In a Wait-and-See Mode – Perspectives: April 2019

Length 3:53

Luc de la Durantaye, Chief Investment Strategist and CIO, Multi-Asset and Currency Management, CIBC Asset Management

"Coming into the second quarter we're entering a little calmer waters following the central bank pivots that we've seen in the last three months. This pivot was motivated by a number of elements late in 2018. You had central banks back then that were normalizing interest rates. You had China that was deleveraging its economy after years of too strong credit growth. And you had policy disputes essentially with the US's main trading partners. That led and forced central banks to change course and provided some stability. And so what are we looking forward from here is we have to look at the economic numbers that are in front of us."

Emerging markets outlook

"If we look at China, we're starting to see signs of stabilization. The manufacturing PMI's were showing signs of stability. The consumers have in China has also shown some degree of resilience. So those are positive points. The rest of the EM, emerging market complex, has also shown signs of stability. And we can't forget that China and the rest of the EM is close to 50 percent of the world economy. The US has shown also some signs of stability. We expect the US economy to grow at about potential GDP, so 1.7, 2 percent. So that's another stability factor looking forward. The weak link in the global economy is Europe. Europe hasn't shown signs of stabilizing yet. We have an Italian recession at the moment, and also we have to admit that the central banks in the ECB doesn't have a lot of policy leeway going forward. So that would be the weak link in the global economy. But all in all, we see some signs of evolving stability in the growth outlook."

Risks to consider?

"One of the elements that we're thinking of is the policy flexibility is lower at this stage of the late cycle. Interest rates are very low. Global debt is relatively at an elevated level. So that doesn't give a lot of leeway to stimulate. So going forward we see that more of a stabilization of growth rather than a strong re-acceleration. Policy disputes, particularly between China and the US, are on the mend. But it doesn't necessarily mean that they are completely eliminated. So those are things to continue to think of and monitor over the next 12 months."

Current strategy

"From a strategy perspective, our main advice revolves around a few principles. One is diversification. A simple one but that is not always completely followed. Try to diversify across asset classes, don't be concentrated in any particular asset classes, any particular region, or any particular currency for that matter. Look into alternative diversifying asset classes such as infrastructure, high yield, and the whole complex of emerging markets. Not only equities but also fixed income, emerging market, as well as currencies. The environment that we're seeing, with the Federal Reserve that is likely to be on pause for an extended period of time, EM economies have leeway to lower interest rates and this provides also an environment where the US dollar is not likely to be appreciating quite a bit. That's an environment that is more conducive to risk taking and more conducive for the emerging market complex."