Turning Up the Pressure - Perspectives: April 2018
Length: 4:05

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

“As of the end of April, this expansion in the U.S. will be the second longest ever with 106 months. The longest ever has been 120 months, which was between March 1991 and March 2001. The supporting factor of this long expansion has been a secular decline in inflation that has allowed monetary policy to remain very accommodative throughout these periods and an almost secular growth in debt. Those two elements have been key to support long lasting economic expansion. So for us to look forward out to 12, 18 months, we need to look at some of these elements to see how far are we from the end of this cycle.”

Continued global growth

“A review of our economic outlook still points towards the global economy to continue to expand above potential, but at a more moderate pace than the last 12 months, which therefore continues to remove excess capacity in the global economy. The U.S. is further advanced in that process. So we do expect the Federal Reserve to continue to remove accommodation. But Europe and Japan continue to lag, and will continue to be very gradual in their removal, which allows us to see that probably over the next 12 months, we will continue to have an economic expansion. The risk of that is where trade disputes come in, and at the margin, trade disputes can, with the imposition of tariffs, can translate into slightly higher inflation, which would force the hand particularly of the Federal Reserve to hike interest rates a little faster, which poses some risk of slowing the economic expansion or maybe even an accident within the 12-month horizon.”

Outlook: fixed income & equities

“In terms of financial outlook, our base case continues to be a gradual removal of monetary policy stimulus. That leads to a continued rise in government yields. And from that perspective, we would expect again subdued returns, from a fixed income perspective. From an equity perspective, the recent turbulence around trade has brought a correction of over 10 per cent in equity markets, which has helped in terms of their valuation. With a continued expansion, we would continue to expect equities to perform a little bit better given the better pricing that we can take. That being said, the U.S. remains expensive relative to international and emerging markets, so we would continue to prefer international and emerging relative to the U.S. and we would still keep the caveat that we had in the prior quarter, that this reaching for a higher return will come at a price, which the price will be higher volatility given the removal of monetary policy as well as continued headline disruption from a trade perspective.”

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