Opportunities in equities as global growth strengthens

A gradually strengthening global economy and less sticky inflation are positive for equity markets.

“The broad conclusion is that markets have reacted well to this combination,” said Michael Sager, managing director and head of multi-asset and currency management with CIBC Asset Management, in a recent interview.

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

The global economic recovery is not only strengthening but also broadening to more countries, Sager noted.

“The markets have taken their key predominantly from the growth outlook,” he said. “That has supported investor sentiment and has continued in broad terms to benefit market performance.”

Markets have also responded to a deceleration of persistent inflation, he said.

Despite a brief spike in inflation earlier in the year, the overall trend shows inflation slowing down, especially in Canada and the U.S.

Canada’s annual inflation rate fell to 2.7 % in June, down from 2.9% year-over-year growth in May. In the U.S., inflation in June declined to 2.5% from 2.6% the prior year.

“Strengthening growth, high but decelerating inflation — that’s a positive environment for markets,” Sager said.

He also highlighted monetary policy, saying central banks in developed markets have “moved from being a challenge to growth to starting to become a tailwind.”

Looking ahead, Sager anticipated further interest rate cuts from the Bank of Canada. 

“For the next 12 months as a whole, we’re looking at about 75 basis points of cuts,” he said, which includes last week’s cut of 25 basis points.

“The growth we’re going to see in Canada, although strengthening, will not threaten a continued slowing in inflation,” he said. “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.”  

The main risk for markets in the coming year, then, isn’t economic data or monetary policy but politics, he said.

Recent elections in Europe, Mexico, and India increased volatility in those markets, he noted, and the upcoming U.S. election could impact economic and foreign policies with major trading partners like China.

Still, when it comes to investing, Sager expressed a “cautiously optimistic” outlook. 

“It’s a relatively good outlook for markets, including equity markets,” he said, citing strengthening economic growth as a supportive factor for corporate earnings and revenues. 

However, he said his caution comes from “worries about potential political risks but also, in some equity markets, challenging valuations.”

As such, Sager was positive on Canadian equities, due to “a gradual strengthening in growth from a starting point of fairly neutral valuations.” 

He also saw potential in emerging markets, given lower valuations as well as upside in terms of economic recovery.

And Sager highlighted corporate reform, specifically in Japan over the past 12 to 18 months, with its “renewed focus on profitability and shareholder value as a way of stimulating investor sentiment.”

Corporate reform has spread to countries such as Korea and the U.K., he said, and is a theme he’ll be watching.

“If it continues to gather pace, it suggests that there’s opportunities within EAFE [Europe, Australasia and the Far East], for instance,” he said.

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