As the global economy grapples with higher inflation and rising rates, CIBC Asset Management’s chief investment officer says the outlook for equities will be challenging.
Central banks have been tested by surging inflation and have little room to achieve a “soft landing,” CIBC’s Luc de la Durantaye said.
The Bank of Canada raised its benchmark rate to 1% from 0.5% earlier this month, and governor Tiff Macklem said he won’t “rule anything out” regarding future rate announcements.
Many economists expect the Federal Reserve to raise its overnight rate by 50 basis points at Wednesday’s policy announcement.
A scenario where central banks are hiking aggressively typically means higher volatility, which de la Durantaye said could mean a limited upside in equity markets.
“High inflation makes it a bit more difficult for a very big performance in equities,” he said. “So, the performance of the last two years — I think we have to forget that for the next 12 months.”
After large gains since the brief bear market in March 2020, equities have fallen sharply this year. April was especially brutal. The S&P 500 dropped 8.8% for its worst month since the start of the pandemic. The tech-heavy Nasdaq composite was down 13.3%, its biggest monthly drop since the 2008 financial crisis.
The S&P/TSX composite ended its fifth straight month of declines with a 5.4% drop in April.
De la Durantaye said investors should be thinking more defensively and adjusting expectations for an environment of low single-digit returns.
Rising rates and decelerating growth will affect earnings growth from certain corporations, he said. Returns are more likely to vary across sectors.
“You have to be mindful of your sector allocation in that environment,” he said.
Investors will want exposure to defensive sectors as well as “late-cycle sectors” such as commodities, which will benefit from elevated prices due to the war in Ukraine, he said.
“It’s going to be a difficult environment to navigate,” he said.
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