Capital Group portfolio managers share their views on the state of the market
With so many unanswered questions about the Canadian and global economies, investors may be finding decision making tricky right now.
For some, they may be tempted to pivot to alternative assets, perhaps try cryptos, or private markets, but traditional stocks and bonds remain the bulk of most portfolios whatever the economic climate.
For bonds, this year has provided some rebound from the weak market of 2022, but how do two leading portfolio managers see the market now and, in the months ahead?
Capital Group’s Tim Ng and Tom Reithinger have shared their insights in a post on the firm’s website and acknowledge that the direction for bonds remains uncertain given that central banks continue to hike interest rates to tame inflation, although many are now able to ease back on the gas.
Ng says that the bond renaissance is still ongoing and with “starting yields where they are today, bonds offer more value than they have in a decade.” He believes that the BoC taking its foot off the brake again has only delayed this positive trajectory for bonds rather than ended it.
Yields, he notes, are higher than they were in the trough of March 2022, both in Canada and elsewhere.
“The fact that central bankers in Canada, the U.S. and Europe are reducing the pace and size of interest rate increases, with some near the end of their rate-hiking cycles, is bond-positive,” added Reithinger.
The PMs agree that locking in higher yields early is a good strategy and, even in recession, will provide diversity from equities.
Recession?
On that note, does the duo think there will be a Canadian recession and when?
The signs of a slowing economy are there such as businesses’ weaker hiring and investment outlooks, future sales outlooks revealing reductions, and other metrics such as the labour market starting to show weakness.
“These indicators are flashing yellow, if not red, but at the same time, they don't say a recession is a sure thing. They just confirm the risk of recession is high,” Ng said.
Reithinger ponders that this could mean the BoC decides to pause rates on Wednesday (Sept. 6) or it may decide to go ahead even if it exacerbates recession risk.
Addressing inflation, Ng says that the data is heading in the right direction but believes that inflation could remain above the BoC’s 2% target for some time yet. He added that Canada’s central bank does have some leeway with a 1-3% target for inflation overall, whereas the Fed will need to get inflation down to a fixed 2%.
There are more investment insights at CapitalGroup.com.
