Easy money now behind us, says leading PM

Watch for economic reacceleration cues to put capital to work as markets slow from high-growth, early-cycle recovery

Easy money now behind us, says leading PM

Economies and markets are transitioning from a high-growth, early-cycle recovery stage to a slower-growth, mid-cycle environment, but the reopening trade is behind us, which should impact how advisors now position portfolios.

That's the view of Michael White, Picton Mahoney Asset Management’s Portfolio Manager and Head of Multi-Asset Strategies, who spoke to Wealth Professional after the firm released its Q4 2021 Investment Review and Outlook.

“It’s very typical that you have the level and rate of growth being quite high in this early phase of an economic cycle, but you can’t grow at an accelerating rate forever. At some point, the rate of growth decelerates. You’re still growing, which is positive; it’s good for the economy. It’s just that that easy money, if you will, is behind us, for sure,” he said, noting the cyclical impulse worked best in the early recovery phase, but there’s less in the markets now.

“We’re not saying be outright defensive, either,” he said. “Right now, we’re in a bit of a consolidation phase. Markets are catching their breath. Under the surface of markets, there’s been an awful lot of rotation from some of those values tilted toward sectors that are a little bit more defensive, but are a little bit more predictable growers and more stable cash flows and quality earnings.”

Picton Mahoney’s Outlook noted several macro themes impacting this phase: the potential fourth wave of COVID and its impact on supply chains, the inflation impact of tight supply chains with pent-up demand, and inflation. White noted inflation has been running from 4% and 6% year-on-year in Canada and the U.S. for a couple months.

“We expect that to come down, but we also expect inflation to reassert itself, maybe toward this time next year,” he said, adding that investors would be well served to wait until next year to deploy their capital.

“We could probably expect to see a bit of a melt-up into year-end. It’s obviously been a good year of returns. And there’s still a tremendous amount of capital awash in the system. So, we’re seeing flow-based investing is remarkable and flow begets flow.”

The Outlook anticipated that stock markets and the global economy will continue to be buoyed for couple of years and inflationary pressures would diminish in the next few quarters as COVID and supply chain issues ease. But, it said inflation will likely be a key risk factor to monitor later in 2022, when base effects and supply chains normalize,

As for what advisors can do, White said, “if someone has been conservative and sat out much of this recovery and missed out on the returns, I would be very cautious about deploying capital now. It might be untimely. But, if someone has been aggressive and believes we’re in for a longer cycle, there’s probably an opportunity to be tactical and maybe rein in their bull horns a little bit, and try to plot their next move.

“I think, in a lot of ways, what made money handily in this early cycle phase has been correcting for many, many months now, so we will probably want to look to those cyclical aspects of the market,” he added. “I think a big function is going to be the signalling from central banks and what they intend to do with interest rates. We’ve had a lot more hawkishness on interest rates over the last couple months of central bank commentary. So, I think they’ve calmed, tempered, the markets and we’re not going to have free money forever. So, as we get this slower economic growth, we would look for the cues for reacceleration to put capital to work. That likely comes into next year.

“I’m not suggesting anyone should raise cash and wait it out from now ‘til then. But I would certainly be cognizant of having made handy profits this year, so it might be prudent to rebalance the portfolio to perhaps understand some of the themes that are located very heavily in the market, beneath the surface of the index level. Look for some tactical opportunities on some of those rotations.”