By Canada Life Investment Management | July 21, 2023

On July 13, 2023  host Dan Gremonprez, National Vice-President of Wealth Distribution at Canada Life, led a discussion with experts Chris Dillon, Vice-President and Investment Specialist at T. Rowe Price (TRP), and Katie Klingensmith, Senior Vice-President and Investment Specialist at Brandywine Global Investment Management (BGIM).

Read on for quick takeaways from the discussion that you can use to help your clients navigate today’s market uncertainty. As we reach the midpoint of 2023, it’s clear we’re facing a great deal of uncertainty and change. As ever, uncertain times mean active investing and defensive strategies can help clients reach their goals.

The global macroeconomic outlook – a tale of two quarters

• There’s a tone of optimism despite the clouds over the global economy.
• Neither BGIM or TRP expect a rate cut this year, since it typically takes 12 to 18 months for policy to bite into the real economy.

For fixed income, bond markets are back in a lot of ways to where they were at the beginning of the year:

• A very inverted yield curve suggests a recession. The first quarter was challenging, but through the ups and downs there are bright spots.
• There’s a lot going on in fixed income markets. Compared to a year ago, valuation opportunities and spreads now vary more widely across sectors and regions.

For equities, investors now have more optimism due to four surprise developments:

• First, we saw a modest surprise in Europe with a warm winter and strong Ukrainian resistance.
• Second, there’s been a massive economic recovery in service sectors across the world, a bi-product of the COVID-19 pandemic recovery.
• Third, the re-opening of China occurred earlier than some had expected.
• And lastly, the re-emergence of generative artificial intelligence (AI), tied to advances in language processing, is creating a lot of opportunities.

There are still concerns on the horizon:

• Tight monetary policy could have unintended consequences if it oversteps. Rates staying too high for too long could impact financial stability, from subprime loans to even more stress on consumers.
• The regional bank crisis in the U.S. was a strong initial signal, but it’s not likely enough to drag the larger economy down. These issues and a lack of liquidity are likely to raise the cost of borrowing for small and regional companies. This is a larger part of the U.S. economy than most realize, which means it’s a very real headwind for overall growth.
• There are massive opportunities from AI, but in some ways the market has gotten ahead of itself.
• China’s economy is sputtering following its re-opening. Slow growth and disinflation there present problems for developed economies that depend on its strength.
• Geopolitical risks suggest serious consequences for financial markets, and fragility is top of mind for investment managers. These include tensions over Taiwan, spats between the U.K. and E.U., the polarization of U.S. politics and the normalization of conflict in Europe.

Inflation is a sticky mess – central banks need to be careful cleaning it up

• BGIM points out that different regions have felt inflation differently, and we could see a mix of effects across the world.
• TRP believes that sticky and stubborn inflation will be with us for a while, which means the U.S. Federal Reserve (Fed) and other developed market central banks will keep rates high for some time.
• But with that outlook, TRP looks to the 1970s, which taught us some harsh lessons about spending too long with higher rates. Former U.S. Fed Chair Arthur Burns took rates to the 12% range in 1974, following an energy shock in 1973. But he didn’t see the 1977 energy crisis coming.

Fixed income – a return to the “good old days”?

• BGIM’s base case is a bumpy ride for the second half of 2023. Portfolios should be built to withstand these periods of market volatility.
• The bond bear market of early 2022 is over, and BGIM believes we’ll see a more negative correlation between fixed income and equities – a return to the “good old days.”
• Sovereign debt and other, traditionally safe fixed income allocations should provide some protection against equity drawdowns.
• BGIM are in some ways still bond bulls as they look to make returns during periods of market volatility. They’re looking to duration for returns. TRP and BGIM agree that emerging market debt is also very attractive and is likely to continue to be, especially if we get into a rate cutting cycle next year.

Equities – stock picking is key

• TRP has only underweighted equities three times in the last twenty years, and there are some good reasons for proceeding with caution through the volatility.
• We’ve seen a great earnings recovery so far this year, but the road ahead is different.
• Interest rates get a lot of the attention, but a reduction in the money supply – quantitative tightening – has been happening behind the scenes. In an environment of declining liquidity, equity markets can’t easily shrug off missing earnings expectations.
• TRP is neutral between value and growth opportunities. Many asset managers have been overweight value until late 2022.
• TRP believes the scarcity of growth favours growth companies that have good prospects.
• The broad-based impact of AI will be huge, but there’s a lag before the rubber hits the road. Tech companies are facing some near-term headwinds. For example, the Nasdaq 100 will soon rebalance following what have been some extreme market actions.
• In a world of scarcer growth – and one where China is likely to disappoint markets – the scales are tilted towards growth.
• This all means a greater focus on stock picking, with an emphasis on core equities. For example, TRP sees pockets of opportunities in firms that are nearshoring and in industrials. 

The road ahead

While none of our panelists has a crystal ball, we hope these global perspectives help you address your clients’ concerns as we navigate the rapidly evolving economic landscape in the months ahead. 

To help with those conversations, we launched a new Market Volatility Toolkit! We’ve packed it with resources that can help you explain market ups and downs and keep clients focused on their long-term investment goals.  

This toolkit includes:

• Tips on how to communicate with clients in times of volatility
• Resources you can use to put rocky markets in perspective – such as a new flipbook, articles and client videos
• Social posts with eye-catching visuals to share with your network
  

For more information, please contact your Canada Life wealth wholesaling team.

Access the expertise of these investment managers with Canada Life™ funds:

T. Rowe Price – mutual funds | segregated funds

Brandywine Global Investment Management – mutual funds | segregated funds