Luc de la Durantaye, Chief Investment Strategist and CIO, Multi-Asset and Currency Management, CIBC Asset Management
"The last 12 months have been one where the U.S. has been outperforming economically to the rest of the world so there was a desynchronization. We're seeing that resynchronizing in the next 12 months because the U.S. will see the fiscal stimulus fade in the first half of 2019. Plus we're going to have the impact of cumulative Federal Reserve hikes and that's going to slow down the U.S. and reconnect or resynchronize with the rest of the world. We still see the global economy growing above potential. So you're still going to see additional pressure on the labor market. Labor markets are really tight around the world and that will continue to push wages upwards. And this is what we'll be monitoring in the next 12 months is how much will inflation pressure move. We don't think that they will move too far because we are in a world economy that's much more competitive. And so therefore corporations will be left with absorbing some of the wage pressures as opposed to translate into higher inflation. And so from that perspective it leaves the major central banks continuing on their very gradual removal of excess liquidity, monetary accommodation over the next 12 months.”
What risks remain?
“The one that's going to be more prominent is a continued escalation of trade tension between China and the US. The objectives are so strategic that they cannot be resolved in a short term horizon. There's also the Italian budget situation that could continue to put a little bit of pressure on the European side. We don't see this as systemic globally like it was in 2011, 2012 just for now. And there's always higher prices of oil which could act as a tax on consumption. Those are the things that we need to monitor as potential risks in the global environment.”
“The labor market is strong, wages are growing. The real estate market has stabilized. Even the household debt has started to decline to a certain degree. All of these things, including also the NAFTA relief if you will where relieving from the risk of investments might give a little bit of boost to investments in Canada. All of these things make Canada a little bit more interesting at this stage of the expansion.”
Interest rates and inflation
“With this global backdrop that we painted we could see earnings growth continue to move along over the next 12 months supporting continued advance to equity markets. The rise in rates though, a gentle rise in rates but nevertheless a rise in rates and inflation, will dampen the valu-ation of equity markets so we're looking at more single digit returns from equity markets in gen-eral. The starting point is higher now for rates so we still have low single digit returns for fixed income markets. In terms of currency, I think the big relief is on the Canadian dollar. From a NAFTA perspective that eliminates some of the trade risks although the strength of the Canadian dollar cannot be too strong. Canada still has a current account deficit and it needs an under-valued currency. So modest rise in the Canadian dollar but not something that would really hamper foreign investments from a dollar perspective.”