Canada

Throughout 2018, global growth has been challenged by a mounting list of headwinds, presenting investors with a more volatile market than they have seen in a few years. Excessive optimism from the December 2017 U.S. tax legislation, robust corporate profits and generally positive economic data should continue to fuel the global expansion. However, worries about inflation, geopolitical tensions in Asia and Europe and escalating trade war concerns have added periods of downside market volatility.

Our key investment theme for this year — synchronized global growth — remains intact, but perhaps with more dispersion than when the year began. As we look forward, will fundamentals win or will trade tensions, a potential policy mistake or geopolitics undercut the global expansion and the current bull market?

1

Global Expansion Continues, but Momentum Is Shifting

Although global growth is forecast to come in at 3.9% this year and next, according to the International Monetary Fund (IMF) some regions are losing momentum as noted in their July 2018 World Economic Report.

2

Central Banks Diverging but Largely Accommodative

Monetary policies have started to diverge. In the developed world, the Federal Reserve has taken the lead in its normalization process, while other central banks like the European Central Bank (ECB) and the Bank of Japan (BOJ) remain relatively accommodative.

3

Recession Fears Premature Despite the Flattening Yield Curve

Although we expect to see continued flattening throughout the second half of the year, we do not expect an inversion of the yield curve to take place any time soon. Even when the curve inverts, history suggests that it can be another 18 months before a recession arrives.

4

Global Earnings Expectations Positive

We continue to believe that earnings — rather than interest rates — will continue to support equity markets at this stage of the cycle, especially in light of mostly benign inflation. Investors should expect overall returns to be more modest than earlier in the cycle with security selection becoming increasingly important.

5

Market Fundamentals More Potent Than Political Headlines

We continue to believe that the U.S., China and the EU will be able to resolve their differences and ultimately reach a mutually beneficial solution on trade. Additionally, while equity markets have historically traded down in the months before midterm elections, they typically rebound in the fourth quarter of the election year.

Stay Positioned for Growth
Our outlook is generally positive

We believe that the global economy and earnings, combined with our expectation for only a drift higher in interest rates and inflation, should provide the backdrop needed for this equity bull market to continue. We continue to favor equities over bonds within a diversified portfolio, with a preference for U.S. over non-U.S. equities.

Modest return expectations for bonds

While we believe bonds provide a necessary source of income and diversification, we have modest return expectations for the asset class as a whole and see greater opportunity for gains in equities. Because of that, we are underweight fixed income, with a focus on income-oriented bonds and slight exposure to high yield with an emphasis on floating-rate securities.

Buffer against volatility with diversifiers

Market volatility is likely to persist with trade-related protectionism, a potential policy mistake or the U.S. midterm elections, all potential headwinds to the markets. Diversifiers, such as long/short equity, provide some degree of buffer to market volatility without the interest rate sensitivity of fixed income. Customized hedging solutions may also provide a complement to a well-diversified portfolio.

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