CoreMacro

Special Report

Investors should avoid / stay underweight Turkish stocks and local currency bonds versus their respective EM benchmarks. Stay underweight Turkish sovereign credit.

Special Report

In this Special Report, BCA’s Foreign Exchange Strategy and Global Fixed Income Strategy teams argue that as the lagged impact of higher interest rates hits the Canadian economy, what will initially appear as a potential hard landing will morph into a mild slowdown. During the process, Canadian government bonds will outperform, and the CAD will drop, setting the stage for a coiled-spring rebound.

Since 1970, the track record of US housing recessions as the ‘canary in the coal mine’ for economic recessions is a perfect four out of four: 1974; 1980; 1990; and 2007. If this perfect track record continues, the current US housing recession presages an economic recession that starts in 2023. We discuss the investment implications.

Pent-up demand for consumer goods and services will boost Chinese household spending this year. Beyond the next 12 to 18 months, however, structural forces will likely drive Chinese household consumption growth lower than in the pre-pandemic era.

Long-term drivers, including the growing ability of banks to returns cash to shareholders, point toward a strong structural performance for European financials. However, the ECB’s aggressive tightening campaign could still spoil the party.

We refresh our 2023 plan of attack to reflect the latest data and several rounds of discussions with clients in virtual and face-to-face meetings. We continue to expect a meaningful first-half rally in the S&P 500, despite revising our expected terminal fed funds rate 25 basis points higher.

The risk of a recession in 2023 is being supplanted by the risk of another inflation wave. We will turn more defensive on equities if it continues to look like inflation is making a comeback.

Investor sentiment on China and EM has become bullish. Meanwhile, the reflation plays have begun fraying on the edges. Cracks always appear first in the most sensitive reflation plays and then spread to the core. The narratives of the Fed's imminent pivot and China's recovery will be questioned in the coming months. Thus, China/EM assets and related plays will sell off, and the US dollar will rebound.

Thai stocks and currency will weaken over the short term. And yet EM equity portfolios should overweight Thailand as tourism revivals will rejuvenate this economy.

Our Central Bank Monitors support the recent shift in tone from central bankers in Europe. Find out what it means for European fixed-income portfolio allocation.