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

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.

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.