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.
Have Interest Rates Finally Peaked?
October 31 to November 4, 2022
Have Interest Rates Finally Peaked?
October 31 to November 4, 2022
Sadiq S. Adatia, FSA, FCIA, CFA
Chief Investment Officer (CIO)
Market Recap
Rate Hikes
Last week, the Bank of Canada raised interest rates by 50 basis point—a smaller-than-expected hike, but one that we thought was within the range of possibilities. We’re not convinced this represents a true turning point, but it is an interesting moment. The Bank of Canada has to be a bit more careful than the U.S. Federal Reserve because of the weakening Canadian consumer, housing prices, and household debt levels. This move doesn’t mean that interest rate hikes are over—it means that the Bank of Canada has already raised rates more than other economies and are giving those moves a chance to have an impact. We’ll have a better sense of the Bank’s outlook after their next rate decision. If they go with a 25-basis-point hike, that will tell us that they’re confident about inflation declining. But if it’s another 50-point hike, that means they’re still concerned. In the U.S, inflation has been a bit stickier, so it’s likely that the Fed will maintain a more aggressive rate hike schedule.
Bottom Line: Rate hikes are likely to continue, and the next one will tell us a great deal about what the future holds.
Tech Outlook
We’ve been right on the money in expecting some weakness in tech earnings—that’s exactly what we saw recently from big names like Google, Microsoft, Amazon and Meta. What we haven’t seen yet is a bigger pullback in equity prices. Normally, when companies of that stature announce disappointing earnings or cautious forecasts, you’d expect broad declines of 4-5% on the NASDAQ, indicating that pessimism has set in. But in this instance, the market seems to believe that this is more of a one-off rather than the beginning of future earnings declines. The question now becomes—will the market eventually catch up to where the outlook is? Or will the market rally based on a belief that the Fed’s interest rate hikes have peaked? If investors believe that the peak has been reached, then markets will move up. But if it’s earnings that have peaked, they could still move another leg lower.
Bottom Line: Based on earnings reports, we would’ve expected a much steeper decline in equity markets—and that decline may still happen.
Chinese Equities
Following a short-lived rally in Chinese equities last week, the re-election of President Xi Jinping by his party prompted concern from investors and massive declines in Chinese stocks. But does this affect our long-term evaluation of China as a source of investment returns? The way the political situation played out wasn’t a surprise—Xi was widely expected to remain president. But what it underscores is that policies and attitudes we’ve seen over the past several years are likely to continue. China’s zero-COVID policy is unlikely to change materially, which will restrict growth, and tech companies that have been in the government’s crosshairs will also remain under pressure. One of Xi’s stated goals is to increase the Chinese middle class. That is accomplished by raising taxes on higher income earners and capital gains, which will further squeeze tech companies and other growth sectors. But it’s important to remember that we can’t control the political situation. All we can ask is—are these good, solid companies? And what discount do we require to account for the higher political risk? Though uncertainties to exist, we believe these companies are fundamentally strong and valuations do look attractive.
Bottom Line: Xi’s re-election was no surprise, but it does raise important questions about Chinese equities.
Positioning
The conversations we’ve been having have focused on a few big questions. First—has the market’s reaction to recent developments been overly positive? We would argue yes, because of weakness on the earnings side. But if that is the case, do we take more risk off the table? We were right to go underweight international markets and overweight Energy, and our overweight to health care and Canada have also worked out well. If we do think that a potential economic decline isn’t fully priced in, we should indeed take more off the table. But to do that, first we need to understand what triggers will send the market back down. That’s what we’re examining right now. Rather than changing our equity and bond weight, the answer may be reallocation amongst geographies—for instance, rotating from the U.S. to Emerging Markets. But there is still uncertainty—have interest rates peaked, or are we at the beginning of an earnings decline? If the situation can still go either way, we may be justified in staying the course with our current positioning. Stay tuned in the coming weeks for an update.
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
Chipmakers Soar, Interest Rates Stall
Seeing the Forest through the Trees – How Investors Can Assess Biodiversity Risk
Readying for a Real Estate Rebound
Is It Game Over for the Greenback?
Defense Wins Championships
Why Climate Action Matters for Investors