Steven Bell

Managing Director, Portfolio Manager & Chief Economist, Multi Asset Solutions

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Risk Disclaimer 

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

Asset Allocation

Our core view is that the global economic recovery has further to run even though monetary policy is slowly normalising and some economies are close to full capacity. Accordingly, we are overweight global equities (expecting earnings to continue to be healthy), underweight government bonds (expecting yields to continue to rise) and underweight credit (which we see as expensive). We see the pro-risk environment continuing albeit with some headwinds that will limit returns.

Risk Disclaimer 

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

Within equities, we prefer the US and Japan, expecting recent strong earnings and the success of ‘superstar’ firms to continue. We also allocate to India and other EM ex-China, seeing recent weakness in these markets as an opportunity to build exposure to the powerful longer-term structural themes that we have discussed. We are underweight the UK based on Brexit and general political uncertainty; we also expect sterling to perform well (which would weigh on UK stocks due to their high foreign currency exposure). For Canadian equities, we remain cautious with a neutral view. While the positive resolution of NAFTA is good for sentiment, Canada faces competitive challenges in addition to a significant household debt overhang. The absence of a fiscal response to recent US corporate tax cuts makes Canadian equities less attractive than US. Within global sectors we prefer financials (which should benefit from rising interest rates) and technology.

We are underweight government bonds across the board with the exception of Italy. While we expect the European project to face further challenges, we believe this will ultimately result in structural reform, and therefore see Italian bonds (that have priced in some euro break-up risk and concerns around the budget deficit) as attractive. It will, however, be a bumpy ride and exposure to Italian bonds should be limited and adjusted on a tactical basis.

We think credit spreads are too tight and are underweight in both developed and emerging markets. In our view, corporate risk is best taken in equities while credit is inferior to government bonds as a hedge against recession risk.

Within currencies, we prefer the US dollar on rising yields and better growth, and sterling, which we see as priced for a reasonably hard Brexit outcome, suggesting room for strong performance in a more moderate scenario as the Bank of England raises interest rates. While the yen is cheap on very long-term metrics such as purchasing power parity (PPP) we see no reason why the yen should perform well when policy is not expected to materially tighten. Japanese investors continue to look abroad for investment opportunities and interest rates in other developed economies are headed higher.

Chart 13: US earnings are growing strongly

Source: Bloomberg, Datastream, BMO Global Asset Management, as at September 2018
The model estimate for US earnings is based on a regression of US ISM manufacturing and non-manufacturing surveys, with a 3 month lag (Y = -120.7 + 1.65*ISM Man + 0.74*ISM NM).

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