Quarterly Asset Allocation

Quarterly Outlook: Stop! Hammer Time.

Abraham Maslow once said, “If the only tool you have is a hammer, everything looks like a nail”. This unfortunately accurately reflects the current economic backdrop with soaring inflation (a lagging/historical indicator) with global central banks hammering away at this odd shaped “nail” with the only tool they have - rate hikes. It’s worth mentioning here that changes in monetary policy not only have a delayed impact on the real economy but they also do very little to help alleviate inflationary pressures associated with China lockdowns, Saudi drilling, Texas drilling, quarantines, refining capacity, war, supply-chain on-shoring, etc. Moreover, as we look ahead, we continue to expect the level of uncertainty to remain elevated as central banks continue to tighten policy despite the growing risks of a hard-landing/recession. While we believe there are “fewer and fewer places to hide across markets” amid all the worrisome headlines or “wall of worries” as we like to refer to them as, we believe for longer-term oriented, patient, and prudent investors, there are many opportunities to invest in today and likely more to come in following months. Stay selective and well diversified!

Key Takeaways:
  • A dramatic fall from peak…While we expected several factors to remain headwinds for the economy and markets in 2022 including elevated inflationary pressures and higher-rates, a few others were unknown at the start of the year which have only helped to further cloud the economic outlook. That said, we continue to expect further downward revisions to global real GDP growth forecasts across both the advanced and emerging economies for 2023. The latest forecasts for global growth puts real GDP at +2.3% year-over-year (YoY) for 2022, down from +3.0% YoY as of our last quarterly update, and now below the long-term 20-year average of +3.2% YoY. That said, “The cleanest dirty shirts” still remain the US and Canadian economies.
  • Recession risks rising. As we expected, the Bank of Canada (BoC) and the US Federal Reserve (Fed) have been aggressive in raising rates, even becoming more forceful in their latest increases following stronger than expected inflation numbers. With the central banks continuing to fight inflation by raising policy rates, the 3mo10s yield US curve (10-year yield minus the 3-month yield) will likely continue to flatten, indicating that North America (and the rest of the world) is heading toward a recession. When or how deep of a recession remains the question, but we note that the more aggressive central banks are today, the higher the likelihood that something breaks and results in a much deeper and more prolonged contraction.
  • Few places to hide - moderating equity overweight. We suggest investors remain selective, well-diversified, and focus on de-risking their portfolios (i.e., close/reduce portfolio blind-spots and/or tighten active relative bets). We continue to prefer high-quality and durable businesses that are trading at attractive valuations, with a preference for value > growth stocks, and a slight preference for the broader S&P/TSX over the S&P 500 index > MSCI EAFE index > MSCI EM index.
  • Moderating underweight to fixed income & cash – moving closer to neutral. For Canadian investors, Canadian government interest rates are higher across most of the yield curve, so we suggest an overweight to Canadian bonds. In the corporate market, we would continue to be very selective.


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