Expect More Volatility as Expansion Continues

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Luc de la Durantaye, chief investment officer, multi-asset and currency management for CIBC Asset Management.

So, the global economic context will be changing over the next 12 months. We’re likely to move from a policy-assisted recovery that we’ve seen in the last 12 months to a more self-sustained economic expansion.

And we think it can be self-sustained because of a number of factors. You’ve got high savings rates in the consumer in Canada, and in a number of places — in the U.S. and Europe — releasing pent-up demand following the lockdowns of the pandemic.

You have job growth accelerating as the economy continues to reopen.

And speaking of the reopening, we see the reopening continuing over the next six to 12 months, based on a number of assumptions.

One is that the vaccines remain … the information we have is the vaccine remains effective against the Delta variant. You have many developed economies that will have exceeded 60% or so immunity by the fall. So, fully vaccinated by 60 to 70% by the fall.

We expect emerging economies too — there are a number of researchers pointing towards that they can reach 60% or so fully vaccinated by the year-end. This will be supported by the fact that there’s over a 13-billion production of vaccine in 2021, which is higher than originally expected. People thought that we’d be at 12 billion or so.

So, that’s going to create a continued economic expansion but at a decelerated pace. Which means that central banks will start removing some of their large policy economy accommodation. In fact, some of the smaller economies have already done so, like Canada has started to taper its asset purchase. New Zealand has stopped its asset purchases. A number of emerging countries have raised interest rates, like Mexico.

So, given, though, the magnitude of this policy support that we had and the withdrawal of the policy support will make a number of market participants probably nervous. And this is especially true. And so that’s going to bring a bit of a market volatility. And we think that it’s going to bring volatility because the economic data that central banks and us investors use as the main guideposts to help this transition, they continue to be distorted by the impact of the pandemic.

So, think about supply-chain disruptions that we hear all the time, the multiple lockdowns and at various rates around the world will create differentiation between economies. There’s different vaccination rates in different countries.

And you also have regulatory changes. You’ve heard regulatory changes in China on the technology companies. You hear also the U.S. administration, the department of justice, pursuing a number of technology companies.

All of that creates a context where market participants will be more nervous as we move through that transition, and there’s going to be higher uncertainty. So, that is likely to create more volatility in the financial marketplace.