Hello, I am Brent Joyce, Chief Investment Strategist for BMO Private Investment Counsel.
We recently published our 2024 Capital Markets Outlook where we outline our forecast for the year ahead.
Looking back on 2023, we can see progress in tackling major issues that loomed over the global economy and capital markets. The world enters 2024 faced with some unfinished business but we are constructive on the investment outlook.
Today, we see opportunities across cash, bonds, stocks, and alternative investments.
We continue to see the global economy and capital markets being in adjustment mode, dealing with pandemic aftershocks and saying goodbye to ultra-low borrowing costs that existed since the 2009 financial crisis. A great deal has been accomplished in returning things to normal, but some final clean up remains.
We see inflation as a symptom – not a cause. Born out of COVID-era excess savings and pent-up demand colliding with supply-chain bottlenecks. These supply-chain problems are largely resolved, and inflation has come down faster than many expected, but there is still work to do to get inflation to acceptable levels.
Excess savings and demand are lingering and tight labour markets (when jobs are plentiful, but workers are scarce) are leading to rising wages. Companies welcome the strong consumer spending that stems from these conditions, but there is a fear this can spiral into inflationary feedback loop.
Outsize government spending during the pandemic crisis has been slow to reset to pre-crisis levels. Households and businesses are adapting to higher borrowing costs. We believe governments will need to do the same. This is part of the recipe to cool inflation.
Interest rates and bond yields have been rising globally for more than two years. Much of this increase was necessary to get beyond the unhealthy, ultra-cheap interest rates that were too low for too long.
A return to normal for real yields lays the foundation for a healthier economic and investing landscape ahead.
Let’s dive into the specifics of our Outlook. We’ll begin with our forecast for the Canadian fixed income market
We believe the end of rising bond yields is here. Central banks appear very close to ending their rate-hiking campaigns, and inflation is well off its highs. This makes the outlook for cash (2023’s most-coveted but not best-performing asset) less attractive in 2024 – we emphasize less attractive, not unattractive. We forecast interest rates available on cash balances will be in the 4.25% range by the end of 2024.
In our base case scenario, our end-of-2024 call is for the yield curve to steepen, with 2- and 10-year Canadian bond yields lining up at 3.75%. This should drive a total return from the broad Canadian fixed income market in the 6% range.
Turning to our equity market outlook
Corporate earnings are the lifeblood of equity markets. We have endured five quarters of no earnings growth. Earnings slumps are a normal part of the business cycle; this is the fourth since 2009. Like all the others, it will pass. We believe 2024 will mark the turning point.
Once inflation is closer to being tamed, businesses and households will be poised to benefit from lower borrowing costs and other easing cost pressures. We expect growth outside the U.S. to stabilize and improve by late 2024, and U.S. growth to cool, not collapse.
Stock markets will react positively in advance of these developments, especially when accompanied by today’s mostly reasonable equity market valuations. The rally we have witnessed in November is likely the start of this move. Remember, the ride in stocks is always bumpy. We’re not straight lining November’s returns all the way to the end of next year.
Given the magnitude of the increase in interest rates, the risk of a recession still exists. It is not our base case scenario, and we have some defensive positions in place should this happen. But even if we have a mild recession, equities may fare okay if investors take the victory over inflation as a signal to act and anticipate a strong rebound for earnings. It is not unusual to see markets look through a soft patch for the economy.
Our forecasts for equity market returns essentially line up with earnings growth projections. Expectations for earnings growth in 2024 are respectable and in the range of long-term averages – a return to normal.
Our targets are 23,000 for the S&P/TSX Composite Index and 4,900 for the S&P 500 Index. Adding in dividends puts total percentage returns in the low-to-mid teens.
Our asset allocation views favour equities over fixed income but we see opportunity across cash, bonds, stocks and selected alternative investment strategies.
We prefer Canadian and U.S. equities over international developed markets (Europe and Japan) and emerging markets.
Yields available from well-diversified bond positions are attractive . We recommend extending duration and lightening up on high yield bonds; measures intended to deliver a level of safety in a recession or other risk-off scenario.
Our base case sees inflation tamed enough to allow an easing in financial conditions, especially in economies where growth is already stalling. Bond yields will then have room to stabilize or retreat slightly.
Looking at today’s levels, we see the potential for low-to-mid-teens equity returns and mid-single-digit bond returns.
The last couple of years have tested the patience and fortitude of investors. However, the pain from these necessary adjustments is laying the foundation to support a solid investment return going forward.
Thank you for joining us, here’s to a great 2024.
