Transcript: In this new regime, investors need to be nimble

What 2024 could bring

LM: There’s greater conviction that you will continue to avoid this feared recession in 2024, and we will see a soft landing — both in the U.S. and for the global economy — and that should be supportive of equity markets. Central banks, I think, are increasingly confident that after the sharp fall that we’ve seen in inflation this year, inflation will continue to fall into 2024, so that they can actually begin cutting policy rates, probably in the middle of the year. And what we have seen over the last 10 cycles in the U.S. when we’ve seen the Fed funds rate peak, nine out of those 10 times, U.S. yields have fallen by on average 110 basis points in the following 12 months. And we think we can see something similar this time around. That provides a positive backdrop for the bond market. So, again, a continuation of many of the trends and themes that we’ve seen this year continue into next year. And that should be positive for both equities and bonds.

Why the health care sector looks attractive

LM: While the health care and pharma sectors this year have lagged the overall market, they do provide, we believe, good long-term opportunities. Demographics are moving in favour of the health care sector, in terms of people living longer. AI machine learning should also be positive for the health care sector. More short term, it is trading quite attractively on an evaluation basis, trading at the bottom 30th percentile of historical valuations. And also the health care sector tends to perform well in an environment of above-trend but falling inflation. That bodes well for the pharmaceutical sector, both in the short and the medium term.

Potential impact of the upcoming U.S. election

LM: The U.S. equity market tends to perform quite well in an election year when a recession is avoided. If that’s the case next year, the incumbent, if they’re running in the election, more often than not tends to win. So something to watch if the economic backdrop does remain positive next year. But in terms of the implications for markets, I suppose a couple things of note. One is that the election probably cements the Fed’s current dovish tilt. In an election year, the Fed probably would want to be as inconspicuous as possible. Just in terms of the fiscal outlook, if you were to see a Republican clean sweep of Congress, it probably would mean that the tax cuts which are due to expire in coming years would be extended. If the Democrats win a clean sweep, you probably would see new spending programs being implemented. Now, if you were to see a split Congress, you probably would see tighter fiscal policies. In terms of the market’s focus on it, it will keep one eye on developments over the course of the first three to six months of the year, but it probably won’t pay a huge amount of attention until the nominations are confirmed.

And, finally, tailwinds and headwinds on the horizon

LM: We have the ongoing Russia-Ukraine war, we have the conflict in the Middle East, we have potential tensions between China and Taiwan post the Taiwanese presidential election in January. And all those issues could cause uncertainties and tensions in markets. If we were to see inflation proving to be stickier than we expected, you may see a requirement for rate increases, which obviously would be a shock to both equities and bonds. We’re unlikely to see the level of monetary support and liquidity that we saw post the GFC going forward. So we think now investors need to be a lot more discerning, a lot more flexible, a lot more nimble, and be quick at identifying opportunities that present themselves in the market. So it does provide a different investment playbook for investors.

Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to Lenny McLoughlin of Irish Life Investment Managers. 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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