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With the bulls gone astray, will the bears come out to play?

24 May 2022 by National Bank Investments
NBI Insights Bulletin – June 2022

Weighing the odds of an imminent recession.

Throughout most of the COVID-19 pandemic, markets have been running at full throttle. But in recent weeks, the economy has shown signs of overheating, prompting whispers of a looming recession.

Is the dampening of sentiment just a short-term blip or are these economic headwinds really suggesting a recession is in the cards?

A combination of lingering uncertainties

In Canada, recession fears are mounting as investors digest a number of catalysts:

  1. Inflation is at a 30-year high;
  2. Debt costs are rising as the Bank of Canada aggressively hikes rates to counter price pressures; 
  3. Geopolitical risks are on the rise due to Russia’s invasion of Ukraine;
  4. Supply chain disruptions caused by COVID-19 lockdowns in China.
     

What if the glass was half full?

Though inflation continues to be a persistent problem and central banks are taking aggressive actions to cool price increases, does Canada have what it takes to weather the storm? 

  • Household savings accumulated during the pandemic and should ensure a healthy level of consumer spending.
  • Although higher debt levels are a concern, debt levels as a proportion of disposable income are still lower than they were before the pandemic.
  • Earnings growth appears to be in line with historical averages and the labour market is robust, highlighting the strength of the Canadian economy. 
     

Are recession risks already priced in?

The most recent investor sentiment surveys suggest that a significant amount of uncertainty may already be discounted in equity prices.

In Canada, despite strong outperformance year-to-date, valuations also seem to suggest that a significant amount of risk is already priced in stock prices. As can be seen in the following chart, valuations are at the bottom quintile of their ranges over the past 10 years.

Diagram of global equity price earning ratios over the past 10 years.

All is in the hands of policymakers

The Bank of Canada will surely attempt to slow the pace of economic growth while ensuring it does not push Canada into a recession at the same time. Though markets could remain volatilie in this context, all eyes will be on policymakers, who will have to strike a balanced approach going forward.

From an investor standpoint, a balanced approach to investing is also warranted. The best way to mitigate your risks is to maintain a well-diversified portfolio!

Offering downside protection in tumultuous times

NBI SmartBeta Equity Funds

As long as these uncertainties are prevalent, markets will continue to go through periods of heightened volatility.

To help limit these fluctuations, NBI’s SmartBeta Equity Funds seek to minimize drawdowns and protect investor capital in market downturns.

NBI SmartBeta strategies:

  • Bridge the gap between active and passive investing;
  • Use alternative index construction rules that differ from traditional market cap-weighted indices;
  • Optimize specific factors such as volatility and correlation to systematically select, weigh and rebalance securities in the portfolio.

Legal notes

The information and opinions herein are provided for information purposes only and are subject to change. The opinions are not intended as investment advice nor are they provided to promote any particular investments and should in no way form the basis for your investment decisions. National Bank Investments Inc. has taken the necessary measures to ensure the quality and accuracy of the information contained herein at the time of publication. It does not, however, guarantee that the information is accurate or complete, and this communication creates no legal or contractual obligation on the part of National Bank Investments Inc.

NBI ETFs are offered by National Bank Investments Inc., a wholly owned subsidiary of National Bank of Canada. Management fees, brokerage fees and expenses all may be associated with investments in exchange-traded funds (“ETFs”). Please read the prospectus or ETF Facts document(s) before investing. ETFs are not guaranteed, their values change frequently, and past performance may not be repeated. ETF units are bought and sold at market price on a stock exchange and brokerage commissions will reduce returns. NBI ETFs do not seek to return any predetermined amount at maturity.

© 2022 National Bank Investments Inc. All rights reserved. Any reproduction, in whole or in part, is strictly prohibited without the prior written consent of National Bank Investments Inc.

® NATIONAL BANK INVESTMENTS is a registered trademark of National Bank of Canada, used under license by National Bank Investments Inc.

National Bank Investments is a member of Canada’s Responsible Investment Association and a signatory of the United Nations-supported Principles for Responsible Investment. 

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