Speaker 1:
Welcome to BMO COVID-19 insights. Visit bmocm.com/COVID-19. For more up to the minute insights.
Speaker 2:
The views expressed here are those of the participants and not those of BMO Capital Markets, its affiliates or subsidiaries.
Dan:
Good morning, welcome to BMO Capital Market's first digital event of the year, Omicron, what's next? This is part of our new series, which we've labeled, define the future, focused on COVID's implications to our health system, our North American economy, and trying to understand and define its future. Given that we're talking about medical information today, I'd also like to give you a reminder that if you need medical advice, please directly consult with your physician or healthcare professional.
Dan:
Since the first cases of Omnicom were identified less than two months ago, the impact to this variant has been wide and fast. The speed has made it difficult to predict the impacts on our population, rates of infection and health implications, as well as the effects on our economic recovery and our reopening.
Dan:
Today, joining me for a deeper dive into Omicron impacts, from a health perspective, Dr. John White, Chief Medical Officer of WebMD, and one of our great hosts and help through the pandemic, on the current state of Omicron, both in Canada, United States and predictors of future mitigation strategies and on our mental health.
Dan:
We're also joined by BMO's own bio pharma analyst, Evan Seigerman, with a focus on big bio pharma companies, and how they're countering and adapting to COVID-19, with a perspective on the current and future state of vaccines, boosters, and now, treatments.
Dan:
And from a market's point of view, we'll have Brian Belski, our Chief Investment Strategist, and he'll discuss the predominant themes across the market, what we're talking about today one year ahead as we think what normalization, and our big year of transition. And Margaret Kerins, our head of FICC Macro Strategy, to provide some updated insights on interest rates, monetary policy inflation, and how we can think about the economic recovery with those big factors.
Dan:
Following a discussion with our panelists, we'll have an open forum for Q&A, so please submit your questions as we go through.
Dan:
So now I'd like to turn it to Dr. Whyte, to kick us off. Over to you.
Dr. Whyte:
Good morning, everyone, happy to be with all of you. And in some ways, today is an anniversary. It's the two year mark of when COVID was first determined to be here in the United States, from a sample that was taken on January 18. So we actually first heard about COVID on January 20th, two years ago. On the 31st of this month, it was declared a public health emergency by then secretary Alex Azar in the United States, and March 11th was the time that most people think of the pandemic, is when the world health organization defined it as such and called COVID a pandemic. But before I talk about where we're going, let's talk about where we are today.
Dr. Whyte:
So in the United States, the seven day average of new cases is about 800,000, 800,000 new cases daily, a seven day average. Some days more than a million. The seven day average for the number of deaths, is about 1,900. There's currently about 140,000 people hospitalized. In Canada, the seven a day average is about 30,000 new cases daily. It is trending down, a very good sign. The seven day average is about 120 deaths per day, and currently, about 9,000 people are hospitalized in Canada.
Dr. Whyte:
Now, I want to point out that the number of new cases in many regions of North America, Canada, and the United States, are at an all-time high. And this is a combination of those that remain unvaccinated, as well as with breakthrough infections in those that are vaccinated. And this really speaks to the contagiousness and the infectiousness of the Omicron variant.
Dr. Whyte:
Think about it, if I asked you six months ago, "Did you personally know anyone who got COVID," I bet most of you would say no. It's different now. If I asked you now do you know anyone, there's a saying out there that says, "If you don't have any friends that have COVID right now, you don't have any friends." And the whole point is that it's so contagious. We all know someone that has gotten COVID, the Omicron variant.
Dr. Whyte:
Now, I want to point out, I do think that the media focuses too much on cases, and I gave you the number of cases, but what I'm more interested in and what we should focus on as we think about recovery, is the number of hospitalizations and deaths. Those are the metrics that really are the most important from a public health perspective. Now, I want to point out, there are still way too many new cases and still way too many deaths, but proportionally, very important point, proportionally they're much lower than where we were during previous surges, especially with Delta. And what we're likely to see here in North America, and we're already starting to see in places like New York city and Boston, and some places in Canada, is looking very similar to what happened in South Africa and the UK with Omicron.
Dr. Whyte:
And that was this sharp, almost vertical increase in the number of cases, followed by a rapid decline. And I want to point out, this was over a period of about eight weeks, right? So that's relevant in terms of where we are here in North America. And England actually announced yesterday, that it was ending its COVID restrictions such as mandatory mask wearing, And these mandatory COVID-19 passes to get into a certain type of venues on January 26. And I might point out, it's actually a non-renewal. But that's an important distinction in terms of the future.
Dr. Whyte:
Now, we still need more data, there's no doubt about it. There's still a lot of uncertainty, we got it wrong a few times. And I do think that this downward slope is going to occur at different times, in different regions of the U.S and Canada, based on where it started. But if we take this perspective of eight weeks or so, that could mean we see much more improvement by February early March. And the reason why I say that is, there's this hope that Omicron is going to leave us with this immunity wall. And what I mean by that is, we're going to have immunity from vaccination, and in the United States fully vaccinated is about 63% of the total population, 67% of people aged five and above, Canada is doing much better, 77% fully vaccinated. So we have that population. And then those that are developing natural immunity from the Omicron tsunami, and that is likely going to protect us from additional variants.
Dr. Whyte:
It's also going to help prevent mutations or slow down mutations, these additional variants that we might see, because the virus simply isn't going to have enough hosts to infect and to continue to replicate. Remember the virus can't at survive and mutate, if there's no-one to infect if people have immunity.
Dr. Whyte:
Now there's still some uncertainty about these models, but it's similar in a way what happened a hundred years ago. They didn't have the vaccine, clearly, but they developed this wall of natural immunity that prevented infections. And at this point in the pandemic, where we're entering the third year, no matter how you're trying to factor anniversaries, there's a clear recognition that a vaccination only strategy is not going to work, and we're moving away from that. Maybe if we reached 80 to 90% immunity last year at some point, but at this point we have to acknowledge we're not going to see the needle moving much in getting more people vaccinated. At this point, many people simply aren't going to change their mind about vaccination. Vaccine mandates are losing steam, and even with Quebec fining those people that refuse to get vaccinated, it's not going to change the number as much.
Dr. Whyte:
Instead, what I think we're seeing, is a continued emphasis on mitigation strategies, upgrading masks to N95 and K95, and you may have seen here in the United States, the president announced 400 million N95 masks will be distributed free later this month. There's going to be much more testing, especially rapid testing. Again, in the United States, you can get four rapid tests per family. Those that are privately insured can get eight per individual per month. And we're going to can see continued upgrade of ventilation systems. But the bigger discussion, is going to be around risk, because let's be honest, we aren't good in evaluating health risks for most disease, let alone COVID, and we have to balance the risk of COVID against the risks associated with school closures, offices remaining closed, limited dining.
Dr. Whyte:
We've been doing that assessment for the most part, most of us implicitly, but I think we're going to see more explicit discussions. And we're seeing that now with keeping the schools open, and recognizing why that's so important for mental health, which I'm going to come back to. And we're having much more discussions about hybrid workplaces, and assessing the safety risk versus the performance challenges, right? And the issue of collegiality, especially for new persons, and recognizing it varies per industry and individual, it's not a one size fits all. And that's largely going to be guided, hopefully, by this immunity role.
Dr. Whyte:
And I want to point out that as we talk about things as a country, and I did at the beginning, we really typically talk about national data and aggregate data, but we really need to look at it local, because what we're likely to see in the future months is it reaches endemic numbers in certain areas of the U.S and Canada. And that means we'll have limited outbreaks in communities, primarily that still have unvaccinated people that haven't gotten Omicron somehow. And that's what we'll see in the future. But it's also going to be guided by the pivot to therapeutics, especially those oral agents that we've seen authorization for, especially Pfizer's Paxlovid in the United States and Canada. And I know Evan's going to talk a little bit about this, but the challenge is going to be supply. It's not going to be readily available, certainly not this month.
Dr. Whyte:
The other point will be not so much about the Omicron booster that we're seeing in the news, which I think by the time it's ready to be deployed, the current surge will have passed. But rather, I think there's going to be much more focus on this nasal vaccine that's currently in development, which could help block transmission as a nasal virus.
Dr. Whyte:
And then finally, we've discussed this for the past 24 months from the perspective of an infectious disease pandemic, but we have to recognize, and we're beginning to, we have a mental health pandemic going on, which is going to persist for years after we stop talking about COVID. We need to reassess our healthcare resources, which are limited. We need to think about how new technologies are going to address this. What about the role of tele psychiatry? What about the role of apps? What about the role of gaming even in drug development, for the treatment of some mental health issues? As well as our employee programs.
Dr. Whyte:
There's a greater recognition, and we're going to see more of this, but we haven't had enough to date, mental health, physical health and financial health are all inter related. And unless we address the ongoing mental health challenges as a result of the pandemic, the economy could also be negatively impacted. So, we're in a state where, it's not ready to declare any type of victory with what we're seeing in the decline in Omicron in some regions, now is still the time to keep our foot on the gas and continue our mitigation strategies, and continue our push towards therapeutics, while recognizing that now is also the time to address metropolitan
Dan:
Dr. Whyte, it's Dan, I think about all of the conversations we've had over the last two years, and it would be interesting, we should almost do a little video montage of your speeches and the key takeaways. And you mentioned this in one of our preparatory calls, but it really feels like when I think about what you've talked about today, we're really moving from prevention to adaption, right? And it's fairly big move, as well as this idea that the myths that we've created around the strategy we had, and I love the way you said it earlier, some of them work some didn't.
Dr. Whyte:
Yeah.
Dan:
And now we need to adapt and have new strategies. And I think that's probably one of the biggest thesis's out today, is this level of adaption and the level of change we have to get to. One of the questions I had for you, was the preventative or the protection element of the existing vaccinations. And I think it's one of those myths that's out there today around, it was going to guarantee you something, but I think it still has medicinal value. The booster still has medicinal value in terms of preventative, or at least mitigating some of the risk. Do you want to comment a little bit about that?
Dr. Whyte:
Sure. I think the messaging was wrong from the very beginning. These were never what we call sterilizing vaccines that eliminate all risk from COVID, but rather the focus should have been, "You know what, if you get vaccinated, you're unlikely to die from COVID, you're unlikely to be put on a ventilator and be hospitalized." And we didn't. We gave the idea that if you get vaccinated, you're not going to get COVID. And COVID has really thrown us for a loop with the variants, and a vaccination only strategy in retrospect, we should have recognized, is not an approach that's going to be effective.
Dr. Whyte:
And, we're seeing that now. And, and that's where we're also seeing this pivot to therapeutics, this pivot even to, Dan, I mentioned the nasal vaccine where we still have to do much more research, but that's better than where we currently are because it's this issue of blocking asymptomatic transmission. So we've had some missteps along the way, but at the same time, Dan, I'd argue, this is tremendous innovation in pharmaceuticals, in terms of if you think about the timeline of bringing a successful, safe and effective vaccine to market. Impressive.
Dan:
I 100% agree. It's one of the things that there is a silver lining, as much as it's hard to say those words around COVID, and it's also a perfect transition, Evan. And as we think about this adaption and different modalities, that we can use to help with COVID and managing as we go forward, Evan, over to you to give us some of your thoughts as a leading biopharma analyst, what are the big pharma doing? What are some of the therapeutics they're working on? And what is your perspective as you look forward around that sector? Thank you.
Evan:
Thanks Dan, thanks Dr. Whyte. I feel like we could talk for hours on this topic, because there's so much going on, from the breakneck speed of vaccines, to the rapid development of therapeutics. So I just want to touch on a few things.
Evan:
One, to your point, Dr. Whyte, the Pfizer and Moderna vaccines are still very effective. Even when boosted, you're getting great protection against the severe illness and hospitalizations, which I think is very important, especially as we're dealing with this Omicron wave. A lot of questions that I get, and when I think about the landscape is, what is the need for boosters long term? And I think you'll probably agree, we don't know necessarily, but I know Pfizer and Moderna are working on an Omicron specific booster, or a booster that incorporates other potential mutations. It's yet to be seen if this is going to be something that's annual, or if this is something that we'll need on a regular basis, maybe with flu. I do know Moderna is working on a vaccination that combines COVID, flu and RSV, another respiratory virus that is problematic. So the point there is, biotech and bio pharma, have really been leading the way.
Evan:
When I look at kind of the space, some things that I think about are access. We have great access in the U.S, and Canada and Europe, but as we all know, the Omicron variant likely emerged in South Africa. So I am encouraged with what Pfizer and Moderna are doing to increase access globally, but that's something that I think still needs to be pushed. Of course, we talked about novel strains, is there something beyond Omicron? I think you and I are probably out of the business of predicting what the next variant is, and just that we need to be prepared with vaccination and mitigation, specifically oral therapies and antibodies.
Evan:
One of the encouraging things is, when I talk to Pfizer and Merck, who are the leaders in the antivirals, Pfizer has expectations of over 120 million courses of therapy, Merck has 20 million courses of therapy this year. But with that said, there are many, many more people who likely need it, so access is still an issue here. And I think that to have that be key when it comes to our strategy moving forward, we need better access in ramping up production. I get the sense that Pfizer plans on selling, they're giving away every course that they make, but there will still be more demand than supply at this point.
Evan:
And what's interesting in the data we've seen from both the Pfizer product and the Merck product is that, these are mostly agnostic to variants, right? They work against Omicron because they look at something different than the spike protein, which is important. So it does help us set up for the future.
Evan:
I want to touch on antibody therapies, because I get a lot of questions on that as well. And then round out of course, with some of the investment of themes, as I am a stock analyst at my core.
Evan:
So people love these antibody therapies initially, right, because we saw great efficacy with the Regeneron cocktail against the Delta variant. Even the Lilly antibody cocktail was good. But Omicron came and these weren't very effective, but I am encouraged with the ability of, of Regeneron for example, and GSK and partner Vir, to come up with novel antibodies relatively quickly. I think those will be part of the arsenal, but not as important as oral therapies just given the access issues. But it shows the innovation in the sector and how important that is. So going forward a few things that just stand out from bio pharma, from an investment perspective and just thinking about the broader sector.
Evan:
I'm still very impressed with the speed of vaccine development. I think that that can't be overlooked, right? And ahead of this pandemic, it took four or five years to come up with a vaccine. We had a vaccine in under a year using a new mRNA technology, which is driving investment elsewhere, right? Pfizer is now investing beyond COVID, and similarly as is Moderna. There is also renewed interest in vaccine development and mitigation strategies.
Evan:
Ahead of the pandemic, investors were not very interested in investing in vaccines companies, they were seen as commodities. Now, they're the lifesavers. And I want to highlight just the rise of mRNA technologies, and just some of the development capabilities of bio pharma and how this truly is the sector that saved the world. I think there's still more to be done, but it really pushed a lot of this science forward and makes bio pharma, still in my view, a compelling space to invest even as sentiment has soured recently, but we don't have to get into that. So with that overview of where we are with therapeutics and bio pharma, I'd be happy to take questions from either Dan or Dr. Whyte.
Dan:
I think Evan, that's a great summary, and is part of this pivot. When you think about evaluation access to capital, we've obviously had some winners and losers and people that move forward, do you think there's been a real change in access to capital for these new therapeutic answers, and for new vaccines and new solutions?
Evan:
Well, it's interesting because that kind of gets to the COVID trade, and kind of what I saw in 2020, there was a lot of interest in trying it. Everyone wanted to invest in developing the next vaccine, and we really saw the winners and the losers. When it comes to access to capital, clearly Moderna has done extremely well. Before the pandemic, their market cap was, I believe under 10 billion, now it's somewhere near 100 billion. The point is that, the winners, and there is increased investment, and now I think investors, they may they may not want to play in the space anymore, but when it comes to something like Pfizer, they are generating a lot of cash and they're able to now invest in their business beyond COVID, which is important for the broader bio pharma ecosystem, right?
Evan:
One of my themes is, Pfizer's going to buy a lot of my bio pharma, is going to buy... Well, they have the cash to do so because of the COVID vaccine and because of the antiviral.
Dan:
We had a couple interesting questions, the audience that are timely here, I'll do them now before later. And one of them was, and you both talked about it, was kind of access and spread, and we all sit with a North American perspective on, but maybe Dr. Whyte, as you think about this concept of new variants, they generate in places with less vaccination rates, Omicron is a perfect example of that, how do you think about that? And then how does some of the therapeutics help us, in terms of scaling or access to control that?
Dr. Whyte:
Right. Well, therapeutics plays a key role here because we've recognized that we're not safe until we're all safe. So we do have this North American perspective, but it's not a coincidence that variants are developing in those areas of the world, where there's low vaccination rates. The irony is, in some ways South Africa has done okay because they had so many infections and had some natural immunity with some baseline vaccination rates. So I think it's still going to be a challenge. There's some areas in the developing world where vaccination is still in the single digits. So that's the concern about new variants emerging here, and we have a global economy, global travel.
Dr. Whyte:
So that's why the therapeutics, which Evan referred to, act a different way. They're for treatment, not for prevention, so they're not acting against the spike protein per se. So I think that's where we're going to see much more investment. And I bet we're going to hear in the next few months, a lot more discussion about, remember operation warp speed when we talked about that, I think we're going to hear a little more about that as well.
Dan:
And Evan, maybe just as an corollary. So scaling is a challenge, it was a challenge initially on the vaccines that we couldn't produce enough, they went to the developed world versus developing. You mentioned earlier, we still have scaling problems on some of the therapeutics, the ones that are more advanced, do you feel like that's changed materially in the last six months or nine months, that the scalability has increased? And I think about that distribution curve and access curve as being critical.
Evan:
So from a vaccine perspective, Pfizer points to that, they're able to make the vaccine quicker, right? It took 110 days, now they have it down to 60 days and they have more capacity worldwide. Still the cold chain requirements around the mRNA vaccines, make it more difficult to say vaccinate in Africa. When it comes to the antivirals, the pills Paxlovid and Molnupiravir from Merck, I think we're just looking for API or an active pharmaceutical ingredient, that just takes time to synthesize. And there's only so much of it available, and a lot of that is in China and we know supply chain issues are just slowing that down. So I think Pfizer's doing everything in its power to ramp up access in production, in addition to potentially licensing to generic manufacturers, say in India. So they are doing everything they can, understanding that it does take time. And this was only recently approved, and I believe that they had started producing a lot of their supply at risk.
Dan:
That's great. Let's pivot now to Brian and have a conversation about the equity markets, and how we're feeling as Omicron... Omicron... I always want to put an M in there that's not there, as Omicron has moved through. And really Brian, I think you've got some interesting thoughts around, how much do investors care? Is this a top priority for them? And then how are they adapting, or how are we thinking they should adapt on the future? Brian, over to you.
Brian:
Well, thanks Dan. And I'm incredibly humbled to be once again with Dr. Whyte, we've been doing these calls for over two years now. So thanks to him, and thanks to BMO financial group and of course, Capital Markets for having us deliver this.
Brian:
I thought I'd start out with kind of a broad brush with respect to the economy, and parrot some of our great economics analysis from not only Doug Porter in Canada, but Michael Gregory the U.S, to kind of paint the picture with respect to what's happening and what that means for stocks. And then of course, answer and clarify a little bit more what Dan's talking about, in terms of what people actually care about.
Brian:
And so that was then, and this is now. We've had this huge recovery in the stock market and in the economy, and I think the number one theme from an investment standpoint, especially when you're looking at economic growth and stock market performance, is slower but still positive, slower but still positive. After all positive is still positive.
Brian:
And when you take a look at what the economics team is looking at with respect to GDP growth for the United States at 3.5%, and it's down from 5.7%, it's still pretty good growth at 3.5%, where Canada is clearly still looking to actually outgrow the United States in 2022, just barely at 4% versus 3.5%. And the Canadian GDP numbers are obviously coming down a little bit relative to last year. But I think the key thing that everybody wants to talk about, is the effect of inflation. And obviously the second half of 2021, we saw this big spike, especially in the fourth quarter with respect to the estimates in CPI, when you take a look at CPI, consumer price index, X food and energy kind of peeking out in the United States at 6.9% in the first quarter, but going... 6.2%, I'm sorry, for the first quarter, and going to 3.9% on a year over year basis in the fourth quarter, that's a pretty decent slope to the downside.
Brian:
And again, less positive, Canada's following suit as well going down to about 2.6% from 4.2% to the beginning of the first quarter. So again, that rated inflation is beginning to change. Inflation is still high on a year over year basis, we know that, but I think we need to look forward and we're starting to see that slope begin to change. It's still going to impact how things are going now with respect to the interest rate scenario, my great partner, Margaret Kerins is going to talk about their call there. They nailed it last year in terms of their call on the interest rate side of things. And they're calling for four rate hikes in 2022. And for the Bank of Canada, we could see something as early as January, but more like March in terms of what the Bank of Canada's going to do with respect to interest rates. But in terms of the FED and the interest rate scenario, we'll let Margaret talk about that.
Brian:
Lastly, in terms of the dual mandate with respect to interest rates and unemployment, with respect to the FED, we're seeing the unemployment drop pretty dramatically down to 3.6%. We obviously saw a spike close to 10% in the United States and a little over 10% in Canada, but I think the key thing is that, the trend is improving. Yes, it's improving a little bit slower, but it's still very positive. So if you take that recipe for economic growth, and you take a look at what's happening in the stock markets in Canada and the United States, obviously the last year it is what it was. We need to move on from that, we had a great market up almost 30%, 27% in the U.S, and a little less than that in Canada. But needless to say, Canada and the United States were among the best developed market in the world, and I think there's a reason for that.
Brian:
And we believe it's because of the earnings and fundamental consistency in Canada and the United States, relative to the rest of the world. So as we normalize and as we transition to whatever normal looks like, we think it is going to be not just a one year process, it wasn't just 2021, we're clearly ramping that up even more so in 2022. And that's why we continue to be favorable on stocks. So we are at 5,300 and $245 of earnings for the S&P500 in the United States, and 24,000 in 1,500 earnings on the TSX. Hard to believe, yes, we're high on the street for both of those side of things, because we are fundamentally biased., we are process and discipline oriented, and we love the fact that U.S and Canadian companies, we believe are the best position companies in the world.
Brian:
And I think the key thing for both countries is this notion of technology. Technology is helping us transition across all sectors with respect, to not only from energy to consumer, to the communication services side of things. Now, while we are neutral in both country's technology, because it's obviously a very big part of the U.S index, and a smaller part too, to the Canadian index, but a little bit higher valuation. We think from a secular basis in the next five years, investors can, will and should be invested in technology.
Brian:
So from a sector perspective in both countries, we favor are financials, consumer discretionary, industrials, and materials, or neutral energy in Canada. We favor Canadian energy over the U.S energy complex, principally because of the cashflow generation and the great management teams that we've seen in energy, and the dividends they're throwing out. Now, we've had a big move in energy companies, but a part of that this whole transition in terms of environmental, social, and governance, where can Canadian companies have led the way. And we still firmly believe that those are great areas to be in from a cashflow flow perspective and dividends.
Brian:
Lastly, I'll talk a little bit about what Dan was talking about, and we haven't heard any mention of Omicron. And the reason is, is most of our clients around the world, and we were on the phone very early again this morning based on how the market closed yesterday, people are worried about two things and two things only, interest rates and inflation, interest rates and inflation.
Brian:
And so I have the very good fortune, blessed to be in this business for a long, long time over three decades, and I'll tell you this, when everybody's thinking about one thing, we want to go the other way. And if you're worried about a black Swan event, let me just tell you, the black Swan event already happened, it's called COVID. And so now we need to move on and embrace what's happening in our countries and in our world, as we normalize and as we transition to more of a fundamentally biased economic environment, but also stock market environment. That's why we believe the U.S and Canada from an asset perspective in terms of equities, is so exquisitely positioned for the next three to five years. And with that Dan, I'll hand it back to you.
Dan:
Yeah. I have a quick question for you, Brian, because I think we're in an interesting time and they happen many times in a decade, but we're in a place of inflection, I hate the word pivot, but let's call it a pivot going on. And I think actually, you would refute the pivot idea and I think your comments were sound. You and I have worked together for a long time, but when you've got a world where we've got different futures being portrayed by different experts, some of those very bearish, some of like yours which I think are constructive and optimistic, I always have heard you say, when you think about talking to an investor in a moment like this, what's the underlying message you give them?
Brian:
Here's the message, and again, I mean no disrespect for some of the people that do what I do, Dan, I really don't, but most of these people have never bought a stock to save their life, but more importantly, have never sat across from a client and talked about their portfolio. We have the very good fortune of being able to manage over $7 billion of equities in both the United States and Canada, and we have sat cross from clients for a number of years. And when you tell a client to sell a stock, they won't come back. They won't come back.
Brian:
And I think sometimes we try, we, meaning other people that do what I do, try to be too cute and call markets and make the big call. You know what the big call is? The big call is to have faith and be positive in the underlying fundamental construct of the stock market. The one thing that nobody talks about Dan, is that we've had a 40 year bull market in bonds, a 40 year bull market in bonds. We still think that we're in a 20 to 25 year bull market in equities, and people still don't believe that we're going to embrace, we think, this transition ultimately back into equities, and that's what's really going to lead us I think for the next 10 years.
Dan:
I love that comment. It's also been a perfect segue to Margaret to talk about views on, and I loved your comment, people don't talk about Omicron as much as they talk about inflation rates. So Margaret over to you and give us your current perspectives, please.
Margaret:
Wonderful. Thank you, Dan. Well, as you know, the interest rate markets in the U.S, are off to quite a volatile start this year. We've got twos and TENS up by 30, 35 basis points in a few short weeks. The focus is really on the hawkish FED and how quickly, and by how much they're going to raise the five funds rate. Obviously in December, we found out that they were speeding up their wind down of asset purchases, ending QE, which is now expected in March. In addition to that, the market is pricing in the first rate hike for March, and a non-zero probability that it's actually a 50 basis point rate hike. We remain in the camp that it will be 25, it's very predictable and smooth, and I don't think they want to shock the market.
Margaret:
Second, the market is pricing in 100 basis points rate hikes by the end of the year, which seems reasonable. The terminal rate right now is expected to be 175, probably a little bit of room for that to go up. The timing and the speed of balance sheet runoff, is the big question of the day. Back in 2017, 2019, the FED waited about two years to between the first rate hike and beginning balance sheet rundown, this time around they've message that it is likely to be quicker and that they will run the portfolio down by more. The market is currently expecting this to be announced in September with it to begin in October. One nuance here is that, the last time the FED wound down their portfolio, they did it... they began it when the FED funds rate was at 125. So if they start in September, it's unlikely that the FED funds rate will be 125, unless they go a little bit faster.
Margaret:
But the nuance really is, why the 125? And it's because there's this thought that policy rates need to be well off the zero bound, for the portfolio to run down smoothly in the background. And if you remember the messaging around, it was like watching paint dry. So we have to kind of wait and see what the FED is going to message around that, but it is a risk that they could go a little bit faster at the onset if they wanted to get up to 125, of course they could start it at 75 basis points. So you can see a little bit of uncertainties surrounding this.
Margaret:
The other big question that we've been getting regarding balance sheet runoff is, how will that impact treasury issuance? As you know, treasury has been cutting coupon sizes since November, and that's really because they had ramped them up so massively to fund some of the programs at the onset of the pandemic.
Margaret:
We do estimate that treasury will have to issue about 300 billion more in the first 12 months than otherwise, and about 520 billion more in the second 12 months. So at some point they will have to, I guess, reverse course is the way to say it, and begin increasing coupon sizes again. That said, we have the February refunding coming up, and we do expect continued cuts just because they are severely over-funded, and there's an implication there for what bills outstanding would fall to basically on the lower end, outside of their 15 to 20% goal there. The FED or the treasury does have a bit of a leeway here, because there's quite a bit of room in bills to issue, some of that rolling off FED maturity. And actually the market implication there isn't that great, because the overnight RRP facility has grown so large, that it basically would take away from that and put it into bills.
Margaret:
So not really disruptive to the market. I think at the onset, there is a bit of talk around it about just the massive amount of issuance, bringing back a term premium to the market. Probably not today's story, but we do think it's probably worth maybe 15 to 20 basis points, not 100 basis points. So we're not too worried about that. And it's really because TENS remain the global flight quality security for the world, and that's likely to continue, especially as the market recovers in the U.S and maybe a little bit of uneven recovery. I think as Brian mentioned, the normalization is going to take time and it's not going to be a smooth path. So for us, that means that while we do expect 10 year yields to push up past 2%, likely between the January and March meetings of this year, we expect TENS to end the year around two to 225. So probably on the lower end of what market consensus is right now.
Margaret:
The big theme that we have been talking about, is the flattening curve. We do think 530s will end the year probably closer to 20 basis points, right now we're at 53 basis points.
Margaret:
Moving on to investment grade spreads, IG spreads have held up really well here in the beginning of the year, despite the volatility of the market. Primary market, a little bit of pressure there, but you know, secondary market, no real movement. Overall, we do think we're going to move about 30 basis points wider over the course of the year, just as the FED increases rates and the implications there for credit. In terms of FX, we do think that there should be about a two to 3% appreciation in the LUNI, as the price of oil gets reflected into the currency. And in terms of oil, we're in the 90 to $100 camp, which I think is pretty consensus in the market right now. So I'll turn that back to Dan.
Dan:
Margaret, any sense for FX as you think for Canadian dollar, love it, hate it, what's it doing?
Margaret:
Yeah. We think it will appreciate two to 3%, probably 122 by year end. And again, it's really based on the commodity backdrop.
Dan:
That's great. I'd like to remind the audience, we've got an open feature for asking questions. I've got ability to see those here and ask them to our panel experts. And so we'll move to the Q&A for the last 20 minutes of the call.
Dan:
One of the dynamics that we saw through COVID, and Dr. Whyte, you started to talk about this, was the value of a booster, and on an ongoing basis, how do we think about having more boosters, continuous boosters? We used to think it was six months now, three months. How do we help people think about the role of boosters in the theme that we've talked about around adaptation today?
Dr. Whyte:
I think this a fundamental discussion that we're going to have more of. And we started to have it at the original advisory community that FDA had on boosters, where they were only going to recommend it, if you remember, for a limited population. Not even healthcare workers at first, because the role is, what are we doing? Are we trying to prevent asymptomatic infection? Are we trying to reduce all infections? And we never really had that discussion with the surge of Omicron. I think we're going to come back to that because there's really no desire, I think on anyone, to have these boosters every three or six months. And you see a continued decrement between the first dose, the second dose, the third dose. It will be different for those that are immunocompromised, where we know those persons have limited antibodies to begin with. So, we know the benefit is there, because the potential outcome for them if they get Omicron or any other variant, but I think we're going to move more towards this idea of perhaps a seasonal vaccination, like influenza for a few years, until we really can reach that endemic stage.
Dr. Whyte:
So I'm not a big fan to be honest, of the boosters going forward. I think there's going to be more pushback about what actually are we using vaccination for. And we haven't had a good robust discussion around that, but I think we'll see that as we have some discussion, as we are about, would there be fourth booster? We've got to focus still on immunizing those people that aren't, we need to think about boosting those people that aren't. It's still way too premature to be talking about the fourth booster. And as I mentioned before, and Evan did as well, it is that shift towards, what do we do about treatments because that's going to be a big issue going forward. So I'm looking forward to that shifting dialogue.
Dan:
Yeah. There's a question from the audience, I'll stay with you, Dr. Whyte for now, which talked about how much of the decline in cases is due to a testing constraint, versus actual case count reduction?
Dr. Whyte:
Yeah. Well, we certainly have not done as well as we could have on testing, but we do have a lot more supply. And Dan, I just have to tell you, I've been very disappointed in the data infrastructure throughout North America, we're not getting good counts, particularly of hospitalizations and that's what we need to know. Those persons that are hospitalized with COVID and that's what they came in for, or those persons that came in for other type of diseases because everyone is tested.
Dr. Whyte:
So we actually need a much more robust accounting system, so to speak, since we're talking financials, and help accounting. So, the reality is let's be honest, we have even more Omicron than we know because many people aren't reporting their rapid tests, many people just aren't getting tested. They're symptomatic, mild symptoms, and they're not just doing it. But I also want to caution people who think, "O well, you know, it's just mild infection, moderate infection," for some people that means different things and that could be, you really feel lousy.
Dr. Whyte:
You can't forget the risk of long COVID, something we're seeing more of, people that have that brain fog, the continued fatigue, the other challenges. So, it's not like, "Oh hey, I'll just get Omicron and I'll be okay," because that's not always the case. So the reality is to the point, much more COVID than we even know out there right now, but I think we're going to have more robust testing. And we should be using testing to prevent contagiousness, that we're infecting more people because we just don't know it, and then we're spreading it.
Dan:
I think you made an interesting comment earlier in the call around the real metric we should be focused on is, what's going into the hospitals and what the state of the health system is. And yes, we have more cases than are published, but the real issue is, are we consuming the healthcare resources to a state where they're not through capacity?
Dr. Whyte:
Absolutely. And we haven't focused enough on that, and that's partly because it's an agenda sometimes that you want to get eyeballs. So if you talk about a million cases a day, that's going to get attention. And that's important to address, but we also have to make sure that we provide the right resources to people when they need it.
Dan:
Evan, I wanted to transition to you. I was struck through a bunch of the conversations that we had during the call today, around the market's adaptation to COVID and what it's focused on. Given where you are at your perspectives on the future, what's your top pick or top two picks, and why would you advocate for that today?
Evan:
Great question. So one of my top picks in pharma is actually Pfizer, and it's related to COVID but not driven by COVID. So we think Pfizer's going to generate $60 billion this year in revenues from the vaccine impact flow, but then while investors may assign a lower multiple to those revenues and the earnings derived from those revenues, it allows them to go out and buy and supplement their pipeline.
Evan:
One of the pushbacks to Pfizer generally, has been that their pipeline is weak and that they have patent issues come 2025, but now they're able to buy companies. They have $164 billion of capacity, we estimate. They've done this already earlier in December with the proposed acquisition of Arena, and we expect more of this to happen.
Evan:
We're also interested in Regeneron, not because the antibody cocktail, but because of their broader pipeline when it comes to oncology, right? Bio pharma is more than just COVID, it's cancer, it's immunology, it's rare disease, it's everything else that we deal with as humans, and I'm very bullish on their prospects in oncology. So we have a play that's somewhat related to COVID, but not a COVID trade per se, and then a more classic bio pharma innovation story in Regeneron.
Dan:
Excellent, that's great feedback. We have our always question that's come in, and I'm going to throw into Margaret and Brian to fight over who wants to answer first, but what is the current state of the housing market? It was focused here in Ontario, but I think we could go more broadly across Canada, across the U.S, enormous volume and price appreciation plus starts now. How do you think about that? How does it moderate or not moderate? Is there risk? And what do we think about as we adapt to COVID, what's the implications to that marketplace?
Margaret:
Sure. So I can jump in on that first. I think we have a massive supply/demand problem, to the degree that, that works itself out over time and supply catches up with demand. It's just going to take time. Obviously, the FED will be raising interest rates, but our call for the long end is still quite low, and that should continue to support the housing market and housing market demand. It is a problem from an inflationary standpoint, really not much that they can do about that.
Margaret:
Well, I think what they're really going to try to do this year is buy some time for the supply chain frictions to work themselves out, but really they can't impact or, they'll have very little impact on the long end. I guess the risk to that would be that they let the portfolio run down quicker, or start selling bonds to get the long end up, but I don't think it's desirable. Part of their actual mandate, it is price stability and obviously, it's also moderate long-term rates. It's right there in the first sentence of their mandate. So that's our view on it, I can pass it to Brian if he has a comment.
Brian:
Sure. If you just look at the statistics in MLS Canada, still looking for 22% year over year price appreciation, where the U.S price appreciation goes down to about 8%. And so buy house in Canada, I guess, number one, but number two, look at this whole theme of investing, Dan, right? Capacity versus scarcity, capacity versus scarcity. Canada's going to have a harder time bringing in capacity, so therefore it's still a scarcity type market, where the second half of the year, especially in the United States, we're going to see a massive uptick in terms of capacity in not only new home sales, but existing home sales we've seen kind of come off the market here a little bit, especially last couple quarters where people have been worried about the variant and things like that.
Brian:
So I think the longer term kind of perspective takeaway is, I remember my parents bought a house in 1978, and their interest rate was 19%. And so, we have to kind of have some perspective on that, and you take a look at where long-term rates are and where mortgage rates are, it's still very, very lucrative to be a homeowner. And so I think that's kind of the takeaway. Now, whether or not that that price appreciation kind of falls off in 2022... oh, I'm sorry, 2023 and beyond, let's worry about that then. But again, it looks like housing prices are going to continue to be pretty, let's say strong in Canada, especially relative to the U.S.
Dan:
Brian, let's stay with you. We've got one here, which someone obviously knows you well, are you updating your North American positioning on stock selection in Canada and the U.S, or Canada versus the U.S, apologies? And then, how is that potential for highest interest rates adjusting that portfolio?
Brian:
No, next question. No, I... So if you listen to everything on this call, and we've lived in a society the last two years, I think we can apply some common sense to say, I think we're beating the VID. I think we're beating the Cron and we're moving on from this. The transition to normalization is on, okay? And so you've seen the at home stocks do what they've done, that's a theme that I think is largely played out, we now need to be transitioning into more of being a fundamental investor.
Brian:
Now, I would say this, the recipe for investing remains very strong, positive GDP, low interest rates, and earnings that are actually quite discernible and consistent. So no, we don't see any real reason to change things. And I do believe investing's not as easy as, Dan, buying growth or buying value, or selling growth or selling value. I think the stock market as a market of stock. I think the number one issue with investors are, they make decisions on the index basis and not on a stock by stock basis. And that's why, again, stocks lean earnings will lead the economy, this is a stock market and I think you need to be implicit with respect to your stock picking and really hone up on your strategy, whatever you are. If you're a value investor or a growth investor, a garb investor, a thematic investor, I think that's what's going to lead the market for the next several years.
Dan:
That's excellent. Really interesting question here, probably back to you, Dr. Whyte, how long until the nasal vaccine is available, and does this mean we don't have to wear masks anymore?
Dr. Whyte:
I mean, it's always about the masks. I think we don't know for sure, or I'm hopeful that perhaps it could be reviewed by the FDA this year. Certainly there is a priority in terms of looking at the vaccines. I think the other big issue is going to be, can we combine vaccines? Can we do influenza and Coronavirus at the same time? It's hard enough to get people to do one vaccine versus multiple vaccines, but I do think the nasal vaccine could be an area of promise, and I think we'll learn more over the next few months.
Dan:
Can you help me for a second, Dr. Whyte, I don't know what a nasal vaccine is. Is this just a different way to apply it to the body, or is it actually a different type of vaccine?
Dr. Whyte:
It would be in terms of, it's kind of like some people may know FluMist where it's a nasal vaccine for influenza. Some years it's had good years, other years it hasn't. It has a different population based on age. But in terms of how it's getting into and working in your immune system, right now the mRNA vaccines are basically inserted into a muscle, without getting into an into immunology lesson, T-cells and lymphocytes. So it is a bit of a different mechanism of delivery and a different mechanism of action, but because remember, Coronavirus is a respiratory that's basically spread largely through our nasal passages and our throat, if we can inoculate those regions, that might actually reduce asymptomatic as well as symptomatic spread.
Dan:
Okay. As always, we learn so much on these calls. Margaret, there's a horrible question for you here, but I'm going to give it to you anyways. Can the FED actually control inflation that is due to the mismatch caused by supply chain frictions and demand, or are they pushing on a string?
Margaret:
So the short answer is no, they can't, but what they can control are expectations, inflation expectations, and they need to be credible about fighting inflation. And so that is one of the reasons they're lifting off. I think Powell has acknowledged that they can't control inflation due to the frictions. I want to say maybe 24% of the inflation that we've seen over the past year, has been due to durable goods. And basically your car breaks and you need a car, you go buy a car. And so they really can't control that. But I think we're hopeful that as the supply chain frictions work themselves out in the second half of this year, that some of that will ease, and I think the FED is certainly hopeful on that front as well. But it's a balancing act. It's a very delicate balancing act, because the FED needs to raise rates to be credible about inflation, but they don't want to slow demand too much because we will have the supply hitting the market later in the year.
Dan:
Yeah. I think that's an important piece. The other is about real versus negative growth rates and the dynamic that they have to wrestle with, which is, if inflation gets too high and they don't find a way to control the expectations on that, you end up with negative growth rates, real growth rates versus nominal and you've run into a place where you don't actually have the economic growth, that then drives Brian's EPS growth behind the companies that he prefers.
Dan:
One of the questions that's come in here just recently, and I suspect it will be a bit of a question to answer for a few of us, is the long term effects of COVID on mental health. Dr. Whyte, you've talked a little bit about in your remarks, we talked about it in our warmup, maybe a couple of things, one, your perspectives around the amount of mental health and the challenges that are there. And then hopefully a little bit of coping strategies for those that are, that have either family members or themselves, that are working through some of that today. I think that's probably a good place for us to focus.
Dr. Whyte:
What I would say is, and I see it in my clinical colleagues, a huge amount of burnout. I know many people that are retiring earlier than they might have, and I think we're seeing that also with first responders. There's lots of reasons for people getting new jobs and quitting, and some of it is the challenges of COVID relating to their mental health. So part of it is recognizing that it's okay not to be okay. We have to normalize the conversations that people are struggling, and recognizing that people are struggling. We have to improve the availability of tele psychiatry. We have to help people in terms of screening or depression and anxiety. There's great tools that we use in medicine to do that. And then we have to think about the role perhaps, of some of these apps, because we can't reach everyone that we need to. But it's going to take, honestly, Dan, a lot more investment in terms of mental health resources for people.
Dr. Whyte:
And then I think there's a role for companies as well in terms of employee health programs, and how do we address it, to Brian's point, as we start the journey back to normal and start to bring people in back into the office in a greater way. Remember, uncertainty creates stress and anxiety. And actually, and we talked about this a while back when we thought there was a light at the end of the tunnel, people kind of got used to things over the past two years, now we're going to change things again soon, and that's going to create child for many people. So we have a lot of work to do in that space, but we have to normalize the conversation, encourage people to seek help, acknowledge that it's okay not to be okay, and really, to utilize some of the current resources we have of tele psychiatry as well.
Dan:
I think that's very insightful, Dr. Whyte. We're acutely aware at BMO of our own employee health and that of the health of our clients. One of the interesting things, I'll call it interesting because I don't want to put a good or a bad on it is, the ability to have a conversation about mental health has changed radically in the last 24 months. And that's a conversation we can now openly have. We can talk about people who are struggling, whether they're at home with kids, whether they've got death in family members, and it's a real different conversation than we had, but we have a long way to go. And that acknowledgement, building a vocabulary, having a language, being able to watch and listen, is critical.
Dan:
As I wrap up, what I'd like to do first, is say thank you to our panelists. Once again, excellent session, very timely in this series of how we try to create insight for our clients so that they can make the best decisions they can make, whether it's personal, professional and investing, and your insights again today were spot on.
Dan:
We talked about earlier, this real theme that I feel through various conversations I'm in ,and I think brought to light very, very well on this call is, we're in a world where we're adapting. And where we were with the pandemic versus where we are and where we need to go, they're not all the same thing. And it's up to all of us to generate new insights, generate new perspectives, learn from the past, things that did work and things that didn't work as we expected. But as we look forward, I think we're going to continue to have change. We're going to have to adapt and we'll have to be thoughtful in how we maintain that look on the future, and how we take advantage of it, particularly as investors.
Dan:
Now with that, thank you. We appreciate your attendance. We appreciate you joining us today. Thanks again to my panelists. We hope you have a great week and happy investing. Thank you.
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