Navigating uncertain markets with a defensive approach

Escalating uncertainty in financial markets calls for a defensive strategy as investors seek safe havens, says CIBC Asset Management’s senior analyst.

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CIBC’s Éric Morin said economic growth has been resilient, as reflected in labour and housing shortages. These shortages contribute to inflation, reinforcing the need for interest rates to remain elevated for an extended period. He still expects a hard landing, though the timing is uncertain.

“The big picture implication on our side is that we have an asset allocation that is more defensive,” said Morin.

That means favouring government bonds and cash. Morin expects bond yields to decline as growth decelerates, leading to higher bond prices. Meanwhile, cash investments offer stability and flexibility, providing an attractive carry with minimal valuation risk.

“It doesn’t happen often that you get paid to [stay] on the sidelines,” he said.

His outlook for equities and other kinds of bonds, however, is gloomier.

Morin predicts stocks will decline, particularly in the overvalued U.S. market, and that credit spreads will widen. On the fixed income side, he prefers emerging markets such as India and Indonesia due to undervalued currencies.

While the U.S. dollar may experience short-term upside due to its safe-haven status, Morin cautioned that it is historically expensive, limiting significant gains. Conversely, several emerging market currencies are cheap, bolstering the appeal of government bonds in those markets.

Morin said he’s also looking to gold as a hedge against idiosyncratic risks. Those include fiscal and monetary policy mistakes, as well as geopolitical tensions.

Looking ahead, Morin said markets are underestimating significant downside risks to the global economy. Restrictive U.S. monetary policy is having an effect, as seen in retail sales and manufacturing activity.

The slowdown could be even more pronounced in China, Morin said, prompting policymakers to launch new rounds of stimulus. Although China poses increasing concerns for the global economy, policymakers have more leeway, he said.

Overall, Morin said his defensive strategy aligns with expectations of continued weakness in global growth, particularly in the U.S. and China. Sticky inflation, resulting from worker and housing shortages, means the Federal Reserve has less room for cuts in the event of a recession.

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Maddie Johnson

Maddie is a freelance writer and editor who has been reporting for Advisor.ca since 2019.