Equity markets rose this week alongside a bounce in U.S. regional banks, and an early-week vote of confidence from President Biden that a deal will get done on the debt ceiling.
On the latter, we’ll breathe easier when we actually see it, and negotiations were reportedly struggling as of Friday.
The S&P 500 rose 1.6%, led by banks and technology. The TSX, however, dipped 0.3% as materials weighed.
Bankruptcies
Last week, the New York Times reported that 2023 is set to be the biggest year for bankruptcies in more than a decade.1 Does this spell doom for equities? The rise in bankruptcies can be attributed to a couple of factors. First, it’s tied to companies’ access to lending—high interest rates have made borrowing costs untenable, limiting firms’ expansion plans. Second, it’s indicative that consumers are possibly being more selective in their spending. This drop in demand means that companies are getting hit from both sides—their expenses are increasing as a result of the rising price of labour, while their revenue is slowing down as inflation-tied earnings fade. Overall, this dynamic isn’t unexpected, and it’s a sign a recession remains fairly likely. Investors will want to keep an eye out to see if other companies are hit; we don’t necessarily expect this double whammy to significantly impact the big, blue-chip names, but it could mean more layoffs in the small business community. That’s why we continue to prefer Quality companies, which can withstand these sorts of headwinds.
Bottom Line: The rise in bankruptcies could be a sign of the other shoe dropping for the economy.
Real Estate
In both Canada and the United States, the real estate market may be showing signs of bottoming out. The U.S. might get there first, especially given the possibility of a pause on rate hikes from the U.S. Federal Reserve. If a pause does happen, it’s likely that we’ll start to see activity in the housing market pick up soon thereafter, as rate cuts will be on everyone’s mind and lenders will be thinking of ways to entice customers back into the market in advance of those cuts. Our expectation, however, is that there won’t be a lot of liquidity in the market. Many homeowners aren’t interested in selling at the moment, in part because of low prices and in part because if they end up selling and buying another house, they’ll likely have to pay more in interest on their next mortgage. High rental costs are also a contributing factor. In Canada, immigration is likely to continue to boost demand. In late 2022, the housing affordability situation in Canada worsened, but was cushioned in Q4 by lower home prices. With interest rates unlikely to go up significantly from here, we could see banks willing to offer more attractive terms going forward, including variable rates and special offers.
Bottom Line: While the U.S. real estate market is primed for a rebound, Canadian housing prices are unlikely to bounce back immediately, which should improve affordability in the coming quarters.
U.S.-China Tension
The situation between the United States and China continues to evolve, with the banning of TikTok in Montana the latest development to contribute to rising tension between the two economic superpowers. But what does this mean for investors? Geopolitical risk is hard to price because it’s difficult to predict. As I discussed last week, we do expect more noise in the coming months as a U.S. presidential election year approaches. The possibility of a TikTok ban has been in the news for a while, and we’re not particularly worried about it; a bigger concern would be the de-listing of Chinese stocks, which could create a tit-for-tat situation and problems for U.S. companies in China, but that hasn’t happened yet. In our view, one of the reasons we haven’t seen more money flowing into China and Emerging Markets more broadly is nervousness around geopolitical risk, and the Russian invasion of Ukraine didn’t help. We remain optimistic about Chinese equities, but if inflows don’t materialize, markets won’t move higher. This wasn’t the primary reason that we recently reduced our allocation to China, but it does help to explain why assets haven’t moved the way we’d hoped. Some investors have said that China is no longer investable, but our view is that everything has its price—if you’re getting a steep enough discount, you have to consider the opportunity. China is one of the world’s largest economies and most populated countries, with pent-up consumer savings from the pandemic potentially set to boost demand. There will be ebbs and flows, but in our opinion, it’s an opportunity that’s too great to ignore. We just need to be a bit patient.
Bottom Line: The value is there in China—it’s just a matter of waiting until the market recognizes it.
Positioning
A detailed breakdown of our portfolio positioning is available in the latest BMO GAM House View Report, titled Are the Bears Ready to Hibernate? Additionally, we’re examining potential opportunities in Japan and evaluating whether we should continue to sell covered calls in a sideways moving market. We’re looking to find incremental value and don’t anticipate any major shifts in our bonds or equities positioning in the near future. At this point, with markets continuing to fluctuate, we don’t want to take on or take off too much risk. We expect that markets may gradually grind up higher, but there’s still room for them to come down a bit before that happens.
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.
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.
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?
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?
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?
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Readying for a Real Estate Rebound
May 23 to 26, 2023
Readying for a Real Estate Rebound
May 23 to 26, 2023
Sadiq S. Adatia, CFA, FSA, FCIA
Market Recap
Bankruptcies
Last week, the New York Times reported that 2023 is set to be the biggest year for bankruptcies in more than a decade.1 Does this spell doom for equities? The rise in bankruptcies can be attributed to a couple of factors. First, it’s tied to companies’ access to lending—high interest rates have made borrowing costs untenable, limiting firms’ expansion plans. Second, it’s indicative that consumers are possibly being more selective in their spending. This drop in demand means that companies are getting hit from both sides—their expenses are increasing as a result of the rising price of labour, while their revenue is slowing down as inflation-tied earnings fade. Overall, this dynamic isn’t unexpected, and it’s a sign a recession remains fairly likely. Investors will want to keep an eye out to see if other companies are hit; we don’t necessarily expect this double whammy to significantly impact the big, blue-chip names, but it could mean more layoffs in the small business community. That’s why we continue to prefer Quality companies, which can withstand these sorts of headwinds.
Bottom Line: The rise in bankruptcies could be a sign of the other shoe dropping for the economy.
Real Estate
In both Canada and the United States, the real estate market may be showing signs of bottoming out. The U.S. might get there first, especially given the possibility of a pause on rate hikes from the U.S. Federal Reserve. If a pause does happen, it’s likely that we’ll start to see activity in the housing market pick up soon thereafter, as rate cuts will be on everyone’s mind and lenders will be thinking of ways to entice customers back into the market in advance of those cuts. Our expectation, however, is that there won’t be a lot of liquidity in the market. Many homeowners aren’t interested in selling at the moment, in part because of low prices and in part because if they end up selling and buying another house, they’ll likely have to pay more in interest on their next mortgage. High rental costs are also a contributing factor. In Canada, immigration is likely to continue to boost demand. In late 2022, the housing affordability situation in Canada worsened, but was cushioned in Q4 by lower home prices. With interest rates unlikely to go up significantly from here, we could see banks willing to offer more attractive terms going forward, including variable rates and special offers.
Bottom Line: While the U.S. real estate market is primed for a rebound, Canadian housing prices are unlikely to bounce back immediately, which should improve affordability in the coming quarters.
U.S.-China Tension
Bottom Line: The value is there in China—it’s just a matter of waiting until the market recognizes it.
Positioning
A detailed breakdown of our portfolio positioning is available in the latest BMO GAM House View Report, titled Are the Bears Ready to Hibernate? Additionally, we’re examining potential opportunities in Japan and evaluating whether we should continue to sell covered calls in a sideways moving market. We’re looking to find incremental value and don’t anticipate any major shifts in our bonds or equities positioning in the near future. At this point, with markets continuing to fluctuate, we don’t want to take on or take off too much risk. We expect that markets may gradually grind up higher, but there’s still room for them to come down a bit before that happens.
1 Andrew Ross Sorkin, et al, “Corporate American Faces a Bankruptcy Boom,” The New York Times, May 18, 2023.
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.
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