Transcript: As Good As It Gets? Perspectives: January 2018

As Good As It Gets? Perspectives: January 2018
Length 4:18

GFX
Luc de la Durantaye, Managing Director, Asset Allocation and Currency Management, CIBC Asset Management

"2017 was a very strong year from an economic perspective. Growth surprised on the upside as well as inflation stabilized from very low levels. That provided a Goldilocks environment for financial markets. In 2018 we're coming into this strong momentum supported by strong financial conditions where interest rates remain low credit spreads are still tight and that therefore provides a good environment as we kick in 2018. Our forecast therefore is for a continuation of strong growth around 3.5%, 3.6% and a gradual rising of inflation. So all in all a fairly positive outlook for 2018."

GFX
What could stall economic & market growth?

"So with such a bright economic environment one can wonder, is this going to be as good as it gets? And certainly from an investment standpoint this outlook is more and more becoming consensus, and so we need to focus on a number of inflection points that can occur in 2018. One of these inflection points is on the inflation. 2017 has been notorious for inflation being missing in action. 2018 might be a bit of a different story. We know very well about the secular factors that are holding down inflation - globalization, technology - but there are cyclical factors as well that are pushing in the other direction and that is, tight labour markets and rising oil prices and that could change the environment from an interest rate perspective, as well as from a monetary perspective. The second inflection point is that contrary to 2017, where the Fed was the only central bank changing course, 2018 might be additional central banks changing course. The European Central Bank has already announced its tapering for 2018. The Bank of Japan might be next. And in the smaller central banks you have a number of central banks that may also change course like Sweden, Norway and of course Canada."

GFX
Financial implications for 2018

"So there are a number of financial markets implications based on this economic background. One is, given the strong performance of risky assets, equity markets and credit markets, investors’ portfolios have probably drifted, being overweight in these asset classes relative to fixed income. I think it's an important time of the year to look back at your portfolio, see if there is any drift and rebalance, consider rebalancing your portfolio. The second point is the Central Bank's intervention up until now has been dampening volatility and we've seen historically low volatility. Going into 2018, there is a chance that volatility starts rising, so it's also an important point that may be to sit down with your adviser and look at whether your portfolio reflects your risk tolerance and align your portfolio with your risk tolerance. Those are two very important points at this stage of the economic cycle. In terms of strategy, given that we expect rates to move higher, a shorter duration over time would probably be well advised. From an equity perspective, focus on more cyclical equity markets given the strength of the economic environment and focus less on, or reduce the exposure to interest sensitive equity markets. And finally, from a regional perspective, the US market has continued to surprise on the upside. There is a limit to how high valuations can be in the US. So consider continuing underweight the US equity market. Emerging markets are attractive still, despite the strong rally of last year so being overweight in emerging market is still favored."

DoubleLine® is a registered trademark of DoubleLine Capital LP.

The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management.

Renaissance Investments, Renaissance Private Investment Program and the Axiom Portfolios are offered by CIBC Asset Management Inc.

™Renaissance Private Investment Program and ™Renaissance Private Pools are trademarks of CIBC Asset Management Inc.

®Renaissance Investments, Axiom and Axiom Portfolios are registered trademarks of CIBC Asset Management Inc.