Look past headwinds for investment opportunities: report

Heading into 2019 and beyond, the world economy is in good shape, the U.S. isn’t headed for recession, and emerging markets—including China—are ready to face headwinds from U.S. President Donald Trump’s continuing trade war.

This may sound too good to be true, but it’s the base case presented in BMO Global Asset Management’s fall 2018 Global Investment Forum report, which comes after a three-day meeting of investment managers, economists and strategists.

While “there are clouds on the horizon” due to persistant global tensions, rising interest rates and geopolitical events like Brexit, the report says, the experts who gathered also foresee opportunity over the next five years for investors as desynchronized global growth leads to “differentiated performance by asset markets, which will in turn bring more opportunity for informed investors to make attractive returns.”

In particular, they expect risk assets to outpace bonds, given the “global economic upswing has been long but shallow, and inflationary pressures remain subdued.”

Equities will do well as corporate earnings remain solid, the report says, but “we fear that government bonds and corporate credit may be vulnerable as the unprecedented central bank stimulus is wound down,” the report says.

Today’s economic drivers

The global economy continues to be affected by traditional factors such as oil prices, which the experts predict will be pushed up in the short- to mid-term, interest rate hikes and growth trends in major players like the U.S., U.K. and Europe.

For those regions, the report says, both the U.S. and Europe are on solid footing. This is the case even in the face of a likely U.S. slowdown heading into 2020 and slowing growth in Europe this year after a strong 2017, the report says.

Despite what the report calls “an overwhelming consensus” forecasting a U.S. recession in 2020, BMO doesn’t agree. “There is no obvious trigger,” the reports says. “But if one should arise, perhaps brought about by an energy shock or an overzealous policy reaction by the Fed, we believe it would be mild and short-lived.”

For the U.K., uncertainty is inevitable until the shadow of Brexit recedes. Until then, the country’s fortunes are “in the hands of the politicians,” the report says.

The value of intangibles

One new economic and market driver that’s tougher to measure but gaining in importance is intangibles, the report says. These include brand recognition and loyalty, intellectual property, artificial or augmented intelligence, and the value associated with data.

“While these analytical tools are commonly exploited to grow revenue and profitability of the major technology disruptors, the usage of data analytics is now spreading to the more conventional players, including financial service providers, with a view to also enhancing shareholder return,” the report says.

Companies that focus on intangibles “tend to have capital-light business models,” potentially leading to higher profit margins even during downturns. Identifying winning companies will be difficult, though, the report says.

What about Canada?

For the third quarter, the Canadian economy has experienced economic growth close to 2%, says a Thursday report from National Bank that cites its Index of Provincial Economic Momentum.

The bank’s view is that the projected increase “occurred despite drags exerted by two indicators, namely housing starts and retail sales,” the report says. The three provinces that drove growth were B.C., Alberta and Ontario, while Quebec and P.E.I lagged.

For its part, BMO expects domestic growth will hover around 2% going forward.

On Canadian equities, BMO experts are “cautious with a neutral view.”

“While a positive resolution of NAFTA is good for sentiment, Canada faces competitive challenges in addition to a significant household-debt overhang,” the report says. “The absence of a fiscal response to recent U.S. corporate tax cuts makes Canadian equities less attractive when compared with the U.S.”

Read the full BMO report and read the National Bank report.