Conflicting signals amid brighter outlook

The economic outlook for 2023 may be brighter, but there are still conflicting signals for investors, CIBC Asset Management’s chief investment officer says. 

Listen to the full podcast on AdvisorToGo, powered by CIBC.

On one hand, central banks have made progress toward their goal of slowing economic activity and bringing inflation lower, CIBC’s Luc de la Durantaye said.

Economic activity is below trend growth, supply chains have improved, commodity prices have lowered, and inflation in the goods sector has come down, he said. Even the red-hot housing sector and rental market have shown signs of declining. 

The World Bank recently slashed its forecast for global growth this year by nearly half, to just 1.7%, from its previous projection of 3%.

However, de la Durantaye said other parts of the economy remain resilient. Strength in the service sector has kept the labour market strong, with Canada’s unemployment rate holding near historical lows, and wage growth remains high.

“These are conflicting economic signals,” he said. 

For this reason, de la Durantaye said central banks will likely continue to raise rates, albeit at a slower pace. “We’ve made some progress, but there’s still some more progress to be done,” he said.

“It’s not all green lights, but it’s not all red lights that we had, for example, in early to mid 2022.” 

However, de la Durantaye said central banks risk overshooting and triggering a more pronounced economic slowdown. To hit that 2% target, he said services inflation and the labour market need to show more signs of weakness. 

On the other hand, because of economic resilience, he said the possibility of a “soft landing” could be higher than expected. 

China, for example, has relaxed its Covid restrictions as well as its policy toward the real estate market, which could benefit the global economy. “Think of it as removing overall downside growth to the Chinese economy,” de la Durantaye said. 

Also, uncharacteristically warm temperatures in Europe have reduced the risk of an energy crisis, and therefore reduced the risk of a recession as well, he said. 

Overall, de la Durantaye predicts 2023 will improve relative to 2022 for a number of reasons. 

In fixed income, both nominal yields and real yields have started the year higher than in 2022. In equity markets, the valuations have come down to more acceptable levels after last year’s selloff.

“The bottom line is the starting point is better,” he said. 

If inflation continues to decline, de la Durantaye said it will create an environment more favourable to fixed income. However, on the equity side, he said investors will likely need to be more prudent. 

“Even though valuations have improved, the second leg remains to be seen for investing in equity,” he said, especially in relation to lower corporate profit as the economy slows.

At this stage, de la Durantaye said the consensus earnings might be too optimistic, and he said fourth quarter earnings will be telling. 

Regardless, he said it could provide opportunities in the first and second quarter of 2023.

This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.