiatives. To have the perception that this change in regulation is not forced, it will be delayed. That delay will be short but the Chinese will have to do the required change, otherwise the 25-per-cent tariffs will be re-imposed on imports. I think that delay should be about a year, and it should happen in the fall of 2020 before the U.S. election. That will allow two things: It will allow the Chinese to save face, and it will reduce trade uncertainty so that we won’t have a recession in the United States so Trump will be in a strong position in the fall of 2020. If the Chinese do not do what is required of them, the sanction can be re-imposed and Americans will be behind Trump because he will have been proven right, that he tried to negotiate but again the Chinese could not deliver on their promises to change the laws and behave in a reasonable fashion and then the public will be behind him.
If you believe this strategy is correct, we are going to have a deal in June. If we have a deal in June, then the markets will go up.
So a catalyst to lift the markets is right around the corner.
This month, there is the meeting between Trump and the President of China and that has the potential to make 5-per-cent returns in June, which is incredible. This is the time to put your bet on the table because there may be a very positive outcome.
In your opinion, what is the probability of your scenario playing out?
I put it above 60 per cent. It may not be exactly the scenario that I gave you because I am not negotiating but something that looks very positive is what I think they are aiming for so that the world economy recovers from the slowdown that's building up that is going to affect everyone.
You appear to be taking a barbell approach, recommending defensive sectors such as utilities and telecom stocks, along with cyclical stocks.
We are dropping some safer assets for more cyclical sectors, in assets that are exposed to international trade, because we think that the optimism concerning trade will come back at the end of the month.
Given your S&P/TSX Composite Index targets and the energy sector’s large weighting in the S&P/TSX Composite Index, are you also bullish on energy stocks?
Canadian oil companies are being destroyed now and they are trading at very low multiples, and I can understand that but Canadian companies are rationalizing their expenses; they are not spending as much on development so they will make a lot of cash. Eventually, when they announced their results and investors see the cash they are making and how much cash they are projecting to make in the future, I am not saying that the values of these companies will double, but even if they go up by just 5, 10 or 15 per cent, because of the weight that they have in the index, it will have a big impact on the TSX index. We are not recommending the sector now because there’s no momentum in it. We are looking to put on a position later this year.
What is your call for the largest sector in the S&P/TSX Composite Index – financials?
The curve has flattened so that has not been very good for the banks. If the trade outlook improves and the curve becomes a little more steep, that should help the banking sector.