Transcript: Cushioning the downturn — Perspectives: October 2019
Luc de la Durantaye
Chief Investment Strategist and CIO, Multi-Asset and Currency Management, CIBC Management
[Soft Music playing in background]
[Title Reads: Cushioning the downturn — Perspectives: October 2019]
[Text reads: Luc de la Durantaye, Chief Investment Strategist and CIO, Multi-Asset and Currency Management, CIBC Asset Management]
Our central scenario for the next twelve months is one of continued slow growth in the world economy, and that is dragged by a number of elements. One is the trade tension that continues between U.S. and China and potentially with Europe as well.
[Several boats navigate a New York City harbor, followed by a time-lapse shot of a busy New York City intersection, followed by a time-lapse shot of a bustling Chinese market, followed by a time-lapse shot looking up at the Eiffel tower]
There is the Brexit that is still lingering and may be postponed.
[A nighttime time-lapse shot of a busy London city road with Big Ben visible in the distance]
And you have, also, geopolitical tension in the Middle East.
[An aerial shot of Istanbul featuring a tower that rises above the surrounding buildings, followed another aerial shot of the Istanbul cityscape at twilight]
That has an effect on trade. Growth is slowing—has been slowing. This has a spill-over into manufacturing and over investments—corporations are reluctant to invest in this uncertainty. The positive element of our forecast is that the consumer still holds up. Unemployment remains low and, therefore, that's the element of the global economy that stays and keeps global growth around 2.6, 2.7 percent in real terms.
[Text reads: 12-month global economic growth expected to be around 2.6%]
But given the uncertainties, we have an unusually low degree of conviction in these forecasts and we need to look at the risks, as well.
[Title reads: Potential risks and surprises]
So in terms of the risks, we have positive risk and negative risk. On the positive side, if we were to reach a trade truce between China and the U.S., and holding off with a trade war in Europe, and we have a rollback of the tariffs—which is very important—then we could have a fairly positive surprise to the financial markets.
[Text reads: Trade truce may boost financial markets]
Equity markets would recover, and bond yields would probably back up to a certain degree, and the yield curve steepen.
It's very important to make a distinction because a trade truce without rollbacks of tariffs would not constitute a stimulus to the global economy.
[Text reads: Markets likely to benefit only if a trade truce includes rollback of tariffs]
So a trade truce without rolling back could have a very short-term positive impact, but would not be sustainable.
[Text reads: Stronger fiscal spending may also fuel economic growth]
The other positive surprise that we could see is that fiscal spending, where governments have some leeway, where we would have stronger fiscal spending to support and kick growth a little higher—those would be the positive surprises that we need to be alert to in our scenarios.
[Title reads: Persistent trade tensions]
The negative surprise could be either maintaining the current or even an escalation of the trade disputes, and that would, therefore, hurt economic activity even more. And the risk would be that this would spill over to the consumer and the services sector, which have so far been resilient. That could lead to a risk of recession.
[In a big-box store warehouse, we see industrial shelving filled with packaged products reaching several stories high, followed by a close-up of a woman pushing a shopping cart through a warehouse aisle, followed by a wide shot of that woman looking closely at a product on a shelf, followed by a shot of a different woman walking slowly through a warehouse aisle looking up at the products that surround her]
[Text reads: Trade troubles could hurt consumer/services sector and heighten recession risk]
We still see the risk of recession as low, given that the state of the consumer balance sheet is not to leverage in many instances.
[Title reads: Portfolio diversification is key]
Given the wide nature of the outcomes that are possible, we continue to recommend a good diversification in terms of your portfolio. We also recommend to hold government bonds, but particularly Canadian and U.S. rather than European or Japanese, given their negative yields.
[Text reads: Consider Canadian and U.S. government bonds (vs. European or Japanese)]
A little continued exposure to some credit—corporate quality credit—and quality emerging markets to pick up some yield to your fixed income portfolio.
[Text reads: Quality corporate and emerging market bonds may help to boost overall yield]
On the equity side, equities will continue to, or should continue to deliver a decent expected return.
But we would also recommend to hold either cash—
[Text reads: Consider holding cash]
—to take advantage of possible changes in scenarios and take advantage of opportunities that present themselves.
[Text reads: Gold may continue to be a good hedge for a well-diversified portfolio]
And we also would recommend again to hold some gold. That has worked well in the last three to four months, and we continue to find gold as a good hedge to an overall well-diversified portfolio.
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