Declines All Around, but Opportunities to Be Had
So far, 2022 has presented a difficult market to invest in, with significant declines in both bonds and equities. The biggest concerns have been central banks beginning to raise interest rates and risk of recession, although there are no signs that we have entered a recessionary period yet. The two events are actually correlated, meaning higher rates will typically raise the likelihood of recession. We believe central banks have a very short window to raise rates as borrowers’ ability to pay higher rates is low.
The markets are now pricing for (i.e., expecting) a total interest rate hike of 300 basis points by the US Federal Reserve within the next 12 months. If it is fulfilled, this will be one of the most rapid hiking cycles in recent memory. The terminal rate will also be higher than that for the previous cycle. Since global debt is significantly larger, a high terminal rate will likely have significant negative implications on spending and could cause a recession. We believe a more realistic path is a series of hikes to 250 basis points, allowing economies and inflation to cool gradually. If the Fed were to apply this strategy, this would mean that bonds are already oversold at current prices and investors could earn a decent income, plus capital gain.
Source: CME FedWatch Tool, CIGAM Multi-Asset Management
Following the outbreak of the COVID-19 virus, central banks did everything possible to restore business and consumer confidence and support prices. We had an unusual period where risk was low, and returns were exceptional. The longer those conditions last, the higher inflation will climb and the longer disruptions to economies will persist. It is necessary or central banks to “step back” but now investors are concerned they could overcorrect and cause a recession.
First, it is important to note that recession is normal. It helps to re-price risks and reset the economic system. Without recession, we would have too many risk takers, lack of competition, low efficiency, and a widened wealth gap. Also, recession makes investing in equities more challenging as some investors will experience losses. We expect central banks to be cautious and avoid triggering a sudden or deep recession.
With this backdrop, we are finding plenty of investment opportunities to keep us excited. Technology innovation trends will continue and may only slow if a recession causes a temporary setback. As a result of price correction since mid-2021, many tech companies are very attractively valued. We are also seeing opportunities to own Canadian energy companies that are generating large cash flows as the world looks for alternative sources to Russian oil. Cenovus Energy Inc., which is held in our portfolio, recently announced plans to triple their dividend and aggressively buy back shares. While electric cars will one day replace gasoline vehicles and reduce demand for oil, the cash flows energy companies could generate before then will be very rewarding to shareholders.
By Alfred Lam, CFA, Senior Vice-President and Chief Investment Officer, CI GAM | Multi-Asset Management
This document is intended solely for information purposes. It is not a sales prospectus, nor should it be construed as an offer or an invitation to take part in an offer. This report may contain forward-looking statements about one or more funds, future performance, strategies or prospects, and possible future fund action. These statements reflect the portfolio managers’ current beliefs and are based on information currently available to them. Forward-looking statements are not guarantees of future performance. We caution you not to place undue reliance on these statements as a number of factors could cause actual events or results to differ materially from those expressed in any forward-looking statement, including economic, political and market changes and other developments. CI Assante Wealth Management and its dealer subsidiaries, Assante Capital Management Ltd. and Assante Financial Management Ltd. (collectively “Assante”) are affiliates of CI GAM | Multi-Asset Management, which is a division of CI Global Asset Management. Evolution Private Managed Accounts are managed by CI Global Asset Management under the United Financial brand and are available exclusively through your Assante advisor. Neither CI Global Asset Management nor its affiliates or their respective officers, directors, employees or advisors are responsible in any way for damages or losses of any kind whatsoever in respect of the use of this report. Commissions, trailing commissions, management fees and expenses may all be associated with investments in mutual funds and the use of the Asset Management Service. Any performance data shown assumes reinvestment of all distributions or dividends and does not take into account sales, redemption or optional charges or income taxes payable by any securityholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the fund prospectus and consult your advisor before investing. CI Assante Wealth Management is a registered business name of Assante Wealth Management (Canada) Ltd. CI Global Asset Management is a registered business name of CI Investments Inc. This report may not be reproduced, in whole or in part, in any manner whatsoever, without prior written permission of CI Assante Wealth Management. Copyright © 2021 CI Assante Wealth Management. All rights reserved.
So far, 2022 has presented a difficult market to invest in, with significant declines in both bonds and equities. The biggest concerns have been central banks beginning to raise interest rates and risk of recession, although there are no signs that we have entered a recessionary period yet. The two events are actually correlated, meaning higher rates will typically raise the likelihood of recession. We believe central banks have a very short window to raise rates as borrowers’ ability to pay higher rates is low.
The markets are now pricing for (i.e., expecting) a total interest rate hike of 300 basis points by the US Federal Reserve within the next 12 months. If it is fulfilled, this will be one of the most rapid hiking cycles in recent memory. The terminal rate will also be higher than that for the previous cycle. Since global debt is significantly larger, a high terminal rate will likely have significant negative implications on spending and could cause a recession. We believe a more realistic path is a series of hikes to 250 basis points, allowing economies and inflation to cool gradually. If the Fed were to apply this strategy, this would mean that bonds are already oversold at current prices and investors could earn a decent income, plus capital gain.
Source: CME FedWatch Tool, CIGAM Multi-Asset Management
Following the outbreak of the COVID-19 virus, central banks did everything possible to restore business and consumer confidence and support prices. We had an unusual period where risk was low, and returns were exceptional. The longer those conditions last, the higher inflation will climb and the longer disruptions to economies will persist. It is necessary or central banks to “step back” but now investors are concerned they could overcorrect and cause a recession.
First, it is important to note that recession is normal. It helps to re-price risks and reset the economic system. Without recession, we would have too many risk takers, lack of competition, low efficiency, and a widened wealth gap. Also, recession makes investing in equities more challenging as some investors will experience losses. We expect central banks to be cautious and avoid triggering a sudden or deep recession.
With this backdrop, we are finding plenty of investment opportunities to keep us excited. Technology innovation trends will continue and may only slow if a recession causes a temporary setback. As a result of price correction since mid-2021, many tech companies are very attractively valued. We are also seeing opportunities to own Canadian energy companies that are generating large cash flows as the world looks for alternative sources to Russian oil. Cenovus Energy Inc., which is held in our portfolio, recently announced plans to triple their dividend and aggressively buy back shares. While electric cars will one day replace gasoline vehicles and reduce demand for oil, the cash flows energy companies could generate before then will be very rewarding to shareholders.
By Alfred Lam, CFA, Senior Vice-President and Chief Investment Officer, CI GAM | Multi-Asset Management
This document is intended solely for information purposes. It is not a sales prospectus, nor should it be construed as an offer or an invitation to take part in an offer. This report may contain forward-looking statements about one or more funds, future performance, strategies or prospects, and possible future fund action. These statements reflect the portfolio managers’ current beliefs and are based on information currently available to them. Forward-looking statements are not guarantees of future performance. We caution you not to place undue reliance on these statements as a number of factors could cause actual events or results to differ materially from those expressed in any forward-looking statement, including economic, political and market changes and other developments. CI Assante Wealth Management and its dealer subsidiaries, Assante Capital Management Ltd. and Assante Financial Management Ltd. (collectively “Assante”) are affiliates of CI GAM | Multi-Asset Management, which is a division of CI Global Asset Management. Evolution Private Managed Accounts are managed by CI Global Asset Management under the United Financial brand and are available exclusively through your Assante advisor. Neither CI Global Asset Management nor its affiliates or their respective officers, directors, employees or advisors are responsible in any way for damages or losses of any kind whatsoever in respect of the use of this report. Commissions, trailing commissions, management fees and expenses may all be associated with investments in mutual funds and the use of the Asset Management Service. Any performance data shown assumes reinvestment of all distributions or dividends and does not take into account sales, redemption or optional charges or income taxes payable by any securityholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the fund prospectus and consult your advisor before investing. CI Assante Wealth Management is a registered business name of Assante Wealth Management (Canada) Ltd. CI Global Asset Management is a registered business name of CI Investments Inc. This report may not be reproduced, in whole or in part, in any manner whatsoever, without prior written permission of CI Assante Wealth Management. Copyright © 2021 CI Assante Wealth Management. All rights reserved.