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Episode 18: What’s up with fixed income, inflation and the global economy as we try to stomp out the pandemic?

Craig Maddock, VP and Senior Portfolio Manager, and Ian Taylor, Assistant VP and Portfolio Manager of the Multi-Asset Management team at MD Financial Management review the second quarter of 2021 – events that impacted markets, MD portfolio performance and key takeaways – and their expectations for what’s ahead.


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With the summer in full swing and the second quarter behind us, we check in with Craig Maddock, Vice-President and Senior Portfolio Manager, and Ian Taylor, Assistant VP and Portfolio manager for episode 18 of the MD Market Watch Podcast. We explored how things are going – covering ongoing imbalances caused by the pandemic, the role of fixed income, inflation scares, performance, how we're positioned and our outlook for the rest of the year.

We had a fair share of market events this quarter – what was the most memorable moment for you from an investment management standpoint?

[Craig Maddock 0:50] Well for me, it was kind of like the peak of everything. We saw rates peak, spreads, stock markets, PMIs – the purchasing managers index, which is a leading indicator of business optimism – it was peaked. It was kind of as good as it gets, everything was looking really, really good. Some risks we saw, you know, bonds were weak on fears of inflation. So that was maybe the one caveat.

We saw a really strong quarter for returns in equities, a little bit of weakness in bonds. Markets really hit all time highs. And then my favourite, you know, we saw the collapse of Bitcoin and other cryptos from their peak in April. So, Bitcoin was down about 50%, which to me is a really good reminder for people around the risks of speculation. But overall, I'd say things were just looking really good for the quarter.

We had seen a rebound in value investing over the last several months, that kind of came to an end at the end of the quarter. And then Canadian equities did really well. Oil prices rocketed higher, like WTO went from about $60 to $75 in the quarter, that was like a 25% gain, which is pretty exciting.

And then maybe last and not the least, but probably the most important, is the vaccine progress. It does seem to be accelerating, economies are reopening, optimism across sectors and countries and just generally is improving, which is a very good thing.

[Ian Taylor 2:07] Well, I think – just building off what Craig said – so as, you know, we're not the only people on the investment management side looking at the markets and seeing the performance. You also see central banks assessing and reassessing their positioning. And that was really prevalent when you look at the Federal Reserve's announcement in June, and they didn't make really any changes to monetary policy. But along with that, they provide projections. And what they've been fairly consistent about over the prior quarters, really since the pandemic outbreak is that monetary policy would remain easy and continue to be easy for quite a long time. There was a lot of what we call capacity or potential that remained untapped in the economy. And as a result, that allows policymakers to be much more accommodative, and make sure that the economy is well supported through this transitionary period until it gets back to full capacity.

And what we heard from the Federal Reserve was reflecting a lot of what Craig was talking about. That things are recovering. Vaccine rollout progress is occurring on a global scale. And so, optimism, being priced into the markets, was also priced into some of their projections, and along with that, the potential for higher interest rates.

So, on the good side, that means the economy is doing well. And at some point, they've gotten away from not thinking about thinking about raising interest rates to actually thinking about thinking about raising interest rates, and that's a good thing.

But the flip side to that is that when markets are pricing in much more accommodative policy, it gives them pause when there's a potential for tighter financial conditions going forward. And it's just something that we haven't had to face for the last year as we've progressed through this period.

So that was a big change and continues to generate a lot of dialogue. But you saw that, right at the end of the quarter, generate lots of change within the market as well.

There was a lot of news about cryptocurrencies, meme stocks and other speculative “investments.” What happened?

[Craig Maddock 4:06] We basically saw a multi-year period of growth stock outperformance got interrupted last fall with a strong value stock surge. Near the end of this quarter, we saw that reverse again and we saw growth stocks come back on and in favour. And I think it's a little bit more nuanced than that, but that's, you know, that's what's getting them the headlines.

Late last year and the beginning of this year, deep value names, and this was like your low-earning or money-losing cyclicals and energies and commodities just did fantastic. We saw a number of very cyclical, as you mentioned, you know meme stocks, which are depressed already – like mall-based video game retailers or you know, movie theatres – were already depressed pre-COVID, but for some bizarre reason, rebounded strongly last year.

Year-to-date, some of the strongest performing stocks are really those that you'd look at their debt and you'd call it junk. Like it's just, it's very risky debt. And yet these are some of the best performing stocks. Which is, you know, a really strong junk rally. So, I think that junk rally is over. That's my claim. That's what I think what happened in this quarter, we sort of saw, maybe that fizzle out, and we're getting back to, maybe and hopefully, something a little bit more normal.

And like, it's summarising, in the recent quarters, it's been kind of like a pendulum swinging back and forth. It's either you've gone from a few growth names doing very well, or some really deep value names doing well. Kind of in the middle, that quality growth or quality value, you know, not really performing excitingly well compared to either deep value or growth depending on the quarter.

So, it's a bit bizarre, but I think investors just sort of forgotten about risk. And maybe some of the behaviour that we've seen is really stupefying over the last while.

Ongoing accommodative policy from central banks and some tightening that may be coming up is a recurring theme – can you talk more about that?

[Ian Taylor 5:45] There's one theme that we've kind of been looking at, which is the imbalance that's created by the event that is the COVID-19 pandemic. And this imbalance has manifested itself, you know, in all areas of the market to a certain extent.

So certainly, if you look at the economy, you're looking through global supply chains, commodity markets, and now even the job market, just huge imbalances that we haven't seen, where, you know, there's a dislocation between unemployment rates in the U.S., for example, and now job vacancies. So, people are actually looking for employees, and they can't find them. And there's a lot of unemployed people. That's going to correct itself over the coming months and years.

And this imbalance extends to a number of things within the market. Too much cash looking for too few investments. So, we've seen some of the big dislocations that, some of these trends were in place before the pandemic outbreak and then accelerated. One of these, as Craig alluded too, was growth versus value. And we've seen that dislocation amplify even further up until earlier this year

These relationships don't necessarily correct overnight. So, it's going to take time. And that's basically what the market’s going through right now. So, we're constantly having to revisit the expectations component because we're dealing with something that's very uncertain, which is the path for this particular pandemic and how that's going to play out, and importantly, how policymakers are going to respond to it – obviously taking very conservative approach at the beginning with very sharp lock downs and now we'll have to see as vaccines rollout, different economies are responding differently.

So, we're still in a very big period of imbalance, except that there's going to be some volatility associated with that uncertainty going forward.

Many investors are concerned about fixed income right now – its performance, its role in the portfolio – what is happening and why is it a concern?

[Craig Maddock 7:34] The interesting backdrop on this is stocks have been so strong lately. Like I mentioned, stocks have been hitting their all time highs in the last quarter, whereas bonds on the other hand, had just had a decent return. So, in the quarter, it was up 1.6%. But that's negative still for the year. So, year-to-date return out of bonds to the end of June was negative. And of course, that pales in comparison when you think of equity returns, which have been up about 10% for the first half of the year.

So, people are worried that maybe bonds don't have much upside from here – yields are quite low. As interest rates start to rise, that's going to have a negative short-term impact on bonds. In the corporate bond market, spreads are really tight, which means you're not getting paid a lot of extra return for taking on corporate bond risk and, as I mentioned before, around some of the lower quality or junkier paper and not paying a lot of returns. And Ian's mentioned, you know, there’s a lot of money chasing few opportunities. So, things are priced pretty much for perfection here and bonds don't look very attractive from a total return standpoint.

However, this is the key piece, as bonds continue to be a core building block of a well-diversified portfolio. And they continue to be a reliable hedge against equity market volatility. Actually, we just witnessed that today where equity markets have come down as have interest rates, providing you some cushion around some of that volatility.

But if you think back to the worst drawdown on equities and we can all think back to the financial crisis, where the MSCI All Country World Index was down 58% from basically Halloween of 2007 through to March of 2009, down 58%. Versus bonds, and you think their worst drawdown was back in [the] ‘94 period, where they were down 5%. 58% versus 5%. I think there's a real big difference between bonds and equities. And I think bonds still deserve to be in portfolios as a function of building a diversified portfolio and giving you that protection to the extent that we do see equity market volatility.

As I mentioned, things were kind of peaking in the quarter, priced for perfection. Ian gave a backdrop of, you know, still some uncertainty going forward and COVID's still with us. So, we really shouldn't be at the point where equity markets and risk assets and everything else are priced for perfection. And bonds are basically thrown out.

Most recently, as an example, when COVID did first arise, we saw equities pretty much collapse in the beginning of the year to bounce back. But you know, they bounced back and equities were down about 1%. bonds were up 7.5% in that period. So, they did their job. So, I think we've even seen recent evidence of bonds, doing what they're supposed to be doing as a diversified part of a portfolio.

Yes, there's volatility. Yes, there's uncertainty around interest rates and what's going to happen. We still think long term, you need to have bonds as a part of your portfolio.

What have we done to prepare for this situation?

[Ian Taylor 10:19] The most important area, is the work that we do more of a foundational type portfolio approach to investing, as Craig alluded to, you know, something we call the strategic asset allocation or your portfolio mix. And the fact that bonds do play a role.

The vast majority of the portfolios that we would otherwise recommend to investors, have a very specific component carved out for fixed income. And that is to provide stability, to complement an overall portfolio that's tilted towards more of the growth-oriented investments like equities, or even alternative investments.

And that's another area where we continue to be, as I say, proactive. We've certainly launched the MD Platinum Pools. We have a private equity offering, a private real estate offering and now we're offering a private credit solution as well. Something that may interest investors, but really, that's there to complement the growth component of the portfolio, but also substitute some of the yield enhancement that you would otherwise get from some of our fixed income investments. And again, this is more strategic, this isn't just taking a look at the next 6-to-12 months, this is really looking out 5-to-10 years and positioning your portfolio accordingly.

Not just that we look at the developments in the fixed income environment. It has an influence on what happens in the equity market. Bond market, obviously an influence on the equity market. And so, we've made some enhancements to our U.S. equity solutions over the last quarter, introducing a new value manager for example, Columbia Threadneedle [Investments]. A big focus on earnings growth, which, you know, with the scarcity that we've talked about of great investment opportunities, it is extremely important to do that. And that's really thinking about over the next 10 years, not the next 10 months.

Given all that information, what's our stance on fixed income?

[Craig Maddock 12:00] Yeah, I think it's important to remember Alex, our portfolios are dynamically managed with a focus on capital preservation. So, the concerns that some investors have around fixed income and maybe the role in a portfolio or the fact that in a short period of time it could have a negative return, there are things we can and do to manage the portfolios on a regular basis.

So, for instance, we can shorten the duration, which is basically reducing or removing some of the interest rate risk in an event of rising interest rate period. We can also then have over weighted credit. So, I mentioned before that, you know, spreads are tight, which means you're not getting paid a lot more for taking on extra incremental credit risk, but you still are getting paid some. So, we have opportunistically added to our global sleeve of higher yielding securities, so we've got more in higher yielding global securities than we've had at any point in time previously, in order to pick up on additional return.

And then of course, there's other ways to get additional return. Ian mentioned private credit for clients who are able to access our [MD] Platinum suite. But for those who aren't, we also do manage an MD Strategic Yield Fund and our [MDPIM] Strategic Yield Pool, which gives us an alternative basket of credit, generally higher yielding credit – global credit – which does generate a higher return than some of our traditional bond funds.

So, all those things together, mean we're doing everything we can to try to incrementally improve the return in the kind of interest rate environment we're in. And, of course, we'll adjust that, as Ian mentioned, with the fact that things are changing on a pretty much constant basis now. We'll change our positions with that to give us the best chance of succeeding given the opportunities that come about.

[Ian Taylor 13:29] The only thing I'll add to that Alex is really we also look at it across assets. And so, with the moves we've seen in the fixed income environment, our expectations still continues to be that, you know, there's a low probability of recession over the next 12-to-18 months.

Policy, even if it gets a little tighter, is still going to be very accommodative. And there's a lot of capacity remaining in the economy. And generally, that's a fairly good tailwind for stock markets. So, we have also reduced our fixed income holdings overall and added to the stock positions within our portfolios. And we've reduced some of that stock position of last quarter, but we've maintained an overweight to stocks for some time now.

How did global markets fare in the second quarter?

[Ian Taylor 14:09] Very well Alex. So, another very strong quarter for stock markets globally. It was led this time by North America. Certainly seen the reopening theme coming a little bit sooner to North American markets. And with that, actually, the TSX did very strong, up 8.5% for the quarter. The S&P 500 wasn't up as much, although when you account for the fact that the Canadian dollar weakened out somewhat, it performed almost inline with the TSX.

Weaker internationally and in emerging markets. Somewhat more uncertain the path to recovery in those markets and that became priced in a little bit more throughout the quarter.

We also saw bond markets, and certainly talked a lot about bonds, and Craig alluded to it, but still last quarter, even with the inflation concerns that were certainly hitting the headlines, the bond market actually rallied – yields  came in and we saw a positive return of about 1.7%.

So, for a balanced portfolio that's, that's a good environment, stocks up, bonds up and a pretty strong quarter overall.

We spent quite a bit of time talking about different parts of the market driving performance last quarter, is that still the case?

[Ian Taylor 15:19] Well, first, it's good to just reiterate what a value stock currently looks like. And if you look at the value indices, they're generally, relative to the more core index on a global basis, overweight, very cyclically geared stocks. And we're talking about financials, materials, energy stocks, industrial stocks. They're all more represented in the value index and less represented in the growth index relative to the core index.

And so, with this reopening theme and a fairly strong background for capital markets, it was a very strong start to the quarter for value stocks – [they] were leading the way carrying off the momentum, really that began since the end of last year.

However, as we got towards the end of the quarter, that enthusiasm started to turn. So, you know, we started to see the bond market start to reprice growth expectations and this was amplified somewhat by even a slightly more hawkish U.S. Federal Reserve [that] gave pause to markets from that perspective.

So, you're really going to have to see a resumption of some of those earlier expectations or improvement in economic expectations to see the cyclically geared stocks take the next leg higher. And that certainly was called into question towards the end of the quarter, and not so much a leadership position from value stocks with that respect.

The economic impact of COVID-19 will be felt for quite some time, but where do we stand from a global economic standpoint?

[Craig Maddock 16:41] Notwithstanding the ongoing impacts of COVID, [the] reduced activity as a result, the economy is actually doing quite well. As Ian mentioned, we've seen an uptick in inflation. It's partially because of some supply constraints, but mostly because of increased demand. There's lots of liquidity in the system right now. Financial conditions supporting economic growth remain extremely favourable.

So, we expect that the ongoing vaccine rollout is going to continue. Economies are going to reopen, and within the next, I'd say 12 months, we'd expect to see the economies for the better part of being fully open, and major economic drivers of the economy open up even sooner.

So, this is exciting on many fronts. But as we've already discussed, maybe it's looking a little too good to be true.

Why is everyone so preoccupied by inflation?

[Ian Taylor 17:32] Investors are very worried about inflation. And over the long haul, when we're looking at capital markets, a big component of your return should be a real component, which is a return over and above inflation. And if you get very high inflation that reduces your return – what the real return on your investments is.

So that should be the number one concern, when it comes to investors when they're focusing on inflation is, if inflation is going to be super high, you should demand a higher return overall, nominal return, to protect and grow your wealth. And if it's just a return that's just barely keeping up with inflation or not even keeping up with inflation, obviously, that's not a good outcome.

The effects or the cause of inflation is really what the debate is circled around right now. We have these huge imbalances, that I already mentioned, that were created by the pandemic. There's, you know, a big mismatch between supply and demand. These asynchronous lockdowns globally, and we have global supply chains now meant that, you know, not only was demand fluctuating significantly, but our ability to meet that demand was fluctuating significantly. And what people were demanding changed materially from when they were locked down, and we've seen this with lumber prices, which skyrocketed and then have now fallen back to earth as the economy opens and people are looking at doing something else with their money. Right, and starting to do things that they were previously prohibited to do.

And so, all that creates these massive imbalances and its clear that's created a lot of price pressures. And you can see it in the incoming data. You can see it in the expectations component. I think the big thing is that a lot of the considerations that were in place prior to the pandemic, that led to generally low and stable inflation, they're still there. So, the big difference really is, some are saying, well, the extraordinary monetary policy, extraordinary fiscal policy that's in place today is going to, at some point, lead to massive inflation that's going to run out of control. And that would be, the I guess, the worst-case scenario on the inflation front. We don't see that happening.

We think the policy stance has generally been warranted given the massive amount of folks who are unemployed and the output gap that's been created. As that closes, and you've already seen it, so, expectations have started to come down as economic inflation forecasts have come up and it's a bit more of a balance at this point in time, then there was in the prior quarter.

Did we make any tactical changes as a result of the renewed focus on inflation?

[Ian Taylor 19:57] Yes, well, I think the inflation component, you can really extract that from a bond yield because you can buy inflation linked bonds. And so, if you take a look at some of the decisions that have been made, not just this past quarter, but throughout the year, a lot of them have been tied to the changing prospects for inflation.

Earlier in the year, we thought inflation expectations would rebound in a meaningful way as the economy's were reopening, vaccines were proving to be effective. And you know, that was just the expectation and inflation expectations were still priced fairly low. And that's what happened. So, at that time, we were certainly very short duration. Craig already alluded to the fact, that means we had reduced significantly our sensitivity to interest rates. And as a result, the inflation expectations component that's embedded into bond yields or even interest rates.

More recently as that became fully priced, I mean, inflation expectations were even higher than pre-pandemic levels at one point in the quarter. At that point, we'd taken a much more neutral stance on interest rates, given there wasn't much more upside, given our view that, you know, we don't think inflation is going to be significantly higher this economic cycle than it was the last.

More recently, as we've seen that component come back in and bond yields come back in, we started to reintroduce a more meaningful short duration position once again, managing that interest rate, you know, the risk of higher interest rates. Which, although it may not materialise in the short, short term, we certainly think as that recovery theme is fully priced in over the next 6-to-12 months, as the economy actually opens to its full capacity over that period, that you're definitely going to see bond yields move, at least marginally higher from where they are today at very, very low levels.

What are some of the notable tactical adjustments we've made recently?

[Ian Taylor 21:42] So even though our overall view on the economy hasn't changed materially over the last quarter, there's some nuances there that we would otherwise want to pick up. And really, we talk about as good as it gets, and the stock market being at record highs. And it's been that way for a while, and we've been patient around not reducing our positioning there.

But more recently, it has become a bit more apparent that the upside/downside trade-off for a bad investment as some of the tailwinds around policy, or just the initial reopening and the optimism around that, starts to wane that the further upside is, you know, it's not that it's not likely, it's just the potential for that versus downside risk at this point in time – it’s not as good a balance. So, we have reduced our equity position, but we still maintain a positive or more procyclical stance.

Within the equity component, you know, we did add a short to emerging markets. Earlier this year, it became apparent that China, which had proceeded fairly well after the COVID outbreak, in having its own domestic economy do well. But they added a lot of stimulus in the short term to offset the negative pressures from global forces where, you know, in the U.S., Europe, you know, the rest of the developed world for sure, in parts of emerging markets were shutting down, and that has an impact on China. More earlier this year, we've definitely seen that China is now starting to remove some of that policy support as the rest of the global economy picks up. And so, there's a bit of a balance there but we do think that favours developed markets a bit more.

We've also seen policymakers, not just in the U.S., but policymakers actually domestically in China, take a bit more of an aggressive stance towards some of the companies that are listed there. And that certainly had a negative impact on investor sentiment. So, combining those things led us to introduce more of an underweight position to emerging markets.

So, I'd say those are two key positions along with the fixed income changes that we've made that would be notable.

Did anything happen in the quarter that materially impacted our long-term thinking or the long-term performance of MD Funds and Portfolios?

[Craig Maddock 23:48] Well, as we mentioned, a lot of things are at or near all time highs. Which doesn't mean they can't go higher but typically that has an impact on long term results. So, with stock market valuations hitting their highs, credit spreads being low, interest rates being low, and you know, at the bottom end of any reasonable range, the same time you got economic growth picking up – it’s kind of a weird backdrop.

So, it would suggest that some of the recent strength received in markets may have overshot what you would see for the long term meaning their long-term potential returns are likely a bit lower. Going forward, definitely lower than some of the real strength we've seen in the last few years out of equity and or fixed income markets.

The biggest challenge however, and this is your comment around short term versus long term, is trying to figure out exactly how and when that's going to happen. And that's what Ian was referring to as we still believe that equities are the best place to make incremental return. And notwithstanding the fact that there are definitely some risks, we just don't know exactly when that's going to show up.

The ideal state, however, and this is what central bankers and policymakers are working on, is can they manufacture a gradual slowdown? Right, so we're going to get a reopening of the economy, a real hit to economic growth, and lots of optimism, and just lots of activity as people get back to work and back to living their lives normally. Huge amount of initial demand, but then, how do you level off from there? And that's going to be the challenge. Often, it is lumpy and sporadic. The goal of policymakers is to try to make that as smooth as possible, which means the impact on long-term returns is less. But the short-term impact might be, you feel it when it does happen. And we just don't know when it's going to happen.

What were some of the largest contributors and detractors to performance overall during the quarter?

[Craig Maddock 25:28] We've already talked about value and growth. Those are definitely have been, you know, big drivers, as I mentioned, select few stocks doing well, or some deep value stocks doing well. In the quarter though, we saw a really diverse set of factors driving markets around the world. And I think this was, for me, maybe an interesting turning point where it wasn't all about growth versus value.

If you look around the world, Ian mentioned already, Canada was actually one of the stronger stock markets. But one of our strongest sectors in the quarter was technology. But that wasn't the case in the United States where the strongest sector was real estate.

And then if you look outside of North America, the strongest sector was healthcare. And if you look even further into emerging markets, the strongest sector was industrials.

So, I think it was really an interesting quarter, even though I've mentioned like the peak of everything and, you know, all the stuff kind of coming together at an inflection point, perhaps, with respect to COVID, and policy and everything else. It was really nice to see a very diverse set of things working as you looked around the world. And not just technology versus financial as an example, like we've seen over the last number of months.

Additionally, while not the strongest sector, energy actually made a huge comeback, as I mentioned earlier with WTI prices. And it was a very strong contributor to performance, although not number one anywhere, it was like right at the top of the list across the world. This helped our small cap Canadian mandate performed very well with the likes of ARC Resources posting really strong gains in the quarter.

Offset, utilities generally weak around the world, which not surprising with input costs, generally being energy, which had gone up. And this discussion we've had around, you know, potential fears of inflation or rising interest rates, not a really good thing for utilities, so they were one of the weaker parts of the sectors.

And then of course, the portfolio's overall in that backdrop, as Ian mentioned already, pretty good. So, you know, ranging returns were strong, if not stronger than our long-term expectations for portfolios. Equity biased portfolios did exceptionally well, fixed income portfolios, not quite as good, but still positive for the quarter.

To discuss our outlook, let’s discuss our capital market assumptions. Firstly, what is capital market assumptions?

[Craig Maddock 27:36] Yes, we are actually just updating our returns. So, when you mentioned the question earlier, around long term, that's really where the rubber hits the road for us. And we put our assumptions in as to what we think returns in markets are going to do over generally the next decade. That's sort of the time horizon that we're trying to predict.

And our capital market assumptions are estimates for return, for risk, and for correlation of assets. And that's what we use to ultimately build a robust portfolio that we manage for our clients. And our process is unique, because we take into consideration all kinds of different aspects. So, we're looking at active return versus passive return, we look at the risk that you get from an active strategy versus a passive strategy. And then of course, we spend a lot of time considering how all these investments work together, the correlation of the returns both from an active and a passive standpoint.

But most importantly, and this is the hard part, and we discussed a little bit earlier, is the forecast. It's not what did portfolios do in the last 10 years? It's what do you think portfolios will do in the next 10 years? And the markets have reshaped. There is different leaders that might emerge going forward than there were in the past, the strength and size of economies will shift through time. So, all these things are, and starting valuations, as we mentioned, which are all pretty high right now, are all contributing factors to how we think about what's going to happen going forward.

We're just finalising that work. However, it would appear from this stage, is that our return estimates are going to be somewhat similar to our previous ones. However, where they're actually coming from might alter a little bit with maybe equity returns coming down and bond returns coming up just slightly.

But generally, if you had a portfolio in place before, there's likely no need to make any changes to that portfolio as a result of our changes in the next 10 years.

What is the latest information – capital market assumptions – telling us?

[Ian Taylor 29:24] Well yeah, I just agree with what Craig just mentioned, that, you know, from a portfolio standpoint and an investor who's got a longer time horizon than just a few years – absolutely, they should feel comfortable with their portfolio asset mix, assuming it was well calibrated to begin with.

Given the potential for fairly reasonable returns out of equity markets is good, but obviously, what a lot of people are focused on right now is the short term and that certainly, you know, we do make some positions there. And so, what I can say is, I still think there's a low probability of recession within the next 12-to-18 months. We're clearly still in the, you know, at some point in the recovery phase as opposed to the economy is expanding, but there's still meaningful progress to be made on the economy. And that should prevent, you know, financial conditions from getting too tight.

You're more at risk of, if there's going to be the sell off, going to be an adjustment around the optimism that's currently priced in and the realisation that, you know, the economy at some point here is going to normalise, that expectations can't continue to improve forever. But ultimately, from a business cycle perspective, we still [have] a long way to go. And that will leave, you know, monetary policy to be very accommodative. Whether, you know, it's obviously going to tighten at the margin. And then fiscal policy obviously, is going to continue to play an important role. And we certainly heard that not just in the U.S., but in Europe, a bit of a change in tone relative to where we were 10 years ago.

Think back 10 years ago, coming out of the global financial crisis, banks were still repairing their balance sheets on a global basis. They're certainly in a better situation today. Consumers were often repairing their balance sheets as well, many are in a better state today. I know not all, but many are in a better state today. And then from a corporate perspective, Craig mentioned spreads very low, the pandemic did cause some businesses to go into default and leave the economy. But of course, that opens up the room for more productivity going forward, for those resources to be applied elsewhere, where the economy has made a meaningful change and is a bit more dynamic in the next cycle, then there's room for more productivity there.

So, lots of room for optimism. You know, on the risk side, we continue to look at the pandemic, currently the delta variant, which essentially is the COVID pandemic at this point in time, if you look at where that strain is, as far as prevalence, seems like vaccines are effective there. And, for the most part, you know, vaccines are rolling out at a pretty quick pace, and production continues to ramp up. So, that's going to benefit not just the developed markets that have obviously benefited from the vaccines most meaningfully, but it will roll through into the emerging markets here through the end of the year.

And so, some of those policy decisions that are happening in the short term will certainly balance out. And I think, you know, overall, we're going to be in a good place, you know, looking back a year from now, even though there's some uncertainty in the short term.

Any final thoughts?

[Craig Maddock 32:12] Maybe just a huge thank you to our clients who are obviously still on the front lines dealing with the effects of COVID. I know we've talked a lot about its impact on the economy and making money and investing. But let's face it, it's our physician clients that have helped us get through this and for us to feel as optimistic as we do right now about the future, and the ability for things to reopen, because we're actually – we’re going to win against COVID. So, thank you.

[Ian Taylor 32:35] Well said Craig, no need to add to that. For sure.

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