Going into Q3, slow global growth will continue to weigh on interest rates and central banks.
“Where central banks have been easing, we’re going to see intentions to ease even more, particularly with the Bank of England and the European Central Bank,” says Luc de la Durantaye, first vice-president of Global Asset Allocation and Currency Management at CIBC Asset Management. He manages the Renaissance Optimal Inflation Opportunities Portfolio.
“This will delay the Federal Reserve’s plan to hike interest rates,” he adds.
Meanwhile, the Bank of Canada continues to stand pat on rates, as was seen in its most recent announcement—the Bank also lowered its domestic growth projection for this year to 1.3% from its April estimate of 1.7%, largely due to weaker investment and export outlooks.
A bigger problem is we’re reaching monetary policy limits. “Most [central banks] have zero or negative interest rates. And, where a lower interest rate used to be able to prop up equities markets, that effect is diminished. We have less support for equities markets and more modest expectations for returns.”
So while interest rates are low, equities will continue to suffer. “From an economic perspective, a slowdown means slower earnings growth. So equities markets [will] struggle and have a volatile trading range.”
From a fixed income perspective, there’s more upside. “You have the long end of the maturity curve—the 10-, 20- and 30-year bonds—continuing to rally […] Because short-term interest rates are already to zero or negative, then you see a yield-seeking investor that goes out further in maturity to protect [his] portfolio and earn a certain degree of interest income. That will continue to favour fixed income.”
If you’re looking for places to invest, domestic bonds are becoming more attractive. “Canada still has AAA-rated bonds, so we can look at Canada as kind of an island of safety in a global context.”
Gold is also doing well. “If you have negative rates for longer than expected, then the price of gold continues to support this outlook.”