Shifting to Neutral: The Case for Optimistic Caution
The winds of change are blowing. In early June, the Bank of Canada (BoC) became the first of the world’s major central banks to lower interest rates, cutting by 25 basis points a day before the European Central Bank (ECB) made the same move.
We believe this is an environment where you don’t necessarily need to be overweight Equities.
Canada’s Yawning Productivity Gap Taking a Toll
U.S. Outlook
Canada Outlook
GDP Per Capita in U.S. Dollars
International Outlook
EAFE is improving, though still at a modest pace. Emerging Markets (EM), led by China, is still challenged. The trickling of stimulus is helping but there are issues—especially domestically in the latter, with real estate headwinds lingering. China manufacturing is also struggling to ramp up production because it is already producing so much. Chinese manufacturing Chinese manufacturing Purchasing Managers Index readings (PMIs) are struggling to remain above 50—a key gauge that if below that mark, indicates contraction; China is flooding the world with cheap manufacturing goods but it is still in the context of massive excess supply.
Key Risks | BMO GAM house view |
---|---|
U.S. Recession |
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Inflation |
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Interest rates |
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Consumer |
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Housing |
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Geopolitics |
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Energy |
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Asset Classes
EQUITIES
- Very Bearish
- Bearish
- Slightly Bearish
- Neutral
- Slightly Bullish
- Bullish
- Very Bullish
FIXED INCOME
- Very Bearish
- Bearish
- Slightly Bearish
- Neutral
- Slightly Bullish
- Bullish
- Very Bullish
CASH
- Very Bearish
- Bearish
- Slightly Bearish
- Neutral
- Slightly Bullish
- Bullish
- Very Bullish
Equity
CANADA
- Very Bearish
- Bearish
- Slightly Bearish
- Neutral
- Slightly Bullish
- Bullish
- Very Bullish
U.S.A.
- Very Bearish
- Bearish
- Slightly Bearish
- Neutral
- Slightly Bullish
- Bullish
- Very Bullish
EAFE
- Very Bearish
- Bearish
- Slightly Bearish
- Neutral
- Slightly Bullish
- Bullish
- Very Bullish
EM
- Very Bearish
- Bearish
- Slightly Bearish
- Neutral
- Slightly Bullish
- Bullish
- Very Bullish
Fixed Income
In terms of credit spreads on High Yield, they are tight in the U.S. and we expect them to remain so, with growth cooling and not crashing. In Canada, they are less tight and there is scope for improvement as interest rate cuts price in. There is going to be more divergence in bond market pricing between the U.S. and Canada, based in part on the fact that there will likely be more cuts in Canada than what the market is pricing in. A significant driver of why the market isn’t pricing more BoC cuts in, is the perceived limits of that divergence with the Fed. There are definite limits to that divergence, but our view is there is more scope for respective monetary policies to widen over the next couple of years than the market currently appreciates. There is significant mortgage refinancing that is coming in 2025 and 2026. Putting aside timing, the narrative has yet to catch up to the amount of loosening the BoC may undertake.
IG CREDIT
- Very Bearish
- Bearish
- Slightly Bearish
- Neutral
- Slightly Bullish
- Bullish
- Very Bullish
HIGH YIELD
- Very Bearish
- Bearish
- Slightly Bearish
- Neutral
- Slightly Bullish
- Bullish
- Very Bullish
EM DEBT
- Very Bearish
- Bearish
- Slightly Bearish
- Neutral
- Slightly Bullish
- Bullish
- Very Bullish
DURATION
- Very Bearish
- Bearish
- Slightly Bearish
- Neutral
- Slightly Bullish
- Bullish
- Very Bullish
Style & Factor
Factors are bleeding into each other in this market. Value is not necessarily synonymous with Quality and Yield at this point. Microsoft falls into the Growth bucket but it is also one of the best Quality names by virtue of its cash flow generation. Even Nvidia is making money on the cash that it is sitting on right now, and it is very much in growth mode. We’re seeing dividends come out of a number of the key market leaders in the Technology area.
VALUE
- Very Bearish
- Bearish
- Slightly Bearish
- Neutral
- Slightly Bullish
- Bullish
- Very Bullish
GROWTH
- Very Bearish
- Bearish
- Slightly Bearish
- Neutral
- Slightly Bullish
- Bullish
- Very Bullish
QUALITY
- Very Bearish
- Bearish
- Slightly Bearish
- Neutral
- Slightly Bullish
- Bullish
- Very Bullish
YIELD
- Very Bearish
- Bearish
- Slightly Bearish
- Neutral
- Slightly Bullish
- Bullish
- Very Bullish
Implementation
CAD
- Very Bearish
- Bearish
- Slightly Bearish
- Neutral
- Slightly Bullish
- Bullish
- Very Bullish
GOLD
- Very Bearish
- Bearish
- Slightly Bearish
- Neutral
- Slightly Bullish
- Bullish
- Very Bullish
Footnotes
1 Duration: A measure of the sensitivity of the price of a fixed income investment to a change in interest rates. Duration is expressed as number of years. The price of a bond with a longer duration would be expected to rise (fall) more than the price of a bond with lower duration when interest rates fall (rise).
2Volatility: Measures how much the price of a security, derivative, or index fluctuates.
Disclosures
The viewpoints expressed by the Portfolio Manager represents their assessment of the markets at the time of publication. Those views are subject to change without notice at any time without any kind of notice. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results. This communication is intended for informational purposes only.
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