Candice Bangsund from Fiera Capital
expects the global nature of the current economic recovery to continue uninterrupted deep into 2018. The firm’s vice president and portfolio manager, global asset allocation, thinks the continued strength in global growth and corporate earnings will compensate for rising interest rates.
“As such, the reflationary window that benefits equities at the expense of fixed income remains open at this time,” said Bangsund. “While we see little value in bonds, the stronger global growth and corporate earnings trajectory should lend support to equity markets.”
With that view in mind, Fiera will maintain its underweight allocation to fixed income this year. Bangsund advises investors to maintain a short duration positioning in fixed income, while also looking further up the risk spectrum towards spread product and inflation protection, both of which should thrive in the current environment.
“We believe that the path of least resistance for global government bond yields remains higher (and prices lower) in the environment of improving global growth, rebuilding inflationary pressures, and coordinated monetary normalization – compounded further by the prospect for expansionary fiscal policy in the US,” Bangsund said.
Fiera remains overweight equities and has a preference for the cyclically-biased and commodity-levered regions of the world. The firm also anticipates a rotation from the defensive, interest-rate sensitive sectors of the market towards the cyclically-oriented plays, such as financials, energy, materials and industrials.
In Canada, Bangsund expects the revival in the commodity space to provide the strongest lift to the S&P/TSX. “Furthermore, pessimism towards Canadian stocks in 2017 has created a significant valuation discount, presenting a compelling opportunity for a reversal,” she said.
Fiera is also overweight emerging markets. Bangsund believes that developing market indexes remain best positioned to benefit from the reflationary thrust. “Developing market bourses should ultimately prove resilient to a tighter Fed in the context of undemanding valuations, thanks to the broad improvement in global growth, firming commodity prices, and robust earnings growth,” Bangsund said.
Fiera’s outlook is less positive for Europe and the US, and the firm has an underweight allocation to both regions. Bangsund feels that the rise of populism warrants caution, particularly in Italy where support for the euro has dwindled.
“Meanwhile, we expect that uncertainty regarding the fortunes of the UK economy in the wake of Brexit will place undue pressure on UK equities as negotiations linger on in the coming year,” she said. “While US equities should thrive on the robust domestic growth backdrop, relative upside is limited given already stretched valuations at a time when the Fed is embarking on interest rate normalization – though earnings upside prevails amid potential corporate tax cuts and softer regulatory burdens.”
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