Pulling the Plug on Global Liquidity - Perspectives: July 2018
Length 4:12

Luc de la Durantaye
Chief Investment Strategist and CIO, Multi-Asset and Currency Management, CIBC Asset Management

“I think the most important change in the economic landscape in the next 12, 18 months is the removal of central banks’ accommodation across central banks. The Federal Reserve has already started to reduce its asset purchases. The Bank of Japan has started. The ECB has announced that they will stop their purchases in December. So it's the first time in ten years that total liquidity or support that's provided by central banks will start to reverse. And the market doesn't exactly know how that will proceed and what the market impact will be. On the contrary though that's a positive sign that central banks are sending. They're sending, “we think the global economy is strong enough that it doesn't need our support.” And to that effect, we see that growth is strong, it’s still going to remain strong. Inflation is moving towards their inflationary target. The dilemma is that the central bank, if they remove too much too quickly, they may create a recession. If you're removing not enough, then you're creating more inflation down the road.”

GFX
U.S. trade

“So the outlook is complicated by the U.S. trade agenda. The U.S. is pursuing a reduction in its trade deficit. They're also pursuing to protect intellectual property. Those are not negative objectives but the way they will pursue these objectives, whether they use tariffs or trade, and the intensity at which they will pursue it, and the reaction of the trading partners is fairly uncertain at this stage. So that creates uncertainty in the financial markets. We think that, over the summer, the U.S. will continue to put pressure to achieve two objectives. One is to show their determination to change the trade relationship with their partners, and also to gain political support through that process.  Ultimately though too much pressure will unnerve the markets, will have significant economic impact, and therefore will bring all the parties back at the table to find a new trade solution.”

GFX
Preparing for volatility

“How do we navigate these choppy waters? I think this is a time where we want to protect capital. We want to be well diversified. We don't want to have an overweight in risky assets of equities. Having bonds in your portfolio will be important to stabilize the return over time. And given that short term rates keep moving up and are expected to keep moving up, having some cash may not be a bad strategy to take advantage of some of the volatility that's coming up. One deception we've had in this environment has been the underperformance of emerging markets in the last three to six months. That being said, the fundamentals that we see - large foreign exchange reserves, a global banking system that's better capitalized than it was - makes us think that the correction we've seen in emerging markets is more of a buying opportunity than one to shy away from going forward. The other element is, if we have tension growing, then U.S. companies doing business in China are also at risk of facing some red tape, some restrictions to the Chinese market which will not be positive for American companies. So from that perspective keeping an underweight in the U.S. market makes sense to us. Other strategies to think about, the supply and demand in the oil sector is relatively favorable for oil prices. Therefore the energy sector is an attractive sector to consider. The bottom line also is to have a very broadly diversified portfolio to protect against the choppy waters that we see coming.”

 

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