From Economists and Investment Strategists

We had the pleasure of attending both the Economic Forum early January and a full day economic update with one of our fund company partners at the end of January. The forum featured the chief economists of the big 6 Canadian Banks, it is always well attended and attracts many investment professionals in the country. Our fund company day featured both their global macro economic strategist, their Canadian chief economic strategist, some former Bank of Canada analysts, along with a few of the portfolio management teams.  

Interestingly there were several common themes among all of the presenters, specifically from the economists:

• The 2023 consensus among these economists was that we would see recession in 2023, we did not
• The US economy is quite resilient, likely supported by accumulated savings by consumers from the lockdown period
• Productivity in Canada is really low, it has been for some time and there are many factors influencing it
• Because of this lack of productivity, Canada will likely face headwinds, both in terms of economic growth and performance in financial markets
• Most expect the Bank of Canada will cut rates, somewhere in the range of 100-150 basis points
• Most expect the US Federal Reserve to cut 75 basis points, despite the market pricing in 6 cuts for a total of 150 basis points, which buoyed markets in November and December
• Inflation will be harder to deal with than expected, that story has not yet concluded, poor government policy likely contributed heavily to the inflation problem
• The interest rate increases have slowed discretionary spending, but shelter is the biggest contributor to inflation and that will be much harder to deal with
• We need much more housing in Canada to solve the affordability crisis, this will be difficult to execute, but very necessary
• The rate increases in US are taking more time than expected to have an impact

And some general comments from the portfolio managers and investment strategists:

• Also commented on high US productivity, low Canadian productivity
• Expect restrictive interest rate policy to higher for longer – the days of ultra low rates are over
• Too much immigration relative to housing capacity is creating problems in Canada
• Most managers are underweight Canadian equities for these reasons
• The inflation trend has been good (coming down), but if it surprises to the upside it will create problems in both equity and fixed income markets

 So there you have it, of course there were many additional elements of the economy and financial markets discussed, but these were the common themes.  So what does this mean in the context of financial well being, long term personal net worth sustainability and your investment portfolios?  The answer to that question is… the same as always.   Investment portfolios should be designed to support one’s long term goals, they are a funding medium.  We know the properties of stocks, bonds and other asset classes. We should own various asset classes based on what we are trying to achieve relative to the perceived risk these assets offer.  We know that long term, stocks outperform bonds relative to inflation, and bonds outperform cash.  But nobody can predict the short term, and to try is likely to set one further back.  Having the appropriate asset allocation within a portfolio, and understanding what each of those assets is expected to deliver is important.  Avoiding prognostication and sticking to fundamentals is always the best approach.

Wishing you and your family a happy and prosperous 2024.

~ Rajeev