With just a handful of trading sessions remaining in 2023, many major equity markets across the world are closing out the year with attractive gains.
To assess whether this strength can continue into the new year, The Globe and Mail recently spoke with Jean Boivin, head of BlackRock Investment Institute and a former deputy governor of the Bank of Canada, who discussed key market drivers and BlackRock’s 2024 outlook report on global markets released last week.
When do you think we will see the next rate move and what’s your outlook for the Bank of Canada’s policy rate?
We think that this is a second half of 2024 story for Canada, for the U.S. for sure. In the U.S. … we don’t think it’s as much as the market is expecting, with maybe one or two cuts in 2024 – so, very different from the very positive expectations that the market has been building up over the last month.
We see the same general story in Canada, although cuts could start earlier and there could be room for one more cut.
What are your thoughts on inflation? Is it going to return to 2 per cent?
I think inflation is normalizing quickly. But we think over the next few years inflation in the U.S. will not be at target, even though we might touch it, and will be, on average, somewhat higher than 2 per cent.
In Canada, I think the progress has been somewhat better and I think the Bank of Canada may have a bit more room to manoeuvre to contain inflation, so maybe closer to 2 per cent in Canada.
But a bigger point for us is that to keep inflation there, central banks will have a lot more work to do against inflation pressures that will keep coming in this regime that is very different from the period we had prior to 2020.
Let’s expand on that topic and discuss this regime where you believe we will see higher macro and market volatility next year.
It’s not only next year, we think that it’s the next few years.
We think there’s been a change of regime. Three structural changes have occurred over the last few years. One is demographics. For the U.S., Canada and Europe, we are in a world where the aging population is only now starting to have a real impact with people going into retirement in waves – a big impact on the labour force participation. This leads to labour market pressure that will constrain our ability to buffer shocks and makes the environment more costly and more volatile.
The second is the global geopolitical environment, which after 40 years of moving in a one-way direction of let’s all try to integrate and get the benefit of globalization, we have over the last few years moved away from this.
And the third one is the energy transition. The energy transition means that we’re going to face a mix of energy that is more expensive.
You put these three things together, they are all about limiting our ability to produce globally or make production more costly. That is something that makes the economy more inflationary fundamentally and that type of inflation is one that is a lot more difficult for a central bank to stabilize.
With respect to market volatility, are you calling for stock markets to be choppy but an upward trajectory overall? Do you have a directional call?
This environment, where we think there’s more macro uncertainty and rates stay high for longer, is one that we don’t think equities are fully reflecting yet. That’s why we are underweight DM [developed market] equities. I think there’s a risk that they can go lower over the next six to 12 months.
However, if you think about the broad U.S. and Canadian markets, within this universe of equities, this is where the most exciting investment opportunities could be. For instance, we think that AI, we call that a mega force – a big, structural change that affects investing now and far in the future – we think AI will drive returns that are very significant.
The outlook report discussed the AI revolution and recommended exposure to stocks in the technology sector in developed markets with a six-to-12-month investment horizon. Does this suggest that the Nasdaq composite will continue to be a leader?
This AI theme is broader than just a set of tech companies. The first phase of it, which played out this year, has been really about a couple of companies, the chip makers or the producers of AI software. We think that the AI theme will evolve to data producers or owners. AI feeds on data and data will become more valuable as we move in that direction. Then, it’s going to be about the application of these technologies to different sectors. We already see health care as being one sector within the AI theme that benefits because it leads to massive innovation, massive efficiency, new procedures and so on. This is not just about tech companies but it’s about the application. I think the first phase of this is positive for the Nasdaq, but it’s going to continue to evolve.
According to the outlook report, 2024 will be a year that favours active portfolio management rather than a buy-and-hold investment strategy. In addition, the report states that BlackRock expects to “deploy more risk over the next year.” Given these expectations, how should investors position their portfolios?
For the last couple of years, our strong conviction view was that short-term government bonds with the yields that they were yielding were very attractive. We’ve been underweight DM equities for some time. We were also underweight longer-term government bonds.
Going into 2024, we think we need to fight the appeal of just sitting in a high-yielding, short-term government bonds.
We think 2024 is going to be the time to start to put money to work more actively and find selective opportunities. I think we need to move away from our home bias; diversification will be important. We see attractive opportunities in emerging markets – Brazil as an example, Mexico and India.
Looking at developed markets, what’s BlackRock’s call on Canada?
We don’t have an explicit call on Canada but I would say that when we look at DM overall, we are underweight U.S. and Europe, Japan is positive and I would put Canada in between the two.
I think Canada is not as exciting as Japan because Japan has a very different macro environment. Inflation is actually a good story for them and there’s a lot of corporate reforms that are gaining traction.
Canada doesn’t have all of that. But I think, as I mentioned earlier, the inflation story is progressing in the right direction. I think we are seeing mega forces at play in Canada. I would say we’re neutral on Canada.
Why do you have a neutral recommendation on China given the country’s challenges?
We think that there’s a lack of animal spirits from the Chinese consumer and the Chinese investor. On the macro front, we’ve been turning more negative on the Chinese outlook over the last year. A big surprise to us was after the restart of the pandemic, the consumer was not there.
Why do you have the neutral call then?
So, I just want to make it clear, we don’t see the macro environment as being positive. Our neutral position is not a signal of bullishness or positivity about China. I think the point is that a lot of it is in the price of Chinese equities; it’s already priced in so that’s why we’re neutral.
Lastly, the report noted that there is greater variability in earnings estimates. Is it your position that earnings estimates at the top end of this expanded range are too aggressive and that earnings might come down or that earnings estimates at bottom end may be too conservative and have upside?
It would be the first option. Our view is that the range is too optimistic overall, given the environment I described. The other point is that we have a much wider range of views on earnings than is typical and that’s the reason why you need to be careful in this environment.
Jennifer Dowty