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Éric Morin, senior analyst at CIBC Asset Management.

So indeed long-term views should be used to complement short-term views. In fact, our investment decision process is based on two things. First the fundamentals, so an assessment on the fundamentals. But also an assessment on the cyclical or the short term. Our assessment on the fundamental is based on pure macroeconomic or empirical research. One example of long-term views is our long-term expected return communication, which gives us a projection of financial asset returns based on fundamental forces such as demographics, monetary policy and productivity. The main takeaway of this publication is that financial assets in emerging markets are much more attractive over the long term.

However, this kind of analysis is far away from being sufficient. Looking at fundamentals is far from being enough. Why? Because a clear understanding of key cyclical forces is as important, and the most important cyclical factor to keep in mind and understand is the risk environment, more precisely the assessment regarding if risks are balanced or skewed to the downside. If the balance of risk is skewed to the downside, financial markets will move in a defensive mode and fail to behave like predicted by fundamental forces.

The deterioration of the economic landscape in the past 12 months is a good example of the importance of having a view on the risk environment and where the cycle is heading. In the current environment, government bond yields have declined further below their long-term targets and emerging equity has become more undervalued based on our long-term matrix. To better navigate in a challenging cyclical environment, investors and advisors should be aware of some important economic data and market expectations regarding those data. Key variables to assess the volition of the risk environment and the cycle are forward-looking survey data such as PMI and inflation data, particularly in the U.S.

The better the cyclical environment expectations an investor has, the more faith he can put on long-term fundamentals. At the opposite, the more concerned an investor is about the future risk environment, the more weight he should put on more defensive or prudent strategies.

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