Market Intelligence | H2 2023

Soft landing, hard landing, no landing? These terms seem to be front and centre in the financial media, and many aren’t even sure what they mean. In essence, the question is whether we’ll experience a recession or not in the U.S. and Canada. We believe that the recession has been postponed, not canceled.

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Capital Markets Strategy Team

Recession postponed, but it’s not time to pop the champagne 

The first half of the year had many positive surprises from both an economic and market perspective. However, given the data that we study, we believe it’s premature to pop the champagne cork and declare victory over a recession. Within the context of a slowing global economy, geopolitical risks that remain heightened, falling but sticky inflation, and central banks that are committed to higher-for-longer interest rates, a lack of market volatility can give investors a false sense of security.

The key is to remain diligent and follow the process. A kneejerk reaction to either jump on a band wagon or out of the markets, based on shorter-term market movements could quickly push an investor off course.

 

 

Capital Markets Strategy team's outlook—a snapshot

Canadian equities
U.S. equities
International equities
Fixed income

"Wherever you get to is better than where you started. To stay on the road is a massive achievement."

— Anthony Joshua

  • Inflation remains too sticky for comfort

    A steep run-up in goods prices was the main cause behind the surge in inflation over the past 2.5 years. From energy to food to shipping, many of the factors that drove inflation higher in 2021 and 2022 have eased considerably this year. However, core inflation remains stubbornly high—an outcome of strong income growth and the resilience of economic activity, among other factors—pointing to intensifying upside risks to inflation in services driven by tight labour supply.

  • Patience is a virtue when it comes to this equity market

    When looking at the opportunities in equities, while we’re constructive longer term, we see there's much uncertainty near term. From a portfolio construction perspective, we believe a neutral posture in equities makes sense. U.S. equities have rallied strongly to start the year, but it has been predominantly on the back of the euphoria surrounding artificial intelligence (AI) and the potential boon for companies that are even somewhat linked to it.

  • Fixed income

    The opportunity in bonds has been one of the most prominent messages in financial circles to begin this year. While there’s no denying this, we believe it’s more important to invest in the right bonds at the right time. As we’ve written in the past, we believe the opportunity in fixed income is likely to unfold in three phases: clipping the coupon, duration is your friend, and take on risk. 

    Learn more in our investment note, “The three phases of fixed-income investing.” 

  • Illustrative portfolio

    Following a 5% decrease in U.S. equity exposure at the end of March, the Capital Markets Strategy Illustrative Portfolio stood at 55% equity and 45% fixed income. Given the continued uncertainty within equities in the near term, and despite reasonable current equity valuations globally, the increasing risk of a shallow recession sometime within the next 6–12 months, has led us to trim our emerging markets posure allocation by 5% in favour of fixed income. We’ve also decided to combine emerging markets and international developed equities into a broader international equities allocation. This further supports our messaging that it’s less about geographic exposure but more about bottom-up security selection.

H2 2023

Market Intelligence: our outlook for the second half of 2023

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