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Written by: Kevin McCreadie | AGF Investments
Why have global equity markets become more volatile after a generally strong start to the year?
The Trump “put” (or idea that the U.S. President will do whatever necessary to keep equity investors happy) has all but dried up as a viable trade in stock markets. That’s not so much because promises to deregulate industry and extend tax cuts have been abandoned, but because they’ve taken a clear back seat to tariffs, deportations and government job cuts in the U.S. Those are seen by many economists and investors as negative for the U.S. economy and other global economies like Canada’s, which have been caught squarely in the crosshairs of the new U.S. administration’s priorities.
In turn, this has led to a “growth scare” that is evident not only in tumbling stock prices, but also in some recent surveys and forecasts that seem to predict gloomier days ahead despite there not being any real signs to date of a significant weakening in actual U.S. economic data.
Notably, this includes the Organisation of Economic Co-operation and Development (OECD) downgrading its global growth projection for 2025 to 3.3% from 3.1% earlier this month. The OECD report said Canada and Mexico may see the biggest drop in growth and warned that “significant changes have occurred in trade policies that if sustained would hit global growth and raise inflation.”
Yet, what’s perhaps even more alarming is the drop in U.S. business and consumer confidence readings, which have both plummeted over the past month. We believe confidence is the cheapest form of stimulus, and it’s not a good sign that it has fallen so precipitously in such short order. Indeed, if confidence is waning from growing concerns about future income, inflation and job prospects, it’s possible that both consumers and businesses may pull back on spending.
That’s not to suggest we are tumbling towards an inevitable global recession. If anything, the OECD’s new forecast for this year would represent solid economic growth on par with most other years this past decade. But it’s no less worrisome how quickly expectations for the global economy have changed since the start of the year. And for as long as the Trump administration’s economic policy seemingly shifts from one day to the next, there is no telling how long this current bout of uncertainty will last or how bad it could get before improving once and for all. More certainty around tariffs, as the U.S. administration unveils its long-awaited retaliatory tariffs on April 2, will hopefully be a start in this process of gaining clarity.
How is AGF positioning its various strategies to “weather the storm,” so to speak?
To be clear, we don’t believe current events are a crisis comparable in magnitude to the Global Recession at the end of the aughts or the COVID-19 pandemic at the beginning of this decade. It’s serious what we’re going through, yes, but we believe it seems to be more typical of an ordinary correction than a full-blown meltdown.
Still, as an asset manager committed to long-term investing, it behooves us to be cautious in today’s environment. In some of our mandates, that could mean an emphasis on more defensive sectors of the equity market, like consumer staples or utilities, while in others it could mean sitting on more cash than would normally be the case.
It also means being prudent about new opportunities as they arise during this difficult time. In particular, some companies that have fallen in price over the past month have strong fundamentals and have only become more attractive to us because of their lower valuation. That’s the type of investment we want to seek right now. At the same time, we are carefully weighing our exposure to stocks that may experience a deterioration in their otherwise strong fundamentals if the current trade war between the U.S. and its trading partners ends up being protracted.
Finally, we haven’t forgotten the importance of asset allocation and diversification more generally. Owning shares in just a handful of U.S. technology stocks may have worked as a strategy over the past couple of years, but it has been a much different story this year. We believe exposure to other sectors, geographies and asset classes like bonds and alternatives may benefit investors navigating through today’s market uncertainty.
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