BMO Global Asset Management is a brand name that comprises BMO Asset Management Inc. and BMO Investments Inc.
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. 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.
The portfolio holdings are subject to change without notice and only represent a small percentage of portfolio holdings. They are not recommendations to buy or sell any particular security.
Forward-Looking Statements Certain statements included in this news release constitute forward-looking statements, including, but not limited to, those identified by the expressions “expect”, “intend”, “will” and similar expressions. The forward-looking statements are not historical facts but reflect BMO AM’s current expectations regarding future results or events. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. Although BMO AM believes that the assumptions inherent in the forward-looking statements are reasonable, forward-looking statements are not guarantees of future performance and, accordingly, readers are cautioned not to place undue reliance on such statements due to the inherent uncertainty therein. BMO AM undertakes no obligation to update publicly or otherwise revise any forward-looking statement or information whether as a result of new information, future events or other such factors which affect this information, except as required by law.
®/™Registered trade-marks/trade-mark of Bank of Montreal, used under licence.
April Monthly MAST Commentary: Fear of War is Coming Down, but Fear Over the Fed’s Soft-landing is Rising
Fear of War is Coming Down, but Fear Over the Fed's Soft-landing is Rising
Although war keeps raging with brutality in Ukraine, fear over an escalation of the conflict have steadily come down in recent weeks. For investors, the number one concern now is whether the Fed can successfully achieve a soft-landing of the economy while leaning against the hot inflation. We expect the recession narrative to get louder into the summer, but we think this could be another moment where investors turn too bearish when eying the flat 10yr-vs-2yr U.S bonds. Treasury yield curve as a predictor of recessions. We agree that headwinds to global growth are mounting, especially in Europe, but we see more resilience from the U.S. economy. We think Canada’s economic outlook growth could surprise to the upside, thanks to what could be a multiyear commodity boom. Meanwhile, China is struggling with COVID-19 and its zero-COVID policy has led to renewed lockdowns, which will weigh on growth.
Global Markets in March: Equities bounce from the lows while yields continue to push higher
As central bankers at the Fed and Bank of Canada (BoC) warm up to a steep hiking cycle, bond yields continued to rise in March, leaving fixed income assets off to one of their worse quarterly performance. The yield on Canada’s 10yr bond jumped from 1.81% to 2.40% while rate-hike expectations rose on hawkish remarks from the Fed and BoC. Fear over oil supplies help push oil prices higher from $95.72/bbl to $100.28/bbl but touched a high of $130bbl during the month. Although risk sentiment improved in March, the U.S. Dollar (DXY Dollar Index, +1.7%) continued to climb along with commodity exporting currencies as the themes of monetary-policy tightening and commodity-inflation penalized commodity-importing currencies such as the Japanese Yen or the Euro-area currency. The Canadian Dollar gained an impressive 7.3% vs the Yen and 2.7% vs the Euro, which added to the weakness of EAFE assets. Finally, the VIX volatility index enjoyed a rollercoaster ride along with investor fear during the month, peaking at 36% before ending the month at 20.6%, reflecting a prudent but constructive outlook on expected equity risk. We continue to foresee higher-than-normal market volatility as the expected degree and pace of monetary-policy tightening remains uncertain, while inflationary pressures show little signs of cooling.
Global Markets: Inflationary Cycle Fueling Renewed Macro Divergence Diverging economic trajectories from commodity cycle
For countries like Canada, Australia, or Brazil, whose economy heavily depends on commodity exports, the current backdrop provides a powerful economic tailwind. By contrast, heavy commodity importers such as Japan, EM/China, Germany, or the U.K., face a deteriorating trade balance, and thereby, a slower growth outlook. This is well reflected by the more meaningful negative revisions to Bloomberg consensus estimates for 2022 economic growth (Chart 1) where large commodity importers have seen their growth expectations revised lower, except for the already slow-growth Japanese economy. Meanwhile, Canada has only seen minor growth revisions and we suspect consensus estimates to err too pessimistically as the Canadian economy maintains strong momentum. News of approval of Bay du Nord oil field also points to renewed commodity-related activity (Source: Global News).
Chart 1: Revisions to 2022 Real GDP Growth Consensus Estimates Since September 1st, 2021
Source: Bloomberg, BMO Global Asset Management, as of April 7th, 2022.
Diverging monetary policies and yields
Strongly diverging macro trends have translated into diverging market performance. One major divergence has been the rise of the 10-year U.S. Treasury yield as the Fed has begun a battle against inflation, whereas China’s 10-year bond yield has been falling on disappointing economic growth since 2021 (Chart 2). We expect U.S. and Canadian yields to continue push higher as both the Fed and BoC have room to hike and lean against inflation. Meanwhile, China remains set to ease monetary policy whereas the European Central Bank (ECB) will struggle to keep up with the Fed or BoC in its upcoming tightening cycle.
Chart 2 Diverging Economic Trend Causing Converging Yields Between the U.S. and China
Source: Bloomberg, BMO Global Asset Management, as of April 8th, 2022
Diverging earnings trajectories
Chart 3: Asynchronized Regional Equity Markets (in CAD$ terms) Since September 1st, 2021
Source: Bloomberg, BMO Global Asset Management, as of April 8th, 2022
Outlook and Positioning: Growth outlook slowing, not derailed
As the Fed hikes and leans against inflation in 2022, we think concerns over the Fed realizing a soft-landing of the U.S. economy will keep risk sentiment in a more cautious stance into the summer. We expect the U.S. earnings season to deliver strong revenue growth, thanks to high inflation, but profit margins could shrink modestly as cost pressures mount and the strength of consumer demand peaks. For fixed-income assets, we still expect some pain ahead as yields have yet to peak. This backdrop leaves our asset mix with a modest overweight of equities vs bonds.
Regionally, we continue to prefer Canadian equities. We are neutral on the U.S while we remain underweight of EAFE and EM equities. On a sector basis, we remain overweight of U.S. financials, U.S. energy, and international travel sectors. Within fixed income, we are underweight interest-rate duration.
Disclosures
BMO Global Asset Management is a brand name that comprises BMO Asset Management Inc. and BMO Investments Inc.
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. 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.
The portfolio holdings are subject to change without notice and only represent a small percentage of portfolio holdings. They are not recommendations to buy or sell any particular security.
Forward-Looking Statements Certain statements included in this news release constitute forward-looking statements, including, but not limited to, those identified by the expressions “expect”, “intend”, “will” and similar expressions. The forward-looking statements are not historical facts but reflect BMO AM’s current expectations regarding future results or events. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. Although BMO AM believes that the assumptions inherent in the forward-looking statements are reasonable, forward-looking statements are not guarantees of future performance and, accordingly, readers are cautioned not to place undue reliance on such statements due to the inherent uncertainty therein. BMO AM undertakes no obligation to update publicly or otherwise revise any forward-looking statement or information whether as a result of new information, future events or other such factors which affect this information, except as required by law.
®/™Registered trade-marks/trade-mark of Bank of Montreal, used under licence.
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