CA-EN Institutional
CA-EN Institutional
This week with Sadiq

Our 2023 Portfolio Strategy Overview

January 9 to 13, 2023
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Market Recap

  • On the strength of a robust jobs report, the S&P 500 rose 2.3%, the Dow Jones jumped 2.1%, and the NASDAQ surged 2.6%.
  • Treasuries rallied hard in the opening week, with 10-year yields falling more than 30 bps to below 3.6%, and 2s dipping 15 bps to below 4.3%.

Sectors

With markets expecting a downturn heading into the new year, we believe demand will likely remain high for equities that are less economically sensitive. Two sectors in particular stand out: Energy and Healthcare. Energy is especially interesting given the recent pullback in prices, because while demand does slow during an economic recession, China’s reopening could push commodity values in the opposite direction, offsetting the negativity. So, at present, supply-demand dynamics still favour higher oil prices. Using call options contracts, we also plan to supplement our total yield by harvesting incremental returns in exchange for some upside potential. Our second focus is Healthcare—a sector that’s benefitted enormously from COVID-related expenditures. While the worst of the pandemic appears to be behind us at present, minor outbreaks may necessitate further vaccine development and the hiring of more health professionals, creating a tailwind for price growth. Healthcare spending also tends to be secular in nature, which fits into the camp of high-quality, low-cyclicality stocks we’re targeting.

Bottom Line: Recession-wary investors may want to look at less economically sensitive sectors, such as Energy and Healthcare.

Factors

For at least the first six months of 2023, we believe Value may continue to outperform Growth. Equity prices have further room to come down, especially for the lower-quality names, as the market absorbs earnings misses, which in turn creates more space for capital appreciation across the market—especially on the technology front. Moreover, across all of our portfolios, we tilt toward quality to screen for companies with strong balance sheets. Because as central banks continue to raise interest rates, companies with deep cash reserves and low leverage can offer insulation against hard economic times. Also, given the market’s expectation for volatility to remain elevated in 2023, we believe Low Volatility strategies are positioned to go higher as well.

Bottom Line: Defensive growth factors such as Quality, Low Volatility and Value look comparatively attractive in today’s market.

Regions

We’ve recently pared most of our regional bets because there is a more balanced scenario for all of them. At our most recent multi-asset solution meeting, our house view on international markets is now neutral, moving from slightly bearish (-1) last month. The ongoing geopolitical risks in the region haven’t caused as much harm as we had expected, and investors may be looking beyond those factors in the near term. On top of that there’s a discount in valuations compared to North American equities. Some upside could start to come through, which is why we want to increase our exposure. Meanwhile, we have moved to underweight in Canada as we are now slightly bearish in the region on the basis of weaker economic outlook. We remain neutral on US equities. One area where we’re slightly bullish is Emerging Markets. The reopening of China’s economy and pullback of its restrictive zero-COVID policies will likely provide a significant boost to EM, making it a silver lining among the various regions.

Bottom Line: We’re currently pared back our regional-specific bets; our preference right now is to narrow the equity universe through sectors and factors.

Bonds

We have finally move to an overweight position on bonds moving from neutral to slightly bullish. At present, we don’t want to go too risky on the bond spectrum, because any slowdown in the economy may cause spreads to widen. We’ll own investment grade and above—that’s where we want to play. And it’s for two reasons: 1) we want increased safety in an economic downturn, and high-quality bonds will likely do a better job protecting downside, and 2) we don’t need the additional yield. Equities are still providing attractive enough returns that we’re comfortable staying lower on the risk ladder in fixed income. This isn’t to say we will avoid high yield altogether; we simply believe there will be better opportunities in the future to buy those names. For instance, if we see more economic weakness later in the year and spreads have widened, those prices may start to look much more attractive.

Bottom Line: Within fixed income, we’re focusing less on yield and more credit quality.

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.


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.


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