Opportunities in Equities as Global Growth Strengthens

Text transcript

Welcome to Advisor To Go, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject matter experts themselves. 

Michael Sager, managing director and head of multi-asset and currency management, CIBC Asset Management.  

The first question to address is how the combination of economic growth and sticky inflation has impacted markets.  

I think the broad conclusion is that markets have reacted well to this combination. We see the global economic recovery gradually strengthening but also broadening out in terms of the number of countries that are beginning to clearly recover in terms of strengthening growth.  

So, I think the markets have taken their key predominantly from the growth outlook. And so that has supported investor sentiment and has continued in broad terms to benefit market performance. And sticky inflation has been assessed, I think, by markets in the context of a broader deceleration in inflation.  

So, at the beginning of 2024, we saw a little road bump in that gradual deceleration. Inflation spiked up a little bit, and there were concerns about whether we were going to see a renewed acceleration in inflation. Subsequent data have minimized those worries, and I think it’s clear whether we look at Canada or U.S. particularly, we are seeing a resumption in the gradual deceleration of inflation.  

So, in that context, you know, strengthening growth, high but decelerating inflation, that’s a positive environment for markets. And in addition, of course, central banks in developed markets have moved from being a challenge to growth to starting to become a tailwind.  

So, if you put all of those pieces together, it’s likely to remain a relatively constructive outlook for markets. 

If we look forward over the next 12 months, a key issue is how much rate cutting, how much more rate cutting, we expect from the Bank of Canada. We certainly expect, based on our view of inflation, we expect the Bank of Canada to follow up its initial June rate cut with more.  

For the year as a whole, the next 12 months as a whole, we’re looking at about 75 basis points of cuts. So, three more quarter-point cuts from the Bank of Canada.  

The market is a little bit more excited than that, and so at the time of mid-July, the market was looking for just over 100 basis points of cuts.  

Those two numbers are broadly similar, and so I would say that the overarching conclusion is that the Bank of Canada will be growth supportive. But the growth we’re going to see in Canada, although strengthening, will not threaten a continued slowing in inflation. So again, if you put all of those parts together, a growth-supportive central bank and a gradual deceleration in inflation, that’s a pretty benign outlook for markets.  

Economic data and central bank actions, we think, are not the primary risks as we look forward over the next 12 months. The primary risk is political, since, particularly early June, we’ve seen a rise in idiosyncratic political risk. We saw it with European elections, Mexican elections, Indian elections, for instance — all individual idiosyncratic political risks that at least lead to an increase in volatility in those markets, not broadly, specific to those markets. And in some cases, that volatility spike was associated with weakness in the local assets — in France, for example, or in Mexico — following their elections.  

So when we bring it back to Canada, political risk, clearly the biggest event, and it’s beginning to be priced and thought about much more acutely, is U.S. election risk. What’s the likely outcome? What does it imply for economic policies, foreign policies, between the U.S. and both partner economies and those countries, such as China, where the relationship is a little bit more including friction.  

So that’s the risk. What do we see in terms of potential tariff risk, for example? How will that play out for the likes of Canada? 

So, let’s talk about opportunities for equity investors.  

Again, set the broad scene: It’s a relatively good outlook for markets, including equity markets. From the perspective of economic growth, we’re optimistic or be it cautiously optimistic. Our optimism comes from strengthening economic growth, which will be helpful to earnings and corporate revenues. Our caution comes from worries about potential political risks, as we described, but also in some equity markets, challenging valuations. So, we need to navigate those aspects, the optimism, but also the caution, and put those together.  

Net net, we like the outlook for equities, and we like the outlook for Canadian equities. That’s one market where you’re having a gradual strengthening in growth from a starting point of fairly neutral valuations. So, we like Canada, within the equity markets. And some of the emerging markets too look cheap from a valuation perspective, and have some more upside in terms of growth recovery. So that would be another opportunity.  

And then one of the big themes that we’re looking at that’s developing week by week, month by month, is corporate reform. It began about 12-18 months ago in Japan, with a renewed focus on profitability and shareholder value as a way of stimulating investor sentiment, as part of an effort to drag Japan out of its multi-decade malaise.  

That corporate reform is gathering strength in Japan and it gives us optimism that, although the Japanese equity markets have rallied a long way over the last 12 to 18 months, corporate reform suggests there’s more upside there. Corporate reform, though, the theme is also spreading. You can see elements much earlier days but elements in Korea, for example, and even now, post the U.K. elections, over the past couple of weeks of mid-July, you’ve seen the starting discussion around the importance of corporate reform.  

So that’s a theme we’re watching. If it continues to gather pace, it suggests that there’s opportunities within EAFE, for instance, to benefit from that theme.