Interest rate dice

A soft landing would benefit equity markets, though investors should view that scenario with caution, a senior portfolio manager with CIBC Asset Management says.

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“There seems to be momentum building up in the soft landing camp,” said CIBC’s Amber Sinha, noting the growing confidence among some experts that a controlled economic slowdown is more likely than a recession.

If a soft landing is achieved, he said there is “no doubt the impact on the equity markets would be positive.”

In such a scenario, Sinha said central banks may have the opportunity to loosen monetary policy, potentially leading to lower interest rates.

In turn, if rates do come back down, it could have a two-fold positive effect on the stock market, he said. First, it would ease the burden on consumers who face higher interest rates. Second, lower interest rates generally boost equity market valuations, making stocks more attractive relative to bonds.

Despite this optimism, Sinha remains cautious.

In the past, he said when inflation became a problem, the common approach was to create a recession to control it. With inflation recently reaching its highest level in 40 years, he isn’t convinced that central banks can achieve their desired inflation targets without a recession.

The U.S. Labor Department said the consumer price index rose 3.7% in August from a year ago, up from a 3.2% annual pace in July. Yet outside of the volatile food and energy categories, other costs rose more slowly, suggesting price pressures might be easing at a gradual pace.

Further, Sinha emphasized the heightened leverage at the consumer, corporate and government levels. These factors could make it challenging to achieve a soft landing without significant economic disruptions, he said.

“I think it’ll be a difficult one to pull off,” he said. “But if they were to pull it off, I think it would certainly have a positive impact for the stock market.”

Regarding the potential impact on growth versus value stocks, Sinha said growth stocks stand to benefit from lower interest rates, potentially boosting their valuations. Conversely, value stocks, which are more cyclical in nature, could perform well due to reduced recession fears.

Regionally, Sinha expressed a fairly negative outlook on Europe despite recent strong market performance. He cited weak fundamentals, Germany’s recessionary state, vulnerability to energy costs and geopolitical uncertainties as reasons for concern.

In contrast, Sinha showed more optimism toward Asia, categorizing the region into three distinct segments: Japan, China and other mature economies.

Japan’s potential for higher inflation is a unique factor that could drive economic recovery, Sinha said. He also acknowledged the significance of China but said the country is largely outside his mandate. Among other mature Asian economies, Sinha said there is growth potential in countries such as Korea, Australia, Singapore and Taiwan.

Lastly, there could be opportunities in North America, Sinha said, particularly in sectors outside of technology. For example, while technology stocks have dominated the market, he said high-quality, blue-chip companies such as Nike were available at reasonable valuations, making them attractive investment options.

“These stocks are available for fairly reasonable prices nowadays,” he said.

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