Where CI GAM sees markets headed now

While Lewis expects inflationary pressures to stay higher in the coming decade than they were in the last, the sharp and lagged impact of central bank interest rate hikes in 2022 and 2023 should bring inflation closer to target levels in the next few months. He describes current interest rate levels as “extremely restrictive,” though and notes both a modest slowdown in US growth and a dip into either zero or negative growth in Canada mean we are likely to see inflation fall into central bank target range this year, while remaining a greater concern across a longer horizon.

Over that shorter horizon, Lewis sees the makings of a ‘tug of war’ on equity markets between valuation and earnings. Valuations, he says, have been driven by expectations of interest rate cuts. We saw that in the rally from October to January, when consensus shifted to interest rates coming down as early as spring of this year. Those expectations were positive both for equities and fixed income.

The earnings side is inherently more nuanced but may reflect the role higher rates are playing on company balance sheets. Lewis believes investors are willing to look through some uncertainty on earnings in the next few months, but once rate cuts begin we may have more visibility. He says we can expect challenges until cuts, but once they come certain sectors and geographies may begin to perform well. That includes Canadian equities which he thinks are oversold due to institutional investor bias against the Canadian housing market. China may also offer some opportunities depending on what the Chinese government does to ensure their markets remain efficient and investable.

Fixed income is where Lewis perhaps sees the greatest opportunities in both the short and the long-term. While the rally in long-duration bonds late last year appears to be in the process of pulling back, he thinks there is continued opportunity in government bonds as rate cuts get closer. Credit is where Lewis believes investors can benefit quite clearly. He notes that corporate balance sheets are healthy and lack the COVID-related debts that governments took on. The results are “decent” spreads with solid outlooks for paybacks. Private credit could also benefit as some regional US banks pull back from some of their lending practices, meaning private credit investments can offer potentially double digit returns in the shorter-term.

On the risk side, Lewis sees geopolitics as a constant threat. However, he notes that it’s hard to position yourself against geopolitical risks, as they tend to have a low likelihood and they elicit market overreactions when they do play out. Nevertheless, it’s something asset managers have to monitor. The other major risk Lewis sees is a prolonged pause by central bankers. If they wait too long to cut, the damage to the economy may necessitate steeper and faster cuts than are healthy, which could prove damaging for markets.