Podcast: BMO GAM’s House View - 29 mai 2024

As the U.S. economy appears stronger for longer, Canada prepares for potential interest rate cuts. In this deep-dive episode, BMO GAM CIO Sadiq Adatia and your host, Mckenzie Box, break down the latest House View and discuss portfolio positioning for the current environment.

McKenzie Box is Vice President of Product Management and Strategy at BMO Global Asset Management. She is joined on the podcast by Sadiq S. Adatia, Chief Investment Officer (CIO) at BMO Global Asset Management. The episode was recorded live on Wednesday, May 29, 2024.

Find The Week with Sadiq, BMO GAM’s Monthly House View, and more fresh insights at bmogam.com.

House View

Markets are still relatively strong and that is tied to the fact that we think consumers remain resilient, earnings have been good, and the U.S. economy is still strong. We remain bullish on markets and in favour of the U.S. in terms of geographical exposure. Heading into the back half of the year, we are letting bonds act as that traditional diversification against equity markets.

Factor of Choice

With higher for longer interest rates, we want to own high-quality companies. Companies that have great balance sheets, high market share, and customer loyalty to withstand higher interest rates. So, quality would be our number one factor. We are tilting a little bit more to value, given the run up in technology and some growth names. 

Interest Rates

The U.S. does not have a real reason to cut rates at this moment in time. The job picture looks outstanding, consumer spending remains resilient, and growth domestic product (GDP) numbers have been good. I don’t think inflation will spike up and cause a concern. As well, inflation does not need to be at 2% for them to cut, but it does need to be under 3% for them to start the process. We should see at least one cut probably by September or October. 

In Canada, the story is quite different. We have a weaker consumer, GDP has slowed down, and inflation is less of a problem than the U.S. So, we should see a rate cut happening relatively soon. And then probably one more followed shortly thereafter. 

Geography

Our equity allocation favours the U.S. economy. In international markets we see opportunities in Japan, where their purchasing manufacturing index is starting to improve and interest rates may come down — so we’re seeing more momentum there. Europe is an area where we are getting a little more optimistic on, but still neutral. Emerging markets are being hit by a stronger U.S. dollar. When we do see U.S. rate cuts that should benefit emerging markets. The property sector in China has been negative on consumer spending and sentiment because of a lot of investment is tied to their housing market. Canada is more on our negative side; we see headwinds picking up for the consumer with more mortgages coming up for renewals, which will be higher than five years ago, even if we get rate cuts. 

Sectors

As of today, we like U.S. Financials, Health Care and Technology. It can give you some of the defensive qualities that you need, and we’ve seen some momentum in those sectors as well. We are a bit more negative on Consumer Discretionary, so a rotation into Consumer Staples may make more sense. When people start adjusting their spending patterns, the discretionary spending gets reduced. 

Canadian Dollar

We are bearish on the Canadian dollar. The economy is weaker than the U.S., and we expect the Bank of Canada to cut rates faster than the U.S. The interest rate and margin differential would now favour U.S. at a higher rate, increasing the U.S. dollar versus the Canadian dollar. The U.S. dollar is also a safe-haven currency if we see volatility pick up.