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Recession risks have mounted as the Bank of Canada continues its path on raising interest rates in an attempt to tame inflation, which is being felt more acutely among clients who face a prolonged period of rising prices.
That’s also leading to more concerns for advisors as clients start to question how long this higher cost of living environment will last and what impact it will have on their savings.
Globe Advisor assistant editor Rajeshni Naidu-Ghelani spoke with Nathan Janzen, assistant chief economist with RBC Economics, at the Inside ETFs Canada conference in Toronto about the bank moving up its call for a recession to the first quarter of 2023 and what this means for investments and consumers.
Recessions, of course, aren’t good for investments. Give us your outlook on where we are and what will happen with investments as we go into a recession.
Business capital investment has been fairly positive recently. I can look at things like imports of machinery equipment into Canada, it’s been very strong. A lot of that is tied to labour shortages. Probably, it’s very difficult for businesses to keep up with demand right now without available labour supply. So, we are seeing evidence that they’re buying more machinery to try and increase the productivity of their existing workforce. That’s a really positive thing.
Long run for the economy, over the next year as we get into a recession, we would likely see some declines in investment spending. There are structural issues with the aging of the population, and that’s limiting the availability of labour supply. So, that will still be an issue. It might be less of an issue next year as the unemployment rate rises, but labour shortages will be back. Those are tied more to longer-run structural forces than any cyclical factors.
[For investors] asset values have already fallen a lot on the expectation that there’s going to be a recession next year. So, to an extent for markets, the idea that there’s going be a recession in the next year is not going to be a surprise. A lot of that is expected and priced in.
The biggest concerns with most consumers regarding inflation are food and fuel. The question they keep asking is how raising interest rates is going to reduce their food bill. What’s your response to that?
From the central bank’s perspective, there’s not a lot it can do about oil or food prices. Those are really driven by global factors and commodity prices that the Bank of Canada alone doesn’t have any influence over.
The kind of inflation central banks are trying to get back under control is the broader inflationary trends that are pushing service prices higher. We get that question as well and it’s not usually a satisfactory answer to tell [clients], ‘Well, the bank can’t do anything about it.’ So, they’re just going to push rates higher anyway, but that’s the kind of environment we’re in, and we also know the alternative is much higher inflation for much longer.
That’s probably the worst alternative. If you have inflation running in excess of wages for a long period of time, you know that’s a negative for all households. What they’re trying to do is get inflation back lower so that wage growth can start to outpace inflation again. That’s a better environment for households, but the path to get there isn’t always easy.
This interview has been edited and condensed.
- Rajeshni Naidu-Ghelani, Globe Advisor assistant editor
Must-reads from Globe Advisor this week
Why these equities are the ‘most exciting trade’ for Canada’s top wealth advisor
David LePoidevin – recognized as the No. 1 advisor in The Globe and Mail and SHOOK Research’s second annual Canada’s Top Wealth Advisors ranking – has made a career of going against the grain of traditional money management. Consider his decision to pull way back on his bond holdings coming out of the 2008-09 global financial crisis – and go to zero bonds in 2021 as inflation started to surge. It was a major statement for Mr. LePoidevin, who began his career as a bond trader in the mid-1980s. He says his most exciting trade right now is the reset, fixed-floating preferred shares, which he’s buying at an average price of about 60 cents on the dollar. Brenda Bouw spoke with Mr. LePoidevin about his current investment strategy and some of the qualities he believes make a good advisor.
Why Gen Xers are shying away from seeking financial advice
Generation Xers were raised in the shadow of Reaganomics, began their careers in the thick of the 1990s recession and dot-com bubble, and witnessed the near collapse of U.S financial institutions less than a decade later. No one could ever fault this generation, born between 1965 to 1980, for being reticent to seek financial advice, says an expert. But as Gen Xers are primed to receive trillions of dollars in inheritance, they will also be looking increasingly for advisors who can provide a roadmap for balancing social good with financial returns. Barbara Balfour speaks with advisors on how they can cater to this generation that may be seeking advice too late.
How rising interest rates are affecting retirement plans for those with mortgages
For Canadians retiring with mortgage debt, the likelihood of having to manage higher payments in the near future is a growing concern. With interest rates on the rise, many retirees are working with their advisors to get a sense of the impact of larger housing costs on their cash flow and consider their options – even if renewal is a few years away. More people in metropolitan areas are also carrying mortgage debt into retirement. Helen Burnett-Nichols reports on how advisors are helping retiree clients make decisions such as whether to downsize sooner, stay in their home and change their spending habits, or explore ways to access the equity in their home.
How top advisors are managing clients’ emotions in volatile times
It’s a tough time to be a wealth advisor given the prolonged market correction, rising inflation and higher borrowing costs that are making investors increasingly anxious about their portfolios and overall financial well-being. For many, these are the times when the real work happens – persuading investors to stick with their investment plans during tumultuous times. It’s not just about managing their money but also coaching clients not to let their emotions talk them into making decisions – such as panic selling or buying stocks overconfidently – they might later regret. Brenda Bouw spoke with some of advisors on The Globe and Mail and SHOOK Research’s Canada’s Top Wealth Advisors ranking about strategies they’re using to deal with clients.
What’s changed in this year’s Canada’s Top Wealth Advisor ranking?
Asset managers pay vastly unequal fees for using indexes
Knowing ‘what it takes to get the job done’ has been key for top young advisors
How top advisors are managing their work-life balance to avoid burnout
Extreme market events put regulators to the test
What you and your clients need to know
ETF strategy targets investors concerned about market volatility
Although stock investors have had some great trading sessions over the past couple of months, this year, overall, has been a tough go for the conservative investor. Unless an investor had the foresight to overweight energy and basic materials sectors (unlikely given the historical volatility of the underlying commodity prices), it’s very likely investors have been disappointed with their portfolio results and are increasingly concerned about market volatility. With that in mind, Ian Tam of Morningstar Inc. looks at the world of low-volatility exchange-traded funds that have outperformed their respective category peers.
Four biases that confound investors
They say to err is human. It’s equally true, but less likely acknowledged, that bias is also a human trait. Everyone has biases – whether we recognize them or admit to having them. The burgeoning field of behavioural economics offers dozens of human foibles that are fascinating because many of them contradict the basic assumptions of traditional economics. Human psychology plays a bigger role in investment decisions than many of us care to admit. John De Goey of Wellington-Altus Private Wealth Inc. looks at four biases that pose particular problems for investors.
Why quitting is for winners in poker, careers and life
Knowing when to quit can be the key to your career success. It’s hard, because of the many admonishments about quitting we hear routinely, such as “quitters never win, and winners never quit.” Quitting is viewed as for losers – even cowards. Sticking with your course of action through adversity is a treasured sign of grit – and heroism. But quitting should be seen as a decision-making tool because lack of information can be leading you in the wrong direction. Harvey Schachter speaks to experts about the main factors to consider before making the decision to quit.
– Globe Advisor Staff