John P. Bryson

Hello and welcome to the Portfolio Intelligence Podcast. I'm your host, John Bryson, head of investment consulting and education savings here at John Hancock Investment Management. Today is December 2, 2024. And as we round up the year—a year of exceptional equity returns, I've invited Sandy Sanders of Manulife Investment Management to the podcast. Sandy is a senior managing director and senior portfolio manager at Manulife, and he is the leader of the U.S. Core Value Equity Team, which manages large-cap value, large-cap core, all-cap core and global equity strategies. Sandy, welcome to the podcast.

Emory W. (Sandy) Sanders

Thanks, John. Great to be here.

John P. Bryson

All right. Hey, listen, you manage a number of portfolios for us. Give us an overview of your investment approach so we can set the stage for the audience.

Emory W. (Sandy) Sanders

Well thanks. We look at companies that have a sustainable competitive advantage. And we're basically a core investor in that we essentially can look at both growth and value stocks together to build a core portfolio. And that flexibility over the years has allowed us to, we think, have an edge because there's more flexibility. We're not essentially stuck in one style box.

And that essentially, coupled with … approximately 50-stock portfolio, so good active share and with a team that's completely dedicated to our philosophy and process. So it's more of a boutique structure. It's focused and that allows us to really rinse, repeat, and constantly trying to get better every day, honing the same investment process year after year.

John P. Bryson

Nice. So you mentioned process, you mentioned rinse and repeat. When our investment consultant team is talking to financial advisors, we often talk about having a definable, defendable, and repeatable process. Can you bring us deeper into your process?

Emory W. (Sandy) Sanders

Absolutely. So what we do is we first start with companies that earn above their cost-of-capital, say they have a good return on invested capital. So this is it. Basically focusing on the quality companies, no matter if it's a growth or a value business. And essentially think of us as avoiding the areas that are lower quality, like generally airlines, automotive, telecom, utilities, metals and mining.

We will shy away from those areas, but then we'll go out in the field. We'll do about 700 meetings a year approximately, meeting with company management teams. Then essentially we'll come back to the office and go through our seven-step process, and it takes a month of work … essentially starting with competitive advantage … understanding what is that business’s sustainable competitive advantage.

And then looking at industry and growth drivers. Financial statement analysis … a management team assessment. And really, the heart and soul of our process is really step number six. This is where we do four scenarios. We do a best case, base case, a bear, and a worst. And these are five-year minimum discounted cash flow models. The base case is what we think the stock is worth essentially today … or …that's the intrinsic value. Or in other words that's 100 cents on the dollar. So that essentially for across all four cases, we use a 10% discount rate. So no matter if it's a company like a consumer … large-cap consumer products company that's a slow, mature business, or it's a high software, a high-growth software business, it's the same discount rate.

So we're leveling the playing field. And essentially what we're doing is that allows us to understand the opportunities out there at any given time. So that base case essentially is that 100%. So let's just say we think a stock's worth $100 in our base case. And the stock this morning is trading at $70 …  so 70 divided by 100.

The stock's $0.70 on the dollar. So we're looking to buy stocks at 70 cents and then sell when we get to 100 cents. We do this with low turnover to approximately about 20% to 25% turnover per year. So we follow about 250 stocks that we vetted in our seven-step process. And every single morning we can look at our inventory of names that are actively vetted and they're ranked by cents on the dollar each morning. And that really essentially allows us to have a repeatable, we think, process that we can hone each year and continue to work on basically building a great portfolio. Approximately 50 stocks that has good margin of safety. At the time of entry, we’re buying stocks again less than 70 cents and selling when they get to 100 cents.

John P. Bryson

You know, it's really got the hallmarks of a classic actively-managed approach, you know. It's going out and meeting with managers, doing your homework, being very thorough. Repeatable process over and over again and then taking a more concentrated portfolio to … to deliver active share and active return. So it's great. It's consistent with a lot of things that we talk about with investors.

So let's, let's dig in a little bit, dig deeper into the portfolio. You’ve basically been overweight consumer discretionary stocks. What do you like about that sector right now?

Emory W. (Sandy) Sanders

When you look at consumer discretionary it really starts with the health of the U.S. consumer. And essentially what we have here basically is, in a U.S. economy that's growing quite nicely, approximately 2.5% to 3% in 2024. And we think it maintains that healthy level of growth next year. But essentially that is being driven by the underpinnings of the economy … s yet two thirds of our GDP is from consumer-related spending and that we are the largest, generally, the largest developed economy growing at this rate.

Other areas like, Canada, Europe, Japan are definitely not growing at the rate we are. So it's a fairly healthy setup that we have with the consumer. Then, we do think that there is growth in the consumer's, wallet. So essentially what you have is full employment, and you've got a, you know, demographic where if you look at the wage earners by quintile, basically the bottom 20% of wage earners, approximately, only represent about 8% of total retail sales.

So the bottom 20% of wage earners, you know, while you get all the bad headlines on, on the television regarding, you know, what's happening out there, paycheck to paycheck and, but the overall impact is fairly modest to the size of the economy. It's only 8% of total retail spending. So, the bulk of folks who have jobs actually have good balance sheets.

They have, wage growth and that essentially that demographic, they essentially think of it as the middle three buckets, that 60% of wage earners in the middle, they represent approximately 75% of all retail spending. So that's where the tonnage is. And that's what keeps me constructive here. For the last couple years, actually. And that's, you know, the market's done well 2024, 2023.

And we've been there at the stress points adding to some of these names when essentially the market panics. But we've fallen back on … say look, the consumer is in good shape here. I don't see any reason why we're going to go into a hard landing. And so that seems to be playing out. So we like online retail. We like some of the home builders, and some of the more, consumer discretionary-related stocks. So that essentially is the crux of it is the strong health of the strong U.S. consumer today.

John P. Bryson

All right. Well, Sandy, I want you to know the Bryson household is doing its fair share. Over the last weekend with Black Friday we have been spending! So we're here to help. Excellent. Hey, listen, let's talk about a couple of other sectors or industries that you find interesting. What else is getting you excited about today?

Emory W. (Sandy) Sanders

When you look at the … where we are in the cycle, we think that the essentially with now Trump, having been, you know, reelected, we do think the overall capital market cycle is likely to kick into a higher gear next year. And that essentially whether it's IPOs, secondaries, mergers and acquisitions, essentially there's been a drought in this activity, essentially in 2022 or 2023 and 2024, you know, as the Fed raised rates aggressively in 2022, they really shut off the capital markets.

And so we do like the investment banks, the large ones, based here in the U.S., seem to be very well positioned. We also like the private equity companies as well. Also, when you think about technology, software and semiconductors continue to actually gather market share in general. So when you think about the way things have … in your daily life, everything that you're doing now is more digitized.

This requires software and semiconductors. And so essentially, even the car today, the cars are becoming much more advanced. And that's, not … not only digital semiconductors, but also analog semiconductors that can sense temperature, noise. And so things like you'll be able to sit in the back of your car in a few years and they'll be a separate music sound.

You know, these are the types of things that I'm sure, you know, when our kids were younger, these were definitely a nice feature or a nice upgrade. But those types of technologies are coming to the market and that really requires software and semiconductor. So we do like technology. In addition to financials, consumer discretionary, and lastly, comm services, digital advertising really is continuing to grow.

You know, there is risk out there basically from the, you know, the government with regards to big tech, we do think some of that noise will start to die down in 2025 in general. But you know certainly is a risk out there. But overall I would say those are the four sectors we'd like. Yeah. Today. And … and that's where we're spending most of their time with this portfolio now.

John P. Bryson

All right. Hey you mentioned technology. I want to hit a couple of things. We've certainly seen large-cap growth perform well. We've seen the market be really narrow in the tech and tech-related companies. If you think about that and you think about high equity valuations, where do we go from here?

Emory W. (Sandy) Sanders

Well, you know, this this is a, you know, a very strong as, you know, market because what's happened is that … that Magnificent Seven essentially, you know. We are at basically 33%, the top names represent, you know, a third of the market today. And what's happened is, is that these companies are producing more free cash flow per dollar of revenue than their peers when the market was this concentrated back in the 1970s with the Nifty 50, as well as in the industrial area back in the 1950s.

So, basically they're twice as or more profitable than their predecessors. And so that's why, you know, with these companies, they're earning these premium valuations because of this enormous profitability. You know, just think of the devices that you use every day and how much margin there is in those devices and how, predictable they are with regard to getting you to upgrade to the next version, you know, every couple of years.

So that's what's different, I think, is that these companies are just extremely strong, extremely high barriers to entry, very difficult to dislodge them. And they're enormously profitable. However, with that being said, we do think that there is a nice set up here with regards to the market broadening out. And I do think that, while these companies—I don't see them collapsing—the Magnificent Seven, I do potentially think they could take a little bit of a breather as you start to see rotation into some of the smaller-cap size companies. And we think more performance is likely to come in a market that's broadening out versus, the domination of this top seven names. So we do see that likely to occur, in general over the next 18 to 24 months.

John P. Bryson

Okay. And then if you think about, new Trump presidency and the Federal Reserve going forward, what are your thoughts on that for the overall markets as this where they from where they stand?

Emory W. (Sandy) Sanders

Well, you know, I think that, it's basically a bullish signal. Honestly, when you look at Trump's agenda, it's essentially for the markets. It's in a matter if you like him or you don't like him. You know, what I see as an investor, looking to allocate capital with an investment process and a team, as we see that the markets go to view this favorably, essentially lower tax rates on the corporate side, is a direct benefit to earnings.

And we were bracing, for this if the … if the presidential election went the other way, we were going to have to reduce our numbers, as you know, basically on higher tax rates, but we don't have that. So that's bullish. Less regulation potentially is also another bullish indicator. And I do think that you're going to see a pickup in mergers and acquisitions.

And so in general … and what we're seeing is that this earnings growth likely, next year, remain strong. We do think potentially a double-digit earnings year in 2025 for the S&P. And that clearly, is a you know, is a positive indicator. And then, you know, when you just take a step back, right.

Trump is you know, he's … he's judging himself by how the market does. You know, that's his report card. And you know, and it's interesting though, when you look back at the various presidents, you know, the performance under Biden as well as under Trump, you know, approximately was very similar with regards to the S&P per year annual return.

So we do think that, you know, we'll see how this shakes out. But as of right now, all the signs are that the bull market is likely to continue.

John P. Bryson

Excellent. Well hey, Sandy, really appreciate an overview of your process, how disciplined it is, how, repeatable it is. And it's really interesting to hear about your enthusiasm around the consumer and the opportunities going forward. So, thanks for joining us on the podcast. We always appreciate hearing from you.

Emory W. (Sandy) Sanders

Thank you. John, thanks so much for having me on.

John P. Bryson

You got it. And folks, if you want to hear more, as always, please subscribe to the Portfolio Intelligence podcast on iTunes or wherever you download your favorite podcast. You can also visit our website JH investments.com to read our viewpoints on macro trends, portfolio construction, alternatives, business building ideas and much, much more. Thanks as always for listening to the show. Have a great rest of 2024.

John P. Bryson

Hello and welcome to the Portfolio Intelligence podcast. I'm your host, John Bryson, head of investment consulting and education savings here at John Hancock Investment Management. I can't believe it. But today is November 15^th, 2024. The year’s flown by and I have invited back Emily Roland and Matt Miskin, our Co-Chief investment strategies here at John Hancock Investment Management, to talk about what is happening in economies and markets around the world. Emily. Matt, welcome.

Emily R. Roland

Hey, John. Great to be here.

Matthew D. Miskin

Thanks for having us.

John P. Bryson

All right. Hey, Emily, I'm going to start with you. Walk us through what has happened in the markets since November 5^th.

Emily R. Roland

So I'd actually even extended John to prior to the election because, as the new administration or as Trump's odds of winning the election increased, we did start to see a rotation in markets, as investors started to … to price those potential political scenarios in. So we saw it across both stocks and bonds. You know, some of the areas that have outperformed, have been U.S. equities.

We've seen credit do well. The idea being there's potential … “potential” for lower, corporate taxes, with this Republican sweep. We've also seen riskier areas like regional banks outperforming on the thought that there could be potential for deregulation, some pro-cyclical policies coming onto the horizon here. Regional banks have a large allocation and small-cap stocks … so that was, a relative winner.

Areas even like lower quality and more speculative companies also saw a bid, I think notably cryptocurrency reaching new all-time highs. There's been an element of sort of animal spirits or positive sentiment kind of taking hold here. And then the dollar, we've seen the dollar rise. A lot of that has been due to the backup and Treasury bond yields.

So we do have higher relative rates here in the United States versus other areas across the globe which are seeing some weaker growth. So some of the areas that have struggled, high-quality bonds, most notably, there have been investors who were … expressed concerns around potential deficit spending, the potential for tighter immigration policy to potentially push up wages.

Pro-cyclical policies also hurting high-quality bonds in a relative basis. And then non-U.S. stocks, investors pricing in potential for, you know, more tariffs. The stronger dollar has also had a negative impact on non-U.S. stocks. There have been some proposals … the potential proposals from the administration, around “America first” that have also … hit non-U.S. stocks on a relative basis.

So a lot of politically-driven sentiment moves. I want to be really careful to say that … sentiment and I know we'll get into this … It isn't the best way to … to think about positioning portfolio. So we are looking past a lot of this noise and focused on the economic data and the fundamental backdrop to make cross-asset decisions.

But to answer your question, these are some of the big moves that we've seen across markets. I will say they've taken a bit of a breather here over the last couple of days after some really sharp moves in either direction. So we'll have to see if some of these trends continue or we start to see a fade of this initial, pre- and post-election response across markets.

John P. Bryson

Thanks, Emily. You've set up a number of things that I want to get into. Matt, I'm going to pivot to you. Emily mentioned animal spirits. I kind of want to talk about U.S. equities right now and to Emily's comment like we've run a lot. Have we gone too far and too fast? And then I want to hear your thoughts on the bond market.

Matthew D. Miskin

Yeah John, the price-to-earnings ratio on the S&P 500 has pushed up to about 22 times. This is about how high we got in 2000 and in 2021—other periods that were, in essence, overvalued markets. The trailing price-to-earnings ratio is 27 times. That again, is really … only times in history … were 2021 and 2000. So the valuation of U.S. equities has increased.

There hasn't been any change in earnings as of late. Earning, for Q3 are coming in at about a 3% growth rate but really haven't grown since 2022. So it's … it's really sentiment. It's, you know, investors just, pushing into equities more. And what we saw actually, which is kind of a good sign … is that, the diversification between stocks and bonds has increased.

So bonds have become more negatively correlated to stocks, which is also in essence, showing investors selling hedges, selling more defensive things, and going into higher risk things. One of the best probably indicators of this are measurement sticks, if you will, is high-yield spreads. So this is the high-yield bond … junk-bond yield versus the Treasury bond yield.

And that is now 2.5%. That's the lowest in 17 years. So the amount of return compensation from yield that you get for taking the additional risk is the least since 2007. And this is another sign of the times … in times like this, when everywhere is, you know, more risk-on positioning and valuations of riskier markets get more elevated.

We tend to think about pruning risk and redeploying capital in higher-quality parts of the market. So that's really what a lot of what Emily and I and a lot of the portfolio managers we're talking to right now are looking at, just after the … the recent move in markets.

John P. Bryson

All right. Perfect. Matt, digging a little bit more on the bond market though. Help me understand the dynamics going there. You mentioned correlations are coming down and differences in how the markets are reacting. How … how is the bond market, in line with the stock market … how is it acting differently?

Matthew D. Miskin

The bond market has repriced really to show a lot of growth into next year and so the bond market has been pricing in a good amount of cuts into 2025. You know, frankly, another 100 basis points was originally the thought, you know, just at the September Fed meeting. And now in the November meeting, you know, Powell kind of pushed back and said, you know, we might be close to done cutting rates for the time being.

We'll just have to see. And then he had an interview yesterday where he continued to say that that, you know, we're kind of closer to where we thought we'd be. The economic data has been on fire. We've gotten better employment data. The initial jobless claims dropped to 217,000. That's a really good level. We've gotten a bit firmer inflation in terms of CPI and PPI.

The retail sales report just beat. So, as the economy continues to do really well, bonds are seeing higher yields. It's less so about inflation. We are seeing still some disinflationary forces we think are going to play out in the next year. Oil prices are dropping. That's usually a good sign for bonds but what we think is the case is that we're getting kind of a pull forward in impulsive growth.

Again, a lot of it probably being sentiment driven. And it's in the price, you know, so bond prices are back down to about $0.90 on the dollar. Yields on high-quality bonds are back over 5%. And we're saying, hey, if we can do 5% in high-quality bonds over the next 5, I don't know … 3, 5, 7 years, we think that's pretty attractive.

Matthew D. Miskin

Returns stream with pretty low risk. So again, the highest quality parts of the markets are on sale. That's where we're doing the most look … most work looking for opportunities. And I … and that's really bringing us to kind of intermediate core and core-plus fixed income okay.

John P. Bryson

Excellent. Emily, I'm going to come back to you. You mentioned the stronger dollar, the risk on here in the United States. Let's talk a little bit more about international markets. How are they reacting?

Emily R. Roland

Yeah, international equities have underperformed, you know, meaningfully since the election and really over the past month and quarter to date broadly. You know outside of the election, the way that we look at this is … we want to find where the best relative economic growth and where the best relative earnings growth is. We still have allocations to international equities, but we're finding that emphasizing the U.S. has … has made more sense, given the fact that we've got better relative earnings growth trends here.

One reason for that is we have more of high-quality stocks here. So we do have a preference for quality companies with great balance sheets, good return on equity, ability to maintain margins in an environment where margins are likely to … to narrow from here. So we're simply finding more of that in the U.S. And then from an economic growth perspective, you know, Matt just hit on the fact that we have seen upside surprises to economic growth here in the U.S. and meanwhile we're seeing not terrible results. But, you know, more of a decelerating pattern in economies overseas … Europe, particularly in China. So, those trends are leading us to a preference for the U.S. as well as the dollar. That's sort of been the cherry on top of our analysis. It's really tough to make calls on, on currency markets.

But our base case has been that because there's better growth here, because our rates are higher than other developed markets across the globe. That should lead, to a strengthening dollar, more capital flowing on to our shores in the United States. So there may be, an election element to this, here based on sentiment. We're looking past that.

And fundamentally, we're … we're having, an overweight to the U.S.  Again internationally, we’re there, we have invest … we have recommended continuing to have diversification, with an allocation to international stocks. We're emphasizing growth over value given better relative earnings trends on the growth side internationally.

John P. Bryson

Okay. Thanks, Emily. Hey Matt, I want to dig on this. One of the one of the popular words we're hearing more and more is tariffs. I want to understand your take on the impact on our economy, our market, and then around the world. What do people need to be thinking about?

Matthew D. Miskin

Yeah. So this isn't necessarily a new policy that we're looking at, you know, in 2016, these … there was tariffs introduced post the 2016 election. You know, we went back and we looked at the data and frankly, the inflation rate under the Trump administration of 2016 … but this was before COVID. So this is just through 2019—inflation averaged 1.6%, and I'm talking core PCE. So really inflation did not come up as much as you might think based on … tariffs. Now it really depends, right? So we are looking at a lot of different things. There's a lot of different … you know … that's one kind of sample of … of tariffs being introduced.

There's a lot … you know … you could see more tariffs, you could see broader tariffs, you could see less tariffs. There's so many unknowns. And I think Powell … you know, Chair Powell had a … a meeting yesterday and he was asked the same thing. And he said, until we know the policy we're not going to speculate because you're just wasting your time. Because you could just think through all these different “what ifs.”

And the other thing that he said, too, which I thought was great, was it is a massive, nearly $30 trillion economy. There's a lot going on. What we saw last time was the dollar strengthened. I mean, he was just talking about the dollar strengthening. The dollar strengthening is disinflationary. If the dollar goes up, we buy foreign goods and we're a huge net importer.

So we're buying stuff all over the world with a stronger currency that makes that stuff cheaper on a relative basis. Now with the tariffs often comes a stronger dollar. So you know, it's … it's massively complex. And in our view, you want to not overreact or not kind of have knee jerk reactions because of hearing of a potential policy.

You got to first see what the policy is. Then you got to see how does it actually implement … impact the economy. And again, there might be so many other crosscurrents that it might not even create the outcome that you're expecting. That's why, again, we're focusing on the earnings. We're focusing on the economy. And valuations frankly valuations right now are getting really stretched and they’re in essence an outlier.

And so that's a big input too. But it is something we're watching. But we wouldn't overreact in the short term until we see what actually is produced and how it impacts everything else.

John P. Bryson

Really helpful. That's why we have you and Emily on the podcast, is to really help us separate the noise from the important information out there. So we'll continue to have that conversation with you all. Emily, I want to pivot back real quick. We've talked, excuse me, all year around. What's the Fed going to do? Where is inflation going?

It's kind of gotten a little bit quiet now, but we've got a December meeting coming up. What are you hearing that we haven't covered yet around the Fed, the economy, and the chances of another rate cut in December.

Emily R. Roland

Yeah, it's certainly … the Fed meeting in December is a little bit more up in the air now than it was prior to…  to recent data that's come in as Matt talked about the strength of the U.S. economy. You know, we look back again at the, you know, sort of examples in which, you know, back in 2016 where, you know, Powell sort of, you know, took a break given potential, you know, accelerating growth potential inflation here.

You know, we've seen this big back up in rates. You know, the bond market is still placing odds on… on a 25-basis-point cut in December. But you know there's going to be some more data certainly between now and then. And … and we'll be watching the incoming data just as the Fed has suggested. But you know Powell has not committed.

It's all about will he commit, or will he not commit? And we just haven't gotten that commitment to a December cut. So we'll be watching closely on the incoming data, as I said. And you know, but there's a potential that maybe we'll have to wait until 2025 to see more … more cuts.

John P. Bryson

Okay. All right. Last question, Matt, to you. Let's pull this all together. How are you advising investors to position their portfolio for the rest of 2024 and then beyond?

Matthew D. Miskin

Yeah. So this is a great time to look at some of the winners that you've seen as of late, that it might be lower quality or don't necessarily have the fundamental strength of other parts of the portfolio and to trim into some strength. We are seeing in our yields really rise on … on higher quality bonds. You know, there was … you rewind three months ago and one of the biggest questions we got was “did we miss the bond rally?” Did we miss it? And we are getting a second chance. It's been a pretty big turn. Yields have gone from about 4% on the U.S. aggregate bond index to now nearly 5%. Investment-grade corporates over 5%. MBS is over 5%. And so I would, you know, take a look at, some high-quality bonds. And again, even if the Fed skips the December meeting and pauses, they stop …  they still can cut into next year and the years after that.

We still think that's likely the scenario. But you got to take a look at, you know, the … what's gotten cheaper, as of late? It’s high-quality bonds. So, taking a look at, you know, dollar-cost averaging or taking part of a portfolio and allocating additionally to there would be something we would consider.

John P. Bryson

Excellent! It's always great to talk to both of you. You give us great insight to what's going on. Even in volatile markets, you're really helping us separate the important information. So hopefully we'll have you back on one more time this year. But I want to thank you for joining us. Folks, if you want to hear more, please subscribe to the Portfolio Intelligence podcast on iTunes.

John P. Bryson

Or you can visit our website JH investments.com. You can get the podcast, you can read our viewpoints, on all things investing. You can get updates from Matt and Emily on where they see markets going. And you can get some great business-building ideas. As always, thanks so much for listening to the show. Have a great day!