Each quarter, La Presse asks four experts to analyze the situation in order to grow a fictitious portfolio with an initial capital of $100,000. In this third meeting of 2023, these experts briefly review the second quarter, and they describe their outlook for the future on the financial markets. They are also calibrating their individual asset allocation for the third quarter of 2023 based on a benchmark balanced portfolio. That is to say, established at 60% in equities and 40% in bonds and cash, with distribution differences limited to 10% more or less.
“Equity markets extended their gains amid speculation that central banks may relax their fight against inflation [interest rate hikes] to promote a soft landing for the economy, rather than a recession. In the United States, the index S
“What surprised me most about the second quarter in the economy was the resilience of household and consumer spending despite interest rates rising sharply for just over a year to slow down the still high inflation. Clearly, the reserves of savings accumulated during the pandemic and the unprecedented imbalance of the labor market in favor of workers’ benefits and wages are maintaining the fiscal confidence of households and consumers. In the stock market, I was surprised like many by the impact of artificial intelligence on the value attributed to technology stocks. Looking closer, we can see that this bullish momentum in the S index
“The second quarter proved to be a series of surprises in the economy and financial markets. I was amazed by the resilience of household spending, despite high inflation and rising interest rates. Obviously, there was still demand [for goods and services] to catch up with the excess household savings coming out of the pandemic. Household incomes and fiscal confidence are rising as a result of wage adjustments to inflation and labor shortages in several industries. In the financial markets, I was initially surprised by the response on the stock market during the episode of strong banking tensions at the start of the quarter. Then, I was amazed by the enthusiasm of investors for artificial intelligence technologies. This enthusiasm even caused a major market rotation in favor of the technology and growth sectors, thus fueling a strong upward momentum on the American stock market. »
“I remember two highlights from the second quarter. In the United States first, investor enthusiasm for large-cap tech stocks pushed the stock market index S
“With inflation still high, and the economy surprisingly resilient, I expect central banks to reaffirm their resolve to fight inflation with further interest rate hikes. And this, regardless of the short-term consequences on the financial markets and the economy. At Fiera Capital, our high probability scenario of an upcoming recession remains intact. And I expect a tougher backdrop for equity markets in the second half of 2023. Meanwhile, as markets underestimate central banks’ resolve to fight inflation, and the outlook economic growth are deteriorating, I am wary of complacency among investors who are chasing the recent stock market rally for fear of “missing out”. »
“After a most astonishing second quarter in the stock markets and in the economy, I note that the main economic issues that concern the financial asset markets are the same ones that have persisted for the past few months. First, how long will it take for the inflation rate to return to the central bank target of around 2%? And to get there, will it take one or two more interest rate hikes to slow demand for goods and services and ease inflationary pressures in the economy? Despite the sharp rise in interest rates in just over a year, financial markets are still looking for clear signs of a slowing economy. In other words, when is this much-heralded recession? Is it still for the end of 2023, or moved to next year? »
“Despite the resilience of the economy in recent months, I remain aligned with a scenario of a sharp slowdown and a possible onset of recession at the end of the year. Also, I expect the early sentiment of this economic downturn to show up in the stock market in late summer or early fall. Considering that core inflation remains higher than the central banks’ target, I expect one or two more interest rate hikes in the coming months. In this context, I prefer to remain cautious on the stock market, especially since the markets tend to peak a few months ahead of the start of a recession. »
“In the very near term, I think equity markets could still surprise on the upside until investors see strong signals of an economic slowdown towards a possible recession. And this, even on the American stock market where the strong surge of the last few months has remained very concentrated in the big titles of technologies. For the future, I remain cautiously awaiting the reaction of the stock markets as the next economic data will make it possible to clarify the risk of a next recession. For the moment, it is the leading economic indicators that increasingly point to a marked slowdown in the North American economy over the next few months. »
“The growing risk of a sharp economic downturn and a coming recession warrants a defensive stance with the portfolio allocation of financial asset classes. In fact, if the financial markets were disappointed by further interest rate hikes, or by a further deterioration in the economy that jeopardizes future corporate profits, the value of stock markets and fixed income securities in the bond markets could be under downward pressure. In this context, I prefer to maintain an underweight in equities (at 50%) and bonds (at 25%) compared to the benchmark balanced portfolio. On the other hand, I maintain a significant overweighting on the cash position (at 25%), especially since this type of financial asset, once neglected, has become much more attractive with the increase in interest rates by central banks. »
“I anticipate a still positive third quarter on the stock market, at least until the next economic statistics clarify the tenor of the slowdown and the risk of a next recession. In the meantime, out of caution in my asset allocation, I am increasing the overweight in cash (to 15%) because it has paid off with very little risk thanks to the sharp rise in short-term interest rates . Also, in anticipation of further rate hikes that could affect the market value of bonds, I lower them to underweight (to 30%) relative to the benchmark balanced portfolio. In my equity allocation, which I maintain as an overall underweight at 55%, I lower Canadian equities to a slight underweight (to 16%) due to the risk of a global economic slowdown which would affect demand for raw materials and energy. I am raising US equities to a slight overweight (to 24%) in order to continue to “surf” the bullish momentum generated in particular by the very influential technology sector. »
“I am not making any changes to my asset allocation in the third quarter, considering that it remains well positioned for a possible pullback at the start of the recession. I therefore maintain a slight overweight in cash (7%) and bonds (36%), as well as a slight overall underweight in equities (55%) compared to the benchmark balanced portfolio. Among major equity markets, I maintain a neutral weighting in US equities (20%). I consider that it has served me rather well in recent months, and that the American stock market has become relatively expensive compared to other major markets in the world. Similarly, I maintain a neutral weighting in Canadian equities (20%). I believe that the Canadian stock market remains relatively inexpensive and well valued compared to the other main markets, and that it could therefore better withstand a possible downturn in the economic situation in the coming months. »
“As the leading indicators of the economy are turning increasingly negative, and the financial markets are still slow to adjust accordingly, I prefer to maintain a wait-and-see and defensive positioning in my asset allocation. It therefore remains unchanged in the third quarter compared to the previous one. I maintain cash at a clear overweight (15%) relative to the benchmark balanced portfolio. I justify this allocation on the grounds that increases in short-term interest rates – returned to around 5% – have rehabilitated cash as a real-return financial asset. I maintain the underweight in bonds (28%) because of their risk of suffering further depreciation during the next rate hikes, when they were thought to be over. On the equities side, I am very undecided on the relevance of investing more in the stock market in a context of economic uncertainty. So I’m keeping equities overall underweight at 55%. Among the major markets, I maintain Canadian equities at a slight overweight and US equities at a slight underweight. Even if the Canadian stock market could suffer the effects of a decline in commodity and oil prices when the economic slowdown becomes clearer, I believe that the significant difference between the value multiples (price/earnings per share) of the Canadian index S
