Will campaign-trail ideas be enough to ease recession fears?

As recession risks loom, Canadians heading to the polls next week are more focused than ever on how politicians plan to improve the economy says Adam Ditkofsky, senior portfolio manager, global fixed income at CIBC Asset Management.

“The real question we need to ask now is how will Canadian leaders look to address rising trade barriers, and how will they look to stimulate a slowing economy, and stabilize both consumers and business confidence,” he said.

Listen to the full conversation on the Advisor To Go podcast, powered by CIBC Asset Management.

Both the Liberals and Conservatives are focused on eliminating interprovincial trade barriers, reducing tax rates and eliminating the consumer carbon tax, he noted in an April 9 interview. Both parties have unveiled a number of initiatives designed to boost GDP and reduce uncertainty surrounding in the economy.

“The question remains, are all these going to be enough?” he said.  

Ditkofsky said the Bank of Canada, which is independent from the government, will play an important role in strengthening markets.

“Should the economy weaken or fall into recession, we think that the Bank will tilt its rate decisions to focus on economic stability, as opposed to inflation,” he said.

Canada’s inflation over the last 12 months has been about 2.2%, he said, in line with the Bank’s target of 1% to 3%.

“In terms of our forecast, we see the overnight rate falling to 2.25% over the next 12 months in our base case,” said Ditkofsky. “But if we do see a recession, which is not our base case scenario at the moment, [we] expect it can go much lower.”

He added that futures markets are pricing in two additional cuts for the Bank of Canada for 2025. One cut would come at the Bank’s June 4 meeting, and the second in September.

What does all of this mean for the fixed income market?

With market risks persisting and volatility remaining high, Ditkofsky suggested low-volatility strategies make “sense right now,” as well as diversified bond portfolios.

He also noted that credit continues to underperform government bonds this year.

“We have been positioning our portfolios over the past few months, reducing credit and moving into shorter-dated corporate bonds, and positioning ourselves into more defensive sectors, such as utilities and infrastructure and telecom,” he said.

“There’s more room for the [yield] curve to steepen as central banks continue to cut rates.” he said. “We feel positioning portfolios for a steeper curve is appropriate, especially as recession fears grow.”

Ditkofsky advised investors to be cautious.

“Things can turn quickly in this market. Maintain their asset mix, be prudent with their portfolios, and don’t just follow the trends in fears of missing out.”

This article is part of the Advisor To Go program, sponsored by CIBC Asset Management. The article was written without input from the sponsor.