As the economy transitions from recovery-driven growth to more normal growth, CIBC’s chief economist says the road might not be as smooth as some economists have predicted.
“If you look at what economists are forecasting, or even what companies are forecasting for their own earnings growth over the next couple of years, it does look like a fairly rosy scenario,” said CIBC chief economist Avery Shenfeld in an interview last month.
However, further waves of Covid-19 remain a significant downside risk.
As governments around the world loosen pandemic restrictions, Shenfeld said epidemiologists have reported that the outlook for Covid “isn’t as uniformly positive as what most are assuming.” New variants could emerge that have the same properties as omicron — or worse, that combine those properties with the deadlier delta variant.
“That sort of combination, or even a milder version of that, will see the economy suffer some setbacks along the way to those better economic times,” he said.
Markets haven’t necessarily allowed for those setbacks in projections, he said. For this reason, Shenfeld said it’s important for investors to continue to have downside protection in their portfolios. That could include bond holdings, which may not perform as well in a sunnier economy but “will provide some downside protection should the economy be hit by further waves of the virus.”
Shenfeld said there is potential volatility in the services sector, where travel and restaurant dining need a prolonged, virus-free stretch for confidence to fully return. Other downside risks include the ongoing Russia-Ukraine conflict and the price of oil.
Shenfeld also recommends investing in companies that are “keeping some resiliency on their balance sheet” in case of months or even quarters where the economy doesn’t perform as well.
That said, even with rising interest rates, Shenfeld expects equities to outperform bonds. Regardless, Shenfeld said investors have to think about balance in a portfolio at all times.
“It behooves investors to keep an eye on a balanced risk perspective in order to ensure that you can live to see a brighter day when the virus, hopefully, truly does start to disappear from our lives on a more permanent basis,” he said.
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