No data was found
THIS WEEK WITH SADIQ

Japan Is Back

June 12 to 16, 2023

THIS WEEK WITH SADIQ

Japan Is Back

June 12 to 16, 2023

Commentary

Market Recap

  • Equity markets held firm this week, with little in the way of major market-moving data.
  • The S&P 500 gained 0.4%, led by consumer discretionary stocks, while technology dipped.
  • Meantime, the TSX slipped 0.7% as health care, consumer staples and industrials lagged.

Japan

Japan’s Nikkei index has seen strong performance so far this year, with stocks reaching highs that haven’t been approached in decades. What’s driving this resurgence, and is the trend sustainable? Our house view is slightly bullish on Japan, and we have a position in those equities in the International (EAFE) sleeve of our portfolios. In our view, there are a few factors at play. First is that over the past few years, we’ve seen Japanese companies refocus on things investors like. Up and down the Japanese market, companies have tended to trade at low price-to-earnings and price-to-book ratios; now, that’s starting to change. On top of that, executives are focusing more and more on capital efficiency, which wasn’t always the case a decade ago. And they’re also realizing the importance of raising dividends—we’ve seen both dividend increases and share repurchases popping up lately. It’s a playbook borrowed from North American markets, and that’s given investors greater confidence. The rebound may also be buoyed by investors pivoting from other regions as a result of rising tensions and political risks in North America and Emerging Markets. Japan enables investors to essentially sidestep those potential headwinds, and despite declines over the past year, the Yen remains a strong, stable currency.

Bottom Line: In a challenging economic environment, Japan may offer investors the attractive valuations and yields they’re looking for.

Energy

Oil and Energy markets are in an interesting and complicated situation. In terms of short-term outlook, there are a couple of considerations. One is OPEC cutting production, which is theoretically good for prices because it limits supply. But this move also tells you that demand has underwhelmed expectations. The production cut is intended to establish a floor for prices above the $70-per-barrel level, but it’s not necessarily going to move prices significantly higher. So, the logical follow-up question is—why is demand not meeting expectations? In our view, it comes down to China. Though its economic reopening is underway, the growth effect is not at the pace investors expected. The property sector has not been strong, and in general, the Chinese consumer is a bit tighter with their spending than their U.S. counterpart. This has lowered energy demand expectations and put further pressure on oil prices. Over the longer term, we do think that oil prices should continue to be in the $80-90 per barrel range. But in the short term, we don’t see a meaningful catalyst for growth.

Bottom Line: An underwhelming reopening in China has reduced the demand for oil, and there’s no obvious imminent catalyst that could cause prices to surge beyond $90 per barrel in the near term.

Gold

Given recent market volatility and the likelihood of a recession down the road, is now the time for gold? Overall, we still have a slightly bullish view on gold despite the fact that, with Technology outperforming, it hasn’t done particularly well of late. In the longer term, however, we still like gold’s upside. If prices can climb past the $2,000-per-ounce mark again, that momentum is likely to carry it even higher. But even at its current sub-$2,000 range, it’s not unattractive, and we believe it could go a little lower in the short term. If that happens, we’ll be buyers.

Bottom Line: We already have a slight overweight to gold, and we’re prepared to buy on the dips.

Positioning

We remain positioned for an extended recession. The expected downturn has already been pushed down the road, and the risk, in our view, is that it will be pushed out even further. Given that uncertainty, we prefer to stay relatively neutral and let the various scenarios play out. We’re still waiting to see strong evidence of a slowdown; so far this year, we’ve only seen slight evidence, and markets have effectively shrugged it off. One could make the argument that only about six of the biggest names have driven the market’s success, and while that’s true to an extent, other companies have started to do well over the past week. It goes back to the question investors have been asking about the S&P 500’s recent bifurcation—will the top six names fall off, or will the other 494 catch up? So far, the top six aren’t losing massive ground, but everyone else does seem to be gaining. That’s the case even in the Financials sector, which had been hit hard after the Silicon Valley Bank debacle. With these questions still sorting themselves out, we believe a neutral position to be the most prudent course of action.

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.


BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate.


Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.


This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.


Commissions, management fees and expenses (if applicable) all may be associated with investments in mutual funds. Trailing commissions may be associated with investments in certain series of securities of mutual funds. Please read the fund facts, ETF 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 the BMO Mutual Funds, please see the specific risks set out in the prospectus. ETF Series of the BMO Mutual Funds trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.


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.

Insights

Steven Shepherd profile photo
Commentary
April 17, 2024

BMO ETF Portfolios’ April Commentary: “Imagine there’s no rate cuts…it’s easy if you try…”

Following a strong first quarter performance from global equities, investor’s collective nerves were shaken in early April.
House view
April 16, 2024

Delayed again: The soft landing that never comes

The view from 10,000 feet is that the economy is still in fairly good shape. That said, it is important to understand that we are beginning to see more signs of underlying economic weakness.
Sadiq Adatia
Sadiq Adatia
Commentary
April 15, 2024

Jerome Powell Was Right

Given recent inflation numbers, are markets resetting rate cut expectations, and is a soft landing is still possible? How will the state of the consumer impact earnings season?
Sadiq Adatia
Sadiq Adatia
Commentary
April 8, 2024

Total Eclipse of the Fed

What do Fed Chairman Jerome Powell’s recent comments mean for the interest rate outlook? And what impact are they having on equity and fixed income markets?
Sadiq Adatia
Sadiq Adatia
Commentary
April 1, 2024

The Supply Chain Problem Rears its Ugly Head

How will supply chain disruptions caused by the Baltimore bridge collapse and conflict in the Middle East impact inflation? Do continuing problems in China’s property sector affect the country’s long-term growth outlook?
Sadiq Adatia
Sadiq Adatia
Commentary
March 25, 2024

Reddit Goes Public: A Good Omen for the IPO Market?

Were Fed Chairman Jerome Powell’s comments as dovish as markets thought? With the Magnificent Seven driving markets, where can investors go if they’re looking to diversify?

Website attestation

You are entering the BMO Global Asset Management (GAM) Institutional website.

Read our Terms and Conditions
Click here to contact us

This information is for Investment Advisors only. By accepting, you certify that you are an Investment Advisor. If you are NOT an Investment Advisor, please decline and view the content in the Investor or Institutional areas of the site. The website is for informational purposes only and is not intended to provide a complete description of BMO Global Asset Management’s products or services. Past performance is not indicative of future results. It should not be construed as investment advice or relied upon in making an investment decision. The opinions expressed are subject to change without notice. Products and services of BMO Global Asset Management are only offered in jurisdictions where they may be lawfully offered for sale. The information contained in this website does not constitute an offer or solicitation by anyone to buy or sell any investment fund or other product, service or information to anyone in any jurisdiction in which an offer or solicitation is not authorized or cannot be legally made or to any person to whom it is unlawful to make an offer of solicitation. All products and services are subject to the terms of each and every applicable agreement. It is important to note that not all products, services and information are available in all jurisdictions outside Canada.