From optimism to skepticism | The Press

Each quarter, The Press asks four experts to analyze the situation to grow a fictitious portfolio with an initial capital of $100,000.

In this fourth meeting of 2023, these experts look back on the third quarter and describe their outlook for the coming months on the financial markets. Also, they are calibrating their asset allocation for the fourth and final quarter of 2023 based on a balanced reference portfolio. That is to say established at 60% in stocks and 40% in bonds and cash, with distribution differences limited to 10% more or less.

What findings from the third quarter of 2023?

Candice Bangsund, Vice President and Portfolio Manager, Global Asset Allocation, Fiera Capital

“Extreme optimism in financial markets during the first half of 2023 gave way to skepticism in the third quarter, as investors doubted the trajectory of inflation, monetary policy and economic conditions. Volatility has resurfaced and stock and bond markets have retreated as the “higher interest rates for longer” narrative has taken hold while the resilience of the U.S. economy continues to fuel inflationary pressures. After a good start to the year, the stock markets reversed their trend and fell again in the third quarter. At the same time, the sharp rise in bond yields has undermined investors’ appetite for risk and weighed on stock market valuations. »

Michel Doucet, vice-president, investment strategist and portfolio manager, Desjardins Wealth Management

“The highlight of the third quarter on the financial markets was the realignment of the bond market – that is to say the drop in value of securities already on the market and the rise in the percentage rate of return – in reaction to two observations of the economic situation in the United States. On the one hand, the performance of the American economy, particularly the job market, continues to be more positive [que prévu]. Consequently, even if reduced, inflationary pressures could persist. On the other hand, in this context of stubborn inflation, the leaders of the American Federal Reserve (Fed) reaffirmed that its monetary policy remained aligned with higher interest rates and for longer. Obviously, such a message displeased the stock market. The decline observed in September constitutes, in my opinion, a “health break” after the strong upward momentum in the first half of the year. »

Martin Lefebvre, Chief Investment Officer and Strategist, National Bank

“After starting the third quarter with optimism, the stock markets turned back in September, worried by the frantic rise in bond rates (10 years) which reached a new peak since 2007, in Canada as in the United States. Several factors have given rise to this upward pressure on bond rates: inflation figures higher than desired, the Fed which has indicated that it wants to maintain “higher rates for longer”, and finally the growth in issuance of debt securities for finance the large deficits of the American government. In the world’s major stock markets, stock value indexes fell in September amid tightening financial conditions with rising interest rates and the rise of the US dollar, combined with rising commodity prices. energy. »

Hugo Ste-Marie, Director of Portfolio Strategy and Quantitative Analysis, Scotiabank Global Markets

“The rise in long-term bond rates surprised investors while the consensus was in the direction of a possible reduction in interest rates by the Fed, as a result of the deceleration of inflation. Also, the American economy continued to surprise with its strength despite interest rate increases and the impact of inflation over the past two years. This resilience of the American economy could support inflationary pressures. This is also what seems to have motivated Fed leaders to announce the possibility of “higher rates and for longer”, a comment that investors were slow to believe before it hurt the market value of bonds and stocks. In fact, the cash ended up [à être] the only financial asset with a positive return during the third quarter. »

What are the prospects for the coming months?

Candice Bangsund, Vice President and Portfolio Manager, Global Asset Allocation, Fiera Capital

“The prospect of persistent inflation and prolonged high interest rates has shifted the economic scenario towards stagflation. In fact, my impression is that central bank policymakers in the United States and Canada do not believe that the importance of bringing inflation back to the 2% target justifies plunging their economies into recession. They therefore seem prepared to live with higher inflation for a prolonged period. Although I expect central banks to ease monetary policy to avoid a full-blown recession, economic growth is nevertheless expected to stagnate below the desired level due to the already heavy burden of “higher and longer interest rates”. ” as Fed leaders recently stated. »

Michel Doucet, vice-president, investment strategist and portfolio manager, Desjardins Wealth Management

“With the relative good performance of the American economy, I expect further interest rate increases by the Fed in order to quell the inflationary pressures that persist. For savers, this rise in interest rates represents an important opportunity to enhance and secure the current return on their cash and liquidity assets. For investors in bond securities, whose market value fluctuates inversely with rate changes, the prospect of further rate hikes by the Fed poses a risk of poor short-term performance in bond portfolios. It is in this context that I expect better comparative performance on the equity side by the end of the year. »

Martin Lefebvre, Chief Investment Officer and Strategist, National Bank

“The good performance of the American economy compared to the rest of the world continues to confound forecasts. I expect the Fed to persist with its high interest rate policy, which could weigh on the value of bonds and stocks. I continue to align myself with a scenario of economic slowdown towards stagnation. A slide into a slight recession is still possible if bond rates continue to rise to a level above the absorption capacity of the economy. »

Hugo Ste-Marie, Director of Portfolio Strategy and Quantitative Analysis, Scotiabank Global Markets

“With the US economy remaining very strong, I expect the rise in bond rates to continue over the coming months, but with less velocity than before. I anticipate that the downward pressure on stock market value multiples will continue. Particularly on the American stock market, where, despite the decline in September, the main value multiples remain high compared to their historical average. The impact of interest rate increases is increasingly felt in the financial situation of households and consumers. It will continue to get worse in the coming quarters, which augurs a difficult economic situation for 2024.”

Where is your asset allocation for the fourth and final quarter of 2023?

Candice Bangsund, Vice President and Portfolio Manager, Global Asset Allocation, Fiera Capital

“The environment of high inflation and economic stagnation justifies a defensive position in asset allocation. I therefore maintain an underweighting in stocks and bonds, with a significant overweighting in cash. [par rapport au portefeuille équilibré de référence]. I expect a more difficult context for stocks during the fourth and final quarter of 2023. As for Canadian stocks, the economic context of stagflation should support commodity prices, and therefore benefit the S&P/TSX index. . The Canadian stock market displays relatively attractive value multiples compared to its global peers, which still justifies an overweight. On the other hand, on the American stock market, I consider that the bullish rally of the S&P 500 index in the first half of 2023 has run out of steam. Value multiples remain elevated at a time when prized growth stocks could be vulnerable to further interest rate hikes. »

Michel Doucet, vice-president, investment strategist and portfolio manager, Desjardins Wealth Management

“I anticipate further increases in interest rates in the United States, and therefore a persistent risk of depreciation in the bond market, particularly those with longer maturities. I am reshuffling my allocation of cash and bonds so that I can reduce their duration. Thus, I am increasing my overweighting in cash from 15% to 20% [par rapport à 5 % dans le portefeuille équilibré de référence] and I am increasing my underweighting in bonds from 30% to 15%, compared to 35% in the reference portfolio. On the equity side, in a context of still high rates, I anticipate that “growth” type securities will have an advantage over “defensive” type securities. I am therefore reducing my asset allocation in stock markets like Canada and Europe, which contain more defensive sectors (banking, insurance, etc.). I am increasing my asset allocation first in American equities – which have become attractive again after the September decline – but also in emerging markets. »

Martin Lefebvre, Chief Investment Officer and Strategist, National Bank

“While waiting for a clarification of the economic and financial situation, particularly with regard to expectations of a “soft landing” for the American economy, I prefer to maintain a rather defensive positioning with regard to the allocation of assets in the portfolio. I am slightly increasing my overweighting in cash (from 7% to 8%) and bonds (from 36% to 37%) compared to the reference balanced portfolio. I am increasing my general underweighting in equities (from 57% to 55%) because I consider that earnings expectations (per share) and value multiples remain too high compared to the prospects of a slowdown in the economy. As long as bond yields remain high, why expose yourself to the risk of a period of lower returns on the stock market? »

Hugo Ste-Marie, Director of Portfolio Strategy and Quantitative Analysis, Scotiabank Global Markets

“With the prospect of a slowdown in the economy over the coming months, while the bond and stock markets adjust to the jump in bond rates, I prefer to remain cautious regarding the allocation of assets in the portfolio. Therefore, I am maintaining the cash overweighting at 15%, compared to 5% for the reference balanced portfolio. I continue to be underweight the bond market due to the risk of depreciation if interest rates rise again. In the equity markets, I am keeping my allocation unchanged between the main regional indices. On the American stock market, despite the decline that occurred at the end of the third quarter, I consider that the value multiple (expected price/earnings) of the S&P 500 index remains high compared to its historical average. The main stock indexes in Canada and elsewhere in the world have returned to around or below their historical average. »