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THIS WEEK WITH SADIQ

The Supply Chain Problem Rears its Ugly Head

April 1 to 5, 2024

THIS WEEK WITH SADIQ

The Supply Chain Problem Rears its Ugly Head

April 1 to 5, 2024

Commentary

Market Recap

  • Equity markets rose further this week, with solid growth data setting the backdrop.
  • The S&P 500 gained 0.4% on a broad mix of strength across utilities, banks and health care, while the high-fliers—technology and telecom services—lagged.
  • The TSX added 0.8% with strength in health care, materials and energy, and the latest rally has lifted the index a solid 5.8% year-to-date.
  • Notably, each of the TSX, S&P 500 and Nasdaq were pushing record highs this week.

Supply Chains

Recently, supply chains have been tested by conflict and piracy in the area around the Suez Canal, and by the tragic collapse of the Key Bridge in Baltimore, which has temporarily blocked access to the Port of Baltimore. The bridge collapse is a major disruption to one of America’s busiest shipping hubs, but we don’t expect it to have a significant long-term impact on inflation or markets in general. In the short run, the lack of access to the port and the effect it will have on local transportation (the bridge was part of a major highway) is likely to put some pressure on prices. The silver lining, however, is that the impacts of supply chain problems tend to be short-lived. The U.S. Federal Reserve (Fed) recently noted that though inflation spiked up in January and February, it was likely temporary rather than part of a larger trend. We’d expect disruptions related to the bridge collapse to be similarly temporary. Supply chain issues in the Middle East are a bit more of a concern, as ongoing conflicts in the region have the potential to cause disruptions over a much longer period of time. Given the situation’s uncertainty, we believe it’s too early to tell what kind of long-term impact on global supply chains it may have.

Bottom Line: The Baltimore bridge collapse is unlikely to significantly impact inflation, while the longer-term impacts of conflicts in the Middle East are less certain.

China

To investors’ dismay, problems in China’s property market don’t appear to be subsiding, and this has affected our view on the country’s growth prospects. On the positive side, the Economic Surprise Index—which tracks the differences between economic forecasts and actual results—is beginning to look a bit better for China, especially in terms of consumer spending. But there is not yet any stabilization in the property sector, which is keeping many investors on the sidelines. In our view, there are two key aspects to a potential turnaround: improving sentiment and stimulus. The government needs to provide the right amount of stimulus, and while some measures have already been taken, they haven’t yet been as robust as what we’d typically see in North America. Looking ahead, we’ll be watching for mortgage rates to continue to come down, which will be necessary for the market to become attractive to investors again. We’ll also be looking out for a pickup in home purchases—that would be another positive sign that buyers are coming back.

Bottom Line: In the long term, we think the Chinese economy will be fine, but in the near term, headwinds from the property sector are still a significant concern.

Europe

We’re definitely warming up on European equities. Last year, we shifted from being underweight Europe to being neutral, and we’ve believed for a while that we’d gradually shift to an overweight positioning over the course of 2024. What we’d still like to see is greater economic stability from the region—recent numbers from Spain and Portugal have been better, but the U.K. and Germany are still dealing with various issues. That said, Economic Surprise indicators have been positive, and valuations are very attractive. In particular, we like the European Healthcare and Financials sectors; though we may not yet be overweight the broader region, we’re certainly on the lookout for opportunities in those spaces. In fact, our global equity funds already have a tilt towards European Financials.

Bottom Line: For now, the U.S. equity market remains more attractive than Europe, but we’re not far from shifting to an overweight position on European equities.

Positioning

We remain fairly optimistic about the direction of markets based on the state of the consumer. Recently, we have seen more signs that the consumer is becoming more cautious in how they spend their money; for instance, Lululemon’s recent earnings report highlighted that demand has softened. For now, the consumer remains relatively strong. But going forward, we’ll be monitoring Consumer Discretionary spending across the board for signs of further weakening.

For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled The Bulls Keep Running: Why Markets Remain Upbeat.

Disclosures:

The viewpoints expressed by the Portfolio Manager represents their assessment of the markets at the time of publication. Those views are subject to change without notice at any time without any kind of notice. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results. This communication is intended for informational purposes only.


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