Model figure stands on rate tables and looks skeptically on a graph with stock prices.
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U.S. bank failures, rising interest rates and persistent inflation have made it a difficult playing field for investors, CIBC Asset Management’s chief investment officer says. But patience and diversification may pay off if investors holding cash can wait for more attractive buying opportunities.

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Cash has been “a good stabilizer in portfolios,” said CIBC’s Luc de la Durantaye, with higher rates providing an opportunity in volatile markets.

“But I think over the next quarter or two there might be an opportunity to redeploy that cash,” he said. “The market will adjust and provide attractive buying opportunities. But patience and diversification are key here.

Bank failures in recent weeks could reduce lending by commercial banks, de la Durantaye said, which could have an impact equivalent to around 25 to 50 basis points of central bank tightening. That means we could be getting closer to the peak in interest rates from the Federal Reserve.  

He said one key element for markets is the difference between expectation and reality of what the Fed’s next move will be. Wall Street expects the Fed to cut interest rates, de la Durantaye said, while the Fed says more interest rate hikes may still be needed to get prices under control.

The tiebreaker will be in incoming data on inflation and the labour market, de la Durantaye said. Recent labour data was weaker than expected, he said, but not enough to close the gap between what the market thinks the Fed should do versus what the Fed wants to do. 

Another factor is OPEC’s surprise decision to cut production and the impact that will have on energy prices. Curbs in production will cause higher prices at the pump, which provides a boost for headline inflation figures, de la Durantaye said. This adds to the belief that central banks will maintain elevated interest rates longer than what the market thinks.

When it comes to earnings, de la Durantaye said there’s a discrepancy here, too, between what the market believes and what the actual data is showing. 

To date, equity markets have been “surprisingly resilient,” he said, given the heightened risk of a recession after the regional banking crisis in the U.S. and increased energy costs.

“The impact of the regional bank situation in the U.S. is leading to tighter lending standards, to a slightly slower economic activity than previously expected, and therefore lower earnings,” he said. “From an equity perspective, there’s probably a little less upside than before.”

However, relative stability in Asia could provide opportunities, de la Durantaye said. 

While Europe and the U.S. have yet to see the downward impact of their tightening cycles, Asia is in the early stages of recovery driven largely by China and India’s economies, he said. Although growth is mild, from a relative perspective, de la Durantaye said Asia looks attractive. 

“There are areas in Asia that could help in terms of sheltering and providing some return opportunities,” he said.

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