Each quarter, La Presse asks four experts to analyze the situation in order to grow a fictitious portfolio with an initial capital of $100,000, and therefore within the reach of most individual investors. In this second meeting of 2023, these experts briefly review the first quarter, and they describe their outlook for the future on the financial investment markets.

They are also calibrating their individual asset allocation for the second quarter of 2023 based on a benchmark balanced portfolio. That is to say, established at 60% in equities and 40% in bonds and cash, with distribution differences limited to 10% more or less.

“Equity markets were rocked at the start of 2023, but managed to end the first quarter with a solid gain. From January, they soared on hopes of a smooth economic slowdown, as inflationary pressures showed signs of easing.

“However, in February, a wave of risk aversion swept through financial markets. Hopes that interest rate hikes will end soon have dimmed amid continued signs of more resilient-than-expected economic growth, a still overheated labor market and ever-higher inflation. higher than the target level of central banks.

“Finally, in March, after the shock of the collapse of California’s Silicon Valley Bank, stock markets rallied again, propelled by speculation that central banks might stop raising interest rates. in the face of the concerns generated by this sudden banking crisis in the United States. »

“I see that the first trimester went in two stages. In a surge of optimism, January was a great month for stock and bond investors, despite persistent messages from the US Federal Reserve (Fed) about further interest rate hikes.

“In February, the prevailing optimism was challenged by a wave of revisions to corporate profit expectations, which is often a precursor to a slowing economy.

“Then financial markets were taken aback by the fall of Silicon Valley Bank in California, as well as the rescue buyout of Credit Suisse by the UBS Group, with the support of the Swiss authorities.

“These two events brought back bad memories of the banking and financial crisis in 2008. But these fears were alleviated by the rapid and concerted intervention of the United States Federal Reserve (Fed) and the major American banks to reassure depositors . In short, the banking system worked, which brought the financial markets back to a good end to the first quarter. »

“What surprised me the most in the first quarter was the continuation of much stronger than expected economic growth in North America. In Europe, a milder winter than expected helped to mitigate the impact of the energy crisis on the economy, which is doing better than expected.

“Meanwhile, on the stock exchange, the strong rebound in major technology stocks in the United States, propelled in particular by new expectations for interest rate caps, has lifted the broader market.

“As for the big uproar in the banking sector in the United States, it was calmed down by the prompt interventions of government authorities. This is also what prompted a recovery in the main stock market indices at the end of the quarter, after the brief decline caused by the banking turmoil.

“Since then, even though the bulk of the US banking system is well capitalized, financial markets remain concerned about the financial condition of hundreds of regional banks in the United States. »

“My biggest surprise of the first quarter is the resilience of the economy despite the sharp rise in interest rates over the past year. The main leading indices are still on the rise, and first-quarter GDP (gross domestic product) growth looks set to beat expectations.

“If sustained, this resilience of the economy could support inflation at a higher level than the central banks’ target, thereby inducing them to keep interest rates high.

“In the meantime, we still saw a reversal in interest rate expectations at the end of the quarter – from bullish to bearish – which gave the stock market a boost. But these expectations remain at odds with recent messages from the Fed, which reiterated its priority of fighting inflation.

“Finally, although the banking crisis in the United States appears to have been contained, the financial health of the many regional banks remains a concern. Among other things, if these banks were to tighten their loan conditions in order to improve their results and their balance sheets, it could have the effect of a brake on the American economy. »

“Faced with persistently high inflation, I expect central banks to step up their fight against inflation with further interest rate hikes. This task for central banks has been complicated recently by strong tensions in the banking sector, which have called into question their policies of raising interest rates.

“For now, these banking tensions appear to have been contained by the authorities, who have taken extraordinary measures to avoid contagion in the financial system. But with inflation still high, and an economy that remains resilient, I expect central banks to reaffirm that their priority is tackling inflation with further interest rate hikes. And this, even if the economy and financial markets risk suffering collateral damage.

“As such, at Fiera Capital, our most likely economic scenario remains aligned to a ‘deep recession’ over the coming quarters. »

“What I follow the most is the evolution of the labor market and the rate of inflation.

“Among other things, if the North American economy continues to add jobs at this rate, it could push back a recessionary scenario to late 2023 and early next year. In this regard, I also pay particular attention to announcements of results and business prospects among companies.

“As for inflation, there is still a risk for financial markets that it will remain elevated despite central bank interest rate hikes.

“For the moment, this stubborn inflation risk is manifesting itself in the price of petroleum fuels, but also in the magnitude of recent government spending budgets, and the use of surplus savings still available to households in middle and high income.

“For example, will discretionary spending (leisure, travel, etc.) by these households remain as strong – and inflationary – as last year? Also, will consumers still be able to adjust their basic spending budget (goods and services for everyday use) to persistent inflation? »

“We must remain cautious in the financial markets while waiting to see the evolution of several important elements of the economic situation. Starting with the core inflation rate, which remains relatively high compared to the Fed’s target, and therefore decisive for the continuation or end of interest rate hikes.

“Also, the continued strength of the labor market, supported in particular by the reluctance of employers to lay off workers, could ease and even reverse if the slowing economy were to force employers who know a drop in revenue to reduce their workforce in order to preserve their profit margin.

“In such a scenario, and adding the risk of declining home values, one could see a ‘negative wealth’ effect in consumer sentiment. This could have a rapid impact on the entire economy, and in particular on the future results of companies in the market for consumer goods and services. »

“While the economy remains relatively good, I am paying close attention to leading indicators like the hiring outlook and corporate earnings expectations, which have started to deteriorate. I also follow the evolution of credit conditions for businesses and consumers, the tightening of which could accentuate the impact of interest rate hikes on the economy. These are elements of economic conditions which, if they continue to deteriorate, could prompt a revision of corporate earnings expectations.

“At the moment, the consensus among equity investors in Canada and the United States suggests that earnings expectations may have bottomed out in the first quarter, when the economy appeared to be heading for a ‘soft landing’. But this consensus seems very optimistic to me in view of the deterioration of the leading indicators of the economy. »

“The growing risk of a severe recession warrants a defensive stance in asset allocation. Therefore, I maintain an underweight in equities and bonds, with a significant overweight in cash.

“In my view, the rally in equity and bond markets in the first quarter was fueled by expectations of interest rate easing by central banks in the United States and Canada. However, these expectations are at odds with the still very limited evidence of significant progress in the fight against inflation, which remains high compared to the central banks’ target.

“This situation leaves equity and bond markets vulnerable to corrections, should investors revise their hopes of interest rates topping and falling in response to stubborn inflation. Moreover, corporate earnings expectations have yet to adjust to the impending risk of the economy deteriorating, or even an outright recession. »

“In an environment where the impact of interest rate hikes on inflation and the economy is slow to manifest itself, I maintain an asset allocation with a moderate conservative bias towards equities for the second quarter.

“As a result, I am increasing my bond weighting from 25% to 35%, so back to parity with the benchmark balanced portfolio. In return, I reduced my overweight in cash – from 20% to 10% – the excessive level of which hurt my performance during the first quarter.

“On the equity side, I’m maintaining my overall allocation at 55%, so underweight relative to the benchmark portfolio. Among the major equity markets, I maintain my Canadian and American equity allocations at a level equivalent to the benchmark portfolio, i.e. 20% for each category.

“Furthermore, in international equities, I am increasing my underweight in EAFE markets (Europe, Asia, Far East, from 12% to 10%). This adjustment reflects the moderation of expectations on European stock markets after a better than expected first quarter, while the European economy thwarted the ambient negativism at the start of the year. »

“North American and European stock markets have done quite well in recent months. But with the accumulation of concerns about the economic situation, it could mean that the next results of companies will decline, and that the stock markets are relatively expensive.

“That’s why I prefer to remain cautious in asset allocation. I keep cash (7%) and bonds (36%) at slightly overweight levels relative to the benchmark balanced portfolio. In return, I keep equities underweight (38%).

“Among major equity markets, I neutralize a slight overweight in Canadian equities (from 21% to 20%), while I maintain a neutral weighting in US equities (20%) and an underweight in international equities (EAFE, at 12%).

“The Canadian stock market has done well over the past year, benefiting mainly from strong results in the energy sector and in certain cyclical sectors. But I consider that we must be cautious for the future, when the scenario of economic stagnation or recession should become clearer at the end of the year. »

“Given the many uncertainties in the economic environment, the consequences of the recent banking crisis in the United States and the interest rate policies of central banks, I maintain my allocation to less risky assets, namely cash (at 15 %) and bonds (at 28%), at their overweight level relative to the benchmark balanced portfolio.

“In terms of equities, I maintain my overall underweight at 57%. I leave unchanged my allocation to Canadian equities, which is overweighted at 23%. But I’m reducing my allocation to US equities to 15%, hence underweight relative to the benchmark portfolio.

“However, I am raising my allocation to international equities (EAFE, from 13% to 18%) to an overweight level. I consider the US stock market to be the least attractive in the short term after the recent rebound in its big tech stocks, while the outlook for the economy and corporate earnings remains very cloudy. »