Asset manager says geopolitics may hamper returns
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The New Year should continue some of the themes seen during 2017 with low market volatility and continued easing of monetary policy.
However, geopolitics together with rising costs present risks ahead for equites according to a new report from Manulife Asset Management.
"The abundance of capital and the easing monetary conditions across the globe have allowed us this period of time where we've seen remarkably low volatility and our forecast for 2018 shows continuing easing conditions," says Bob Boyda, Head of Capital Markets and Strategy.
He adds that the risks could hit US corporate profits.
“If profit margins come under pressure from rising wage costs, interest costs and potential cost increases in areas like energy – with equities having been priced for perfection, investors could be disappointed," says Boyda.
MAM’s chief economist Megan Greene agrees that the downside risks outweigh the upside and warns that the markets have not priced that in.
Canadian equities
For Canadian equities, the main headwind is elevated stock valuations leading to more volatile stock prices.
However, Manulife’s Patrick Blais, Senior Portfolio Manager, Canadian Equities, says that the interest rate rises and policy measures to tackle rising household debt and the housing market should be beneficial for the economy and equities.
He adds that valuation analysis is vital and can create opportunities for investors but the rise in interest rates creates risk if leverage levels are elevated.
Fixed income
Manulife’s Global Intelligence Outlook 2018 notes the recent softening of the Bank of Canada’s tone and forecasts that there will be two interest rate increases in 2018.
These are most likely in the spring/summer and the autumn says Terry Carr, CIO, Fixed Income.
The divergence of Canadian/US interest rates and the uncertainty of NAFTA is likely to mean weakness in the Canadian dollar of around 2-3 cents.
Carr points to corporate debt as one area that has been performing well although caution is required as the central banks tighten macro policy and geopolitics remains a risk.
NAFTA failure would bring “immediate disruptions”
Manulife Asset Management chief economist Megan Greene believes that there is still a risk of the NAFTA talks breaking down without agreement resulting in the three parties reverting to WTO rules. Canada and the US would reprise their pre-NAFTA bilateral trade agreement.
"There would be immediate disruptions to trade and firms are likely to pass on the higher costs to consumers, contributing to rising inflation in the U.S. and a stronger U.S. dollar," says Greene.
She says that there is a further risk that the US will opt for an ambiguous ‘halfway house’ version of NAFTA leading to uncertainty and legal action from businesses suing the US government.
However, geopolitics together with rising costs present risks ahead for equites according to a new report from Manulife Asset Management.
"The abundance of capital and the easing monetary conditions across the globe have allowed us this period of time where we've seen remarkably low volatility and our forecast for 2018 shows continuing easing conditions," says Bob Boyda, Head of Capital Markets and Strategy.
He adds that the risks could hit US corporate profits.
“If profit margins come under pressure from rising wage costs, interest costs and potential cost increases in areas like energy – with equities having been priced for perfection, investors could be disappointed," says Boyda.
MAM’s chief economist Megan Greene agrees that the downside risks outweigh the upside and warns that the markets have not priced that in.
Canadian equities
For Canadian equities, the main headwind is elevated stock valuations leading to more volatile stock prices.
However, Manulife’s Patrick Blais, Senior Portfolio Manager, Canadian Equities, says that the interest rate rises and policy measures to tackle rising household debt and the housing market should be beneficial for the economy and equities.
He adds that valuation analysis is vital and can create opportunities for investors but the rise in interest rates creates risk if leverage levels are elevated.
Fixed income
Manulife’s Global Intelligence Outlook 2018 notes the recent softening of the Bank of Canada’s tone and forecasts that there will be two interest rate increases in 2018.
These are most likely in the spring/summer and the autumn says Terry Carr, CIO, Fixed Income.
The divergence of Canadian/US interest rates and the uncertainty of NAFTA is likely to mean weakness in the Canadian dollar of around 2-3 cents.
Carr points to corporate debt as one area that has been performing well although caution is required as the central banks tighten macro policy and geopolitics remains a risk.
NAFTA failure would bring “immediate disruptions”
Manulife Asset Management chief economist Megan Greene believes that there is still a risk of the NAFTA talks breaking down without agreement resulting in the three parties reverting to WTO rules. Canada and the US would reprise their pre-NAFTA bilateral trade agreement.
"There would be immediate disruptions to trade and firms are likely to pass on the higher costs to consumers, contributing to rising inflation in the U.S. and a stronger U.S. dollar," says Greene.
She says that there is a further risk that the US will opt for an ambiguous ‘halfway house’ version of NAFTA leading to uncertainty and legal action from businesses suing the US government.
