Don’t bump up equity exposure—for now

The first quarter brought increased volatility, weaker-than-expected economic activity and growing trade tensions—and these factors aren’t expected to disappear any time soon.

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That’s due in part to global trade issues, but there’s more to consider, said Luc de la Durantaye, head of asset allocation and currency management at CIBC Asset Management, in an early April interview. He says he favours emerging market and international equities, and that the U.S. market remains overvalued.

“We had anticipated, at least in our last [quarterly report] that volatility would potentially rise, and that the economic expansion was as good as it gets,” he says. “We […] advised investors to rebalance their portfolios to make sure they were not overextended in terms of risk assets.”

The follow-up Q2 Perspectives report, released this month, suggests that investors will experience “an increasingly volatile bull market.” While growth will still occur, upward inflation trends will continue to impact interest rates and valuations.

Read: Big banks weigh in on inflation, bonds, rate hikes

We’re in an environment “where robust growth meets late-cycle monetary policy removal,” the report says, and that could lead to “more turbulence before the dust settles and investors adjust to the new regime.”

Still, as the report says, the market jumps seen over the last few months may have been unexpected for some, on the back of strong global economic growth and “well-behaved” inflation in most of the world. Investors who were optimistic earlier in the year were faced with asset classes providing low to negative returns.

De la Durantaye, who manages the Renaissance Optimal Inflation Opportunities Portfolio, says the correction in the equity market has led to more attractive equity markets.

Read: Where bearish advisors can look for opportunity

Before this correction, he says, “equity markets were relatively expensive, particularly the U.S. market. A discount across the board of 10% for equity markets, all else being equal, makes [them] more attractive in the context of the economic expansion continuing over the next 12 months.”

In the coming months, uncertainty over the removal of monetary policy will add to market volatility. The ECB is looking at removing accommodative policy, while the U.S. Federal Reserve continues to tighten.

Read: Market moves that capitalize on rising rates

For all of these reasons, “we don’t recommend increasing equity exposure just yet,” says de la Durantaye.

Trade disputes front and centre

Ongoing NAFTA negotiations, alongside trade tensions between the U.S. and China, will remain obstacles. “To this day, it’s still relatively difficult to decipher [between] theatrical and what is real policy,” says de la Durantaye.

One thing that’s certain is “the trade relationship with the U.S. and the rest of the world is changing,” he adds. “We’re moving from an environment with positive engagement with the rest of the world [to] one with more frictions with the rest of the world.”

Read: What to know about growing U.S.-China trade tensions

De la Durantaye characterizes Peter Navarro, director of trade and industrial policy in the U.S., and Larry Kudlow, director of the National Economic Council under President Trump, as “two trade warriors, if I can use the expression. And businesses, even, in the U.S. are starting to put pressure on China to open up a little bit more.”

But he’s not worried. Currently, the U.S. imports about US$2.5 trillion in products from around the world and exports about US$1.5 trillion, he says. “US$50 billion or so of product identified in position of tariffs is relatively small from an economic perspective.”

He expects trade tensions to only have a small effect on economic growth and inflation, but will remain cautious for now.

“Our sense at this stage is that trade friction […] will come and go but is not something we expect to be resolved in the next few weeks,” says Durantaye. It’s “something that will remain until the end of the year at least.”

Also read: Volatility, geopolitical tensions and rising debt worrying the IMF

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