Protecting portfolios as global risks mount

With a wide range of potential outcomes from various geopolitical risks, CIBC Asset Management’s Luc de la Durantaye says investors should diversify and remain flexible to take advantage of opportunities.

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Slow growth over the next several quarters is the global baseline, said de la Durantaye, chief investment strategist and CIO, multi-asset and currency management, in an Oct. 8 interview. But Brexit, Middle East tensions and the U.S.-China trade war are slowing investment and creating uncertainty.

The International Monetary Fund’s latest forecast predicts global growth of 3% this year, down sharply from the 3.6% growth of 2018, with a 2020 rebound to 3.4% growth.

The outlook for the U.S. is dimmer, with the IMF projecting a modest 2.4% gain, down from 2.9% in 2018. For 2020, the organization expects the U.S. economy to grow by 2.1%.

For Canada, the IMF projects economic growth of 1.5% this year and 1.8% in 2020.

A truce in the U.S.-China trade war and rollback of tariffs would be positive for markets, de la Durantaye said. Stocks from emerging European markets would probably see a bigger bounce than American ones, but “all equities would go up,” he said.

“You would have a rise in bond yields, and the yield curve, which is inverted at the moment, would probably steepen,” he said.

For any enduring impact on the markets, de la Durantaye said a trade truce would have to include the rolling back of tariffs.

A CIBC Economics report released Tuesday downplayed progress on a trade truce. The U.S. and China are no further along than they were in May, when talks broke down, bringing markets with them, the report said.

The only change is that the White House is willing to push tough issues to a second phase of talks while postponing a small tariff hike set to take effect this month.

“Unfortunately, as a very partially completed homework assignment, the grade we can assign to this effort, in terms of reducing trade frictions and business uncertainties, isn’t very high,” the report said.

The only hope is that the Trump administration will want something positive to report on trade, which may “prompt a softer line that allows for a true rolling back of trade tensions at some point before the November 2020 elections.”

However, de la Durantaye also warned about an escalation in the trade dispute that would potentially spill over into the services sector, hurting employment and wages, and increasing the risk of recession.

Low global unemployment and steady wage growth have maintained healthy consumer spending, he said.

“The danger would be that a spillover into the service economy and into the consumer, where wage growth would slow down and/or growth in employment would slow down — that would increase the risk of a recession.”

De la Durantaye recommended diversification across various asset classes to offset losses in such a scenario. Investors should keep North American government bonds in their portfolios, he said, given the negative rates in Europe and Japan, as well as some quality corporate bonds and emerging market debt.

“They still provide a yield pickup, and in our base scenario where growth continues at a moderate pace, those asset classes would continue to do OK,” he said.

Equity markets could still offer low single-digit returns, he said, but de la Durantaye recommended keeping some cash and gold to weather the market volatility.

“In a world of geopolitical uncertainty and stability, gold is probably going to stay up or move a little higher,” he said, adding that gold stocks will also likely outperform other Canadian equities.

He also recommended safe haven currencies such as the Japanese yen and the Swiss franc.

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