Luc de la Durantaye,
Chief Investment Strategist and CIO,
Multi-Asset and Currency Management,
CIBC Asset Management
So for our next twelve months, the global economic outlook is one of gradual deceleration of global economic activity. Our forecast is somewhere around 2.9% global growth. And that's combined with an environment where central banks are seeing their inflation being a little bit below their objectives. And this is pretty broad based in the sense that you have some deceleration in the US, some deceleration in China, and that's mainly driven by the manufacturing component of the global economy because of the trade tension impact and the uncertainty that that creates. But the service part of the economy is still holding up well. You still have very high employment and that certainly supports consumer income and that at least helps stabilize this global economic growth environment.
[Part one: Risks over the next 12 months]
Over the next 12 months, the global economy's facing a few risks. I think the ones that are predominant on our radar is obviously the trade negotiations with China, but also with Europe. From that aspect, many think that it is in the best interests of the US and China to reach a deal, and we agree with that. The issue is strategically, they remain relatively far off from one another. And so the ability to come up with a genuine deep understanding and agreement between China and the US will be somewhat difficult. They also have different timeframes to achieve an agreement. China has a much longer term to negotiate a deal as opposed to the Trump administration, which is facing re-election a little bit more than a year from now.
[Part two: Effectiveness of monetary policy]
The other element that we keep watching is the effectiveness of monetary policy around the world. So Europe is already at negative interest rates. There is a limit to how far they can go to negative interest rates. Think of it as the lowering interest rate may help in terms of credit growth, which is supporting of economic activity, but that negative interest rate continues to hurt the financial sector; they have to deal with a negative interest rate and a much flatter yield curve, which is a very difficult environment for the financial sector.
[Part three: Portfolio positioning]
On the one hand, if you have a positive resolution on trade and the monetary policy effectiveness is relatively OK, then you need to have a certain degree of risky assets that are growth sensitive. Those assets need to be undervalued. You also need to have economies that have flexibility both from a monetary policy and a fiscal policy. So Canada, from that perspective, is well positioned, and selected emerging markets are also well positioned from that perspective. So that should be part of your growth-y part of your portfolio. In the event that a more negative outcome occurs, then you want to have more defensive anti-risk type assets. What assets qualify? Government bonds - some government bonds. Canadian government bonds still have a degree of attractiveness in terms of protecting in a more volatile environment. If volatility rises then the low or no volatility asset class - which used to be taboo to a certain degree - is cash. Having cash adds some flexibility into your portfolio and gives you some flexibility to take advantage of volatility. And you also want to have some safe assets - safe assets like gold, safe assets like certain safe haven currencies like the Swiss franc or the Japanese yen can complement a portfolio and stabilize your portfolio in a more binary environment.