Market expert says a soft landing is the base case but investors must understand the assets they own
Amid battered stock and bond markets, Canada remains a relative beacon of light held aloft by the pillars of commodity prices and financials. Derek Massey, head of portfolio management at HSBC Global Asset Management, believes the Canadian equity market is, therefore, well positioned as we head into the next 12 months.
This view is backed up not just by energy but by a rotation away from technology stocks towards “building block-type businesses” that pay dividends, such as the big banks, and a strong employment picture.
As a result, despite the backdrop of volatility, Massey believes there is a window of opportunity for investors, with HSBC GAM’s base case that there will be a “soft landing” from this period of high inflation.
Massey puts the probability of a recession as “quite low” but concedes the narrative is building given rising costs and slowing growth. However, with both energy and financials doing well in an inflationary environment, right now it’s a win-win for Canada.
“The story is going to be the forward guidance [from the banks],” Massey says. “Loan books are probably going to be challenged a little bit as interest rates start to rise and maybe squeeze the consumer a little bit. But the banks can make it up on that net-interest margin, and deposits and loans that are outstanding. The ‘R’ word - we're not going to say it – is a risk, but as long as the economic numbers continue to support growth, and they are at this stage, then the central banks can manage this balancing act of raising interest rates and not raising them too quickly.”
Massey expects inflation to be prolonged by the impact of the Ukraine and Russia conflict, as well as the resurgence of COVID in China, but he points to low unemployment as providing the backbone of the economy. “As long as we have that, where companies are challenged to find workers because businesses are continuing to grow, I think we're still in a good spot and that’s why we don't see the ‘R’ coming any time soon.”
His analysis is that inflation has likely peaked and the numbers will improve, dampening stagnation fears, especially if oil production is raised and prices come down. Nevertheless, Massey believes this summer will be telling; does a “demand destruction” happen, causing the economy to slow down?
Heading into this period, HSBC GAM remains overweight Canadian equities but more neutral on the U.S., European and emerging markets. Within these portfolios, it’s gone to a defensive asset allocation, concentrating less on high multiple technology and more on financials, energy, and materials. As an inflation protector, it has gold, real estate and infrastructure exposure, with the latter aiming to take advantage of the fiscal spend that’s coming from governments.
For investors unnerved by their negative statements so far this year, Massey admits recent months have provided some perspective.
“It is unfortunately part of investing in equities, where you're going to have to suffer through short-term volatility and down markets,” he says. “But it's understanding the assets that you own and the quality of the assets you own, that really make a difference. If you've got good companies that are paying good dividends and have clean balance sheets, that gets you through, but it doesn't stop the portfolio from suffering short-term volatility.
“The first quarter was challenging because not only did stocks go down but bonds went down as well, so it’s the old adage that trying to time the market is next to impossible, but time in the market really matters.
“The quote I got from our head of fixed income was that it was the worst historical performance in the Canadian bond market last quarter. That tells you that if you've been able to weather the storm in fixed income, eventually those higher yields are going to improve your portfolio. But you've got to be able to stay in market and have that timeframe.”
