Transcript: Continued uncertainty calls for active management
Portfolio manager Susan Spence says passive allocations can’t capture the nuanced and shifting positioning we see within asset classes
- Featuring: Susan Spence
- January 2, 2024 December 28, 2023
- 13:01
Susan Spence
Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re talking about asset classes, regions and themes to watch in 2024, with Susan Spence, vice president and portfolio manager with Portfolio Solutions Group, a division of Canada Life. We started by asking what the big story was in 2023.
Susan Spence (SS): There certainly was no shortage of stories making the headlines in 2023. AI, bank failures, geopolitics, the resilience of the U.S. consumer, and the return of fixed income investing… but in my opinion inflation was the big story of the year. Shifting views of the path inflation would take through the year and of the ability of central banks to control it had a persistent and significant impact on capital markets in 2023. Questions around inflation drove volatility in both bond and stock markets, and created continued uncertainty about economic growth rates globally that investors are still grappling with.
Asset allocation
SS: 2023 market performance reinforced the benefits of diversified asset allocation and of allocating to active management within both major asset classes of fixed income and equities. Fixed income achieved a solidly positive total return for 2023. However, there have been significant differences in returns for different parts of the market. Corporate bonds did very well, while inflation-linked bonds weren’t as strong. Within equities there have been even more material differences in returns, such as across sectors, large cap versus small cap, U.S. equities versus other regions, and developed markets overall compared to emerging markets. Having exposure to active managers within fixed income and equity would have provided the opportunity for investors to benefit from nuanced and shifting positioning within these asset classes, something passive allocations don’t capture.
Regions that performed well
SS: Regions that surprised in 2023 were the U.S. and China. In the U.S., the consumer proved to be more resilient than expected, the job market remained robust, and it was encouraging to see that the regional banking crisis proved to be contained. This paved the way for the strong returns we saw in the U.S. equity markets. On the other hand, China surprised to the downside. The much-anticipated post-pandemic reopening proved not to be as powerful as expected, which led to China’s equities lagging other countries and dragging down emerging markets’ returns as a whole. We expect regional equity market performance in 2024 will continue to be driven by developments on the economic front, and ultimately how earnings growth is balanced by valuations. This year we don’t have a strong conviction that any particular region is best positioned from this earnings-valuation trade-off, and I think it’s prudent to maintain broad exposure.
Prospects for fixed income
SS: Interest rates were clearly in focus last year, as central bankers increased their policy rates in an attempt to slow inflation. Although overnight rates are the only part of the curve that is actually controlled by central banks, increases implemented there had a knock-on effect on interest rates all along the curve. What shouldn’t be forgotten is that the starting point for rates was unusually low coming out of the pandemic. 2023 saw a sharp, rapid rise in shorter-term rates in particular, but with interest rates also rising at the long end, bond yields overall reached much more attractive levels and drew renewed interest in fixed-income investing. More recently, during the fourth quarter, we saw long rates pull back. There is still a way to go before interest rates are fully normalized, which we ultimately expect will include a steepening of the yield curve, led by shorter rates lowering somewhat. This process is expected to continue through 2024 and beyond, with the path becoming clearer as inflation and economic growth rates settle out.
And, finally, how she’d characterize the current economic momentum
SS: The global economy is still growing, but at a slower pace, and is looking to find a footing. The debate over whether 2024 may bring a recession or a soft landing continues. However more recent data points in North America have been directionally encouraging. What may prove to be most critical is the length of the period of suppressed growth, not how severe a slowdown may be. And remember, there’s a difference between economic momentum and market momentum, with markets anticipating future conditions. Capital markets are still vulnerable to sharp moves as expectations evolve, and such shifts in sentiment are hard to time. With continued uncertainty in the strength of the economy, I think it’s important to reiterate the benefits of diversification and active management.
Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to Susan Spence of Portfolio Solutions Group. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.
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