Despite a rather spectacular end to the year on the stock and bond markets, the defensive approach remains dominant at the start of 2024, the year known as the aftershocks of the pandemic. Where could the surprises, the unexpected come from?
National Bank analysts sum it up well. “We continue to believe that economic growth and corporate profitability will hold unpleasant surprises in the coming months. Lags in monetary policy transmission might be slightly longer than historical averages, but they have not disappeared. We maintain our defensive asset allocation, underweighting equities in favor of fixed income and cash. »
Such a portfolio allocation makes it possible to reflect the expected decline in interest rates. Also to have a capacity to enter the equity market when the opportunities preceding the recovery in economic activity expected somewhere in the second half of the year present themselves.
Recession or soft landing?
We are therefore talking here about unpleasant surprises coming from a recession manifesting itself with more severity than what the dominant belief foresees, namely a short and moderate recession in Canada and a utopian soft landing in the United States.
In their overview of the major themes for 2024, Robert Hogue and Benjamin Richardson, respectively deputy chief economist and research associate at the Royal Bank, write that the cost of living has increased so much that even a return of the inflation rate to 2 % by mid-2024 will not solve the problem. “Because of the lagging effects of inflation and monetary tightening, economic growth will be sluggish in Canada. The interest rate cuts planned during the year will only reduce the restrictive effects of monetary policy. » Oxford Economics goes further by asserting that, despite a modest recovery towards the end of the second half, Canada will display the worst performance among so-called advanced economies.
“In a context of growing tensions and financial difficulties, consumers are expected to keep a low profile and reject further price increases. Debt defaults and bankruptcies will increase among consumers,” continue the Royal analysts. For their part, “companies will struggle with a slowdown in demand and protests against price increases. The upward trend in bankruptcies is expected to continue.”
Risk of haircut
Public debt is another source of unforeseen events. In their crystal ball, RBC analysts estimate the debts contracted by Canada and the provinces in their response to what can be described as the largest global health crisis in more than a century at $400 billion. Governments therefore have little fiscal room for maneuver and will need to develop a plan to achieve fiscal sustainability and return to balance. What Ottawa, sitting on its triple A, is still not doing. “Canada will not have a free pass. We will have to monitor the risk of a discount,” warns Robert Hogue.
Added to this unpredictability are extreme weather phenomena, the risks of the rise in the power of generative artificial intelligence and the impact of the American election not only on relations between Canada and the United States, but also on United States’ relations with the world. Hazards to be placed in a context of climate policy conflicts expected to intensify. “Many of these conflicts could color the year 2024” and slow down, or even stop, the necessary and urgent response to global warming. “Economics, affordability and healthcare are increasingly pressing issues, raising the question of how climate action can be accelerated. »
The biggest threat is…
But the biggest unknown remains the evolution of geopolitical tensions, which have already slowed down, or even reversed, globalization. Policies and trade are now focused more on geopolitical aspects than on economic criteria. “Governments are closing in on themselves and creating alliances. Relations, alliances and trade blocs are gaining importance, and security, technology transfers and the resilience of supply chains are central issues,” emphasizes the RBC deputy chief economist.
In 2024 specifically, some 3.2 billion people in 40 countries representing more than US$44 trillion in GDP will go to the polls, notes the Royal. This is particularly the case for India, Taiwan, Turkey, Mexico, Indonesia and the United States. “While centrist parties around the world are in decline, parties on the left and right have contrasting views. Once again, the world order could be upended by the ballots. »
Added to this is the risk of spillover or expansion of the ongoing conflicts in Ukraine and the Middle East, or the probability (very low, but not negligible, RBC analysts highlight) of a military conflict. direct between China and Taiwan. The economic slowdown in China and Beijing’s withdrawal into itself raise many questions about commercial and diplomatic exchanges.
In short, it will be necessary to exercise caution and perhaps take out an insurance policy in the portfolios, such as exchange-traded funds with market-neutral beta.
Fingers crossed and wish each other a happy new year 2024.