Fiera: Environment remains compelling for equities in 2018

Global growth and normalizing monetary policies provide favourable conditions, but don't rule out a possible correction, says Fiera's Candice Bangsund.

Christian Charest 21 December, 2017 | 6:00PM
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Christian Charest: For Morningstar, I'm Christian Charest. Global equity markets continue to put up some impressive numbers as we near the end of 2017. I'm joined today by Candice Bangsund, Vice President and Portfolio Manager at Fiera Capital, to talk about her team's outlook for 2018.

Candice, thank you very much for being with us today.

Candice Bangsund: Thanks for having me.

Charest: Before we get to the market themselves, I'd like to talk about the economy. It's been over eight years since the last global recession that was caused by the financial crisis, and a lot of people may be wondering whether this cycle is getting a bit long in the tooth. Do you think we still have another year of growth left?

Bangsund: Well, you are right. We are seeing some renewed economic momentum here across the board. As we go into 2018, leading indicators of global growth are also quite supportive. So, yes, we are in the later stages of the economic cycle. The good news is that we are in the earlier stages of the monetary normalization cycle, which means that the global economy can continue chugging along uninterrupted as we head into 2018.

Charest: And we are really seeing basically every region the world contributing to the growth right now?

Bangsund: Yeah, and that's what so encouraging is that the economic recovery is really increasingly broad-based. And it's not just the U.S. and Canada, but looking abroad, we are seeing above-trend growth in Europe and Japan. China has all but defied expectations for a slowdown and is actually in stabilization mode. So, absolutely, the global economic recovery is increasingly entrenched, meaning it's also self-sustaining.

Charest: So, as a result of this economic strength we have seen central banks around the world pare back their more accommodative policies over the past year or so. How do you see that playing out in 2018?

Bangsund: Yeah. So, we are not surprised to see that central banks are responding to the stronger growth and beginning to normalize policy, albeit very slowly. In the U.S., obviously, this has begun already. We are seeing interest rates moving slowly. They have begun the process of unwinding the balance sheet. Similarly, in Canada, we've removed those two rate cuts from 2015 in response to the strong growth that we have seen here at home this year. Looking abroad as well, the ECB has started to reduce the amount of their asset purchase program but has at the same time extended into 2018 as well. So, the global growth recovery is strong enough to keep recession fears at bay. At the same time, it hasn't stoked excessive inflationary pressures, and this has allowed central banks to take their time in normalizing, which we really think is justified at this time.

Charest: Now, how will all this impact equity markets in 2018?

Bangsund: So, the good news is that this reflationary window of stronger improving growth and slowly normalizing central bank policy means that it's creating quite compelling environment for equities in 2018, particularly with stronger growth supporting corporate earnings and of course, that still-attractive level of interest rates lending some support as well. So, while we are not likely to see similar returns that we saw in 2017, we do still expect positive equity returns next year.

But at the same time, there are some warning signals out there. Valuations are extremely stretched. Volatility has been extremely subdued. Investors are really complacent. And we are seeing some worrisome signs of complacency out there. And our fear is that investors in the markets aren't prepared for a negative surprise in that environment. So, as result, we have used this recent market strength to take some profits and are just exercising some caution as we head into the new year, but we'd look to reinstate that overweight equity positioning in 2018 if we did see a potential correction.

Charest: Now, your forecasts instruct how Fiera positions its portfolios. How are you reacting then to the current environment with regards to specific asset classes? Let's start with fixed income.

Bangsund: Well, we don't have a constructive view on fixed income right now. We think interest rates are moving higher, both at the short and long end of the curve. And of course, this is inherently negative for bond prices. At the short end, obviously, this trend of monetary normalization across the board will move rates higher. But at the long end, obviously, lately we are seeing some flattening, but we do believe that the longer end of the curve will move higher owing really to that stronger growth, the revival in inflation and of course, stronger commodity prices as well. So, we think that interest rates are moving higher across the board and then of course, as a result, we are underweight fixed income.

Charest: Switching over to equities, we've had a very good run. 2016 was the year of Canada -- we saw a more than 20% increase in our stock index. This year it seems to be the U.S. that's doing very well also. What do you expect for 2018?

Bangsund: So, we continue to have a preference for the procyclical commodity-oriented regions of the world, such as Canada and the emerging markets. In Canada, obviously, this is a value play and one that has disconnected from the strong growth we have seen in Canada this year and with the TSX underperforming quite substantially because of its exposure to financials, energy, which have been unfairly battered here this year and we think that these stocks are going to reverse and potentially catch up next year. And as a result, we have an overweight allocation to Canadian stocks.

On the emerging side, again, this is a story of stronger global growth, stronger corporate earnings as well and of course, rising commodity prices, all lending support.

Charest: And what's your view on the U.S. market?

Bangsund: Right now, we are underweight U.S. stocks, and this is really about valuations. The economy is strong. The central bank is taking its time in normalizing policy. Again, this is creating a nice sort of goldilocks atmosphere for U.S. stocks. But at the same time, from a valuation perspective, these stocks have run quite substantially, and we just feel that it's prudent to take some profits after that strong run.

Charest: And finally, something that's very important to a lot of Canadians. What's your forecast for the price of oil?

Bangsund: So, we are quite constructive on crude oil prices. We've got a US$65 target on WTI in the next 12 months and that's really hinging on our call for stronger global growth and of course, global demand for commodities. At the same time, inventories are starting to normalize while the recent agreement to extend OPEC production cuts, removes the key downside risk to our forecast. So, we continue to be bullish.

Charest: We will have to have you back a year from now to see how it all went. Candice, thank you very much for sharing your insights with us today.

Bangsund: Thank you.

Charest: For Morningstar, I'm Christian Charest. Thank you for watching.

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