The BMO Multi-Asset solutions team (MAST) House View has returned equities to an overweight position this month, leaving fixed income neutral, drawing down cash to underweight. We were adding modestly to U.S. equities to bring the Income and Conservative Portfolios back to benchmark over the month.
We entered into a small tactical trade purchasing call options on KraneShares CSI China Internet ETF (KWEB), an ETF that tracks Chinese internet-related companies. This provides potential participation in any shorter-term recovery in the market, while limiting downside risk to a very small absolute proportion of the portfolios.
We have reduced our Canadian equity exposure, buying broad EAFE to reflect our relative regional bias. This is primarily a reflection of a struggling Canadian economy, with lower relative job growth and continued concerns over the health of the consumer balance sheet.
Rate Cuts See Their Shadow
Japanese equities led global markets in January, with the Tokyo Stock Price Index (TOPIX) rising 7.8%. This market has been an overweight among the managed solutions since the second quarter of last year, on attractive valuations and increasing shareholder yield opportunities. Weaker than expected wage growth data helped ease concerns of the Bank of Japan’s potential termination of its yield curve controls and negative interest rate policy, boosting valuations over the month. January’s slow start turned quickly into a continuation of the fourth quarter’s “everything rally” in the U.S., as earnings season delivered above average upside earnings surprises. The “Magnificent 7” [a group of high-performing U.S. stocks including Microsoft (MSFT), Amazon (AMZN), Meta (META), Apple (AAPL), Google parent Alphabet (GOOGL), Nvidia (NVDA), and Tesla (TSLA)], was more mixed, with disappointing earnings from Tesla and a sales slump from Apple, while Meta soared on cost-cutting and the initiation of a regular dividend. The banking sector provided a modest fright with regional bank New York Community Bank (NYCB) reporting that they were increasing their credit provisions by $552 million, more than 10 times analyst expectations, while also cutting their dividend. This was all due to deteriorating residential and commercial real estate loans, sparking fears that there might be similar uncovered risks throughout the sector. However, strong U.S. economic data, including upside surprises to January jobs and fourth quarter annualized GDP growth of 3.3% contributed to the rally, only to be cut short by the U.S. Federal Reserve’s (the “Fed’s”) more hawkish stance.
As expected, the Fed held rates steady on January 31, and firmly put the notion of potential further hikes in the rear view. However, it also became abundantly clear that March was also unlikely for any first rate cut, with a blowout jobs report of 353,000 jobs in January versus a consensus expectation of 185,000. Mr. Powell even made it a point to appear on 60 minutes, an unusual forum for the Fed Chairman, to explain to the broader American public that while significant progress had been made, there remained inflationary impulses in the economy that were not yet tamed. Market pricing of rate cuts for the year ahead adjusted quickly, moving down to 4 from the prior 5-6 widely expected by 2024’s end.
Chinese equities continued to struggle to rise from their knees in the wake of the property sector’s final collapse of Evergrande Group, with authorities taking incremental steps to try to support the equity market, including restrictions on short sellers and a commitment of government buying of domestic equity ETFs. Unfortunately, these lack the scale to radically turn the market in the short-term, although the historically wide valuation discounts versus domestic markets, particularly the U.S., might prove interesting to longer-term contrarians. The increasing volatility1 has created shorter-term tactical opportunities to capture asymmetrical upside via the options market, however.
Footnotes
1 Volatility measures how much the price of a security, derivative, or index fluctuates. The most commonly used measure of volatility when it comes to investment funds is standard deviation.↩
Disclaimer:
The views expressed in this document are those of the Portfolio Manager. They do not necessarily represent the views of BMO Global Asset Management. The views and opinions have been arrived at by the Portfolio Manager and should not be considered to be a recommendation or solicitation to buy or sell any products that may be mentioned.
This material may contain forward-looking statements. “Forward-looking statements,” can be identified by the use of forward-looking terminology such as “may”, “should”, “expect”, “anticipate”, “outlook”, “project”, “estimate”, “intend”, “continue” or “believe” or the negatives thereof, or variations thereon, or other comparable terminology. Investors are cautioned not to place undue reliance on such statements, as actual results could differ materially due to various risks and uncertainties.
This communication is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Particular investments and/or trading strategies should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance. BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from the Bank of Montreal.
Commissions, trailing commissions (if applicable), management fees and expenses all may be associated with mutual fund investments. Please read the fund facts or prospectus of the relevant mutual fund before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Distributions are not guaranteed and are subject to change and/or elimination. For a summary of the risks of an investment in BMO Mutual Funds, please see the specific risks set out in the prospectus.
BMO Global Asset Management is a brand name that under which BMO Asset Management Inc. and BMO Investments Inc. operate. BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.
®/™Registered trademarks/trademark of Bank of Montreal, used under licence.
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BMO ETF Portfolios’ February Commentary: Rate Cuts See Their Shadow
February 22, 2024
BMO ETF Portfolios’ February Commentary: Rate Cuts See Their Shadow
February 22, 2024
Steven Shepherd, CFA
Portfolio Activity
Rate Cuts See Their Shadow
Japanese equities led global markets in January, with the Tokyo Stock Price Index (TOPIX) rising 7.8%. This market has been an overweight among the managed solutions since the second quarter of last year, on attractive valuations and increasing shareholder yield opportunities. Weaker than expected wage growth data helped ease concerns of the Bank of Japan’s potential termination of its yield curve controls and negative interest rate policy, boosting valuations over the month. January’s slow start turned quickly into a continuation of the fourth quarter’s “everything rally” in the U.S., as earnings season delivered above average upside earnings surprises. The “Magnificent 7” [a group of high-performing U.S. stocks including Microsoft (MSFT), Amazon (AMZN), Meta (META), Apple (AAPL), Google parent Alphabet (GOOGL), Nvidia (NVDA), and Tesla (TSLA)], was more mixed, with disappointing earnings from Tesla and a sales slump from Apple, while Meta soared on cost-cutting and the initiation of a regular dividend. The banking sector provided a modest fright with regional bank New York Community Bank (NYCB) reporting that they were increasing their credit provisions by $552 million, more than 10 times analyst expectations, while also cutting their dividend. This was all due to deteriorating residential and commercial real estate loans, sparking fears that there might be similar uncovered risks throughout the sector. However, strong U.S. economic data, including upside surprises to January jobs and fourth quarter annualized GDP growth of 3.3% contributed to the rally, only to be cut short by the U.S. Federal Reserve’s (the “Fed’s”) more hawkish stance.
As expected, the Fed held rates steady on January 31, and firmly put the notion of potential further hikes in the rear view. However, it also became abundantly clear that March was also unlikely for any first rate cut, with a blowout jobs report of 353,000 jobs in January versus a consensus expectation of 185,000. Mr. Powell even made it a point to appear on 60 minutes, an unusual forum for the Fed Chairman, to explain to the broader American public that while significant progress had been made, there remained inflationary impulses in the economy that were not yet tamed. Market pricing of rate cuts for the year ahead adjusted quickly, moving down to 4 from the prior 5-6 widely expected by 2024’s end.
Footnotes
1 Volatility measures how much the price of a security, derivative, or index fluctuates. The most commonly used measure of volatility when it comes to investment funds is standard deviation.↩
Disclaimer:
The views expressed in this document are those of the Portfolio Manager. They do not necessarily represent the views of BMO Global Asset Management. The views and opinions have been arrived at by the Portfolio Manager and should not be considered to be a recommendation or solicitation to buy or sell any products that may be mentioned.
This material may contain forward-looking statements. “Forward-looking statements,” can be identified by the use of forward-looking terminology such as “may”, “should”, “expect”, “anticipate”, “outlook”, “project”, “estimate”, “intend”, “continue” or “believe” or the negatives thereof, or variations thereon, or other comparable terminology. Investors are cautioned not to place undue reliance on such statements, as actual results could differ materially due to various risks and uncertainties.
This communication is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Particular investments and/or trading strategies should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance. BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from the Bank of Montreal.
Commissions, trailing commissions (if applicable), management fees and expenses all may be associated with mutual fund investments. Please read the fund facts or prospectus of the relevant mutual fund before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Distributions are not guaranteed and are subject to change and/or elimination. For a summary of the risks of an investment in BMO Mutual Funds, please see the specific risks set out in the prospectus.
BMO Global Asset Management is a brand name that under which BMO Asset Management Inc. and BMO Investments Inc. operate. BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.
®/™Registered trademarks/trademark of Bank of Montreal, used under licence.
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