CIBC’s Éric Morin said economic growth has been robust, reflected in labor and housing shortages. These bottlenecks contribute to inflation and increase the need to keep interest rates high for an extended period of time. He’s still anticipating a hard landing, although the timing is uncertain.
“The overall message for us is that we have a more defensive asset allocation,” Morin said.
That means favoring government bonds and cash. Morin believes that bond yields will fall as growth slows, leading to higher bond prices. Cash investments, on the other hand, offer stability and flexibility, offering an attractive carry with minimal valuation risk.
“It’s not often that you get paid for it [stay] on the edge,” he said.
For stocks and other types of bonds, however, his outlook is bleaker.
Morin predicts stock prices will fall, particularly in the overvalued US market, and credit spreads will widen. In terms of fixed income, he prefers emerging markets such as India and Indonesia due to their undervalued currencies.
While the US dollar could see near-term upside given its safe-haven status, Morin cautioned that it is historically expensive, which would limit significant gains. Conversely, several emerging market currencies are cheap, which increases the attractiveness of government bonds in these markets.
Morin said he’s also considering gold as a hedge against idiosyncratic risk. These include fiscal and monetary policy mistakes and geopolitical tensions.
Looking ahead, Morin said markets are underestimating the significant downside risks to the global economy. The tightening US monetary policy is having an effect, which is reflected in retail sales and manufacturing activity.
The slowdown could be even more pronounced in China, Morin said, prompting policymakers to launch new stimulus packages. Though China is a growing concern for the global economy, policymakers have more leeway, he said.
Overall, Morin said his defensive strategy is consistent with expectations of continued weakness in global growth, particularly in the US and China. Persistent inflation due to labor and housing shortages means the Federal Reserve has less room to make cuts in the event of a recession.
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