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.
Don’t Fight the Markets
Don’t Fight the Markets
Sadiq S. Adatia, FSA, FCIA, CFA
Chief Investment Officer (CIO), BMO Global Asset Management
Market Recap
Central Banks
Over the past several weeks, the Bank of Canada, U.S. Federal Reserve, European Central Bank (ECB) and Bank of England have all raised interest rates by at least 25 basis points. But despite those increases, equity markets are rallying. Are markets ignoring the messaging coming out of the central banks? It’s not quite that simple. In our view, the message that markets are receiving—and the reason they’ve rallied of late—is that rate hikes may be nearing an end. They don’t care that, for instance, the Fed may raise rates by another 25bps at their next meeting, or that the ECB may have some more work to do. The consensus view is that a pause is on the horizon, and a rate cut from some central banks is a possibility for the end of the year as long as inflation continues to decline. Recession fears are still there, of course. But with a downturn potentially having been pushed down the road, markets see room to move higher, especially with nothing terrible on the earnings front that would alter those expectations. Now, is the market correct? Will we actually see a rate cut by the end of the year? We remain skeptical. But it is worth noting that we don’t necessarily need a recession in order for central banks to cut rates. Once inflation is successfully calmed, interest rates can start to be normalized.
Bottom Line: With a rate hiking pause on the horizon, markets are understandably optimistic.
Oil Prices
U.S. oil production appears to be on the rise, but does this change the outlook for crude prices? In the short term, oil still faces some potential challenges—the economy is weakening, demand is slowing, and China still hasn’t fully reopened. These could prevent crude prices from rising in the near future. But looking further out, it’s a different story: OPEC is unlikely to increase supply materially; when China does finally reopen, demand will likely increase; and if the recession everyone’s expecting doesn’t come to pass, or if it’s not particularly severe, then demand could be greater than anticipated. In our evaluation, these factors mean that oil prices still have room to go higher, potentially into the $80-$90 per barrel range. So, we do like Energy from that perspective. But what’s different this year compared to last is that in 2022 oil was outperforming in a down market. Markets are now rallying, so the debate of which you want to own—oil vs. the market—is very different.
Bottom Line: Oil won’t outperform markets by as much as it did last year, but it could still outperform, at least in the long run.
Tech Stocks
Tech stocks surged in January, and while some believe it was a flash in the pan, we believe it was a sign of growth equities recovering. Tech was the first sector to really get punished when markets sputtered, and we’ve always expected it to be among the first to recover, even with recent layoffs. A key factor is that the market’s risk appetite has changed—risk-off sentiment is increasingly turning to risk-on. We’re seeing that in the crypto space, which has rebounded somewhat from its much-publicized lows, and even the more speculative Tech names are bouncing back. That bodes well for the sector as a whole. There’s also the earnings picture, which hasn’t been as disappointing as some were expecting. And, perhaps most importantly, Tech seems to have resumed its role as a market leader. Back in Q4, when Meta had a bad day, the market didn’t follow suit. But last week, Meta had a good day, and it filtered into the whole market. Cathie Wood’s ARK Innovation ETF, which is available in Canada through the BMO ARK Innovation Fund ETF Series (ARKK), is a great example of the tech rebound—it’s got appeal to the retail investor, some innovation out in the future, and some big names like Tesla.
Bottom Line: Tech is leading the charge again, and it’s wise not to be too underweight—even if there may be some volatility.
Positioning
Right now, the big message is—don’t fight the markets. It’s markets that are driving what’s happening at the moment, and it’s clear that they want to go higher. We don’t think investors should bet against that, which is why we’re remaining neutral on equities for now.
Regionally, the U.S. remains the strongest economy, and we’re still seeing optimism on the China front—those bets will be reflected in our portfolios. In terms of bonds, the question now is—with the economy potentially pushing a recession further down the road, is it time to get back into lower-quality bonds like High Yield and Emerging Market Debt? Given their attractive yield and our expectation that they’re not going to be punished much given the strong chances of only a mild downturn, it’s a debate worth having. And finally, on the currency front, the U.S. dollar has been weakening, and we expect that to continue. We think that the CAD is undervalued and will continue to appreciate, especially as the appetite for risk continues to grow. We’re not concerned about a potential oil headwind—in our view, the CAD is currently only pricing in oil at around $60 per barrel, which means that if prices do come down in the short term, there won’t be much damage. Overall, this is a good market to be back to your strategic weights, not deviating too much even in light of the recent rally.
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
The Volatility Wild Card
Big Troubles at Small Banks
Chairman Powell’s Senate Shocker
Fighting Climate Change ‘Like a Girl’
Rumours of U.S. Housing Recovery Overestimated
The Walmart vs. Home Depot Paradox