Benjamin Franklin
iStockphoto/Marharyata-Marko

Against the backdrop of an escalating trade war that’s now expected to push developed economies toward recession, non-U.S. global equities are expected to outperform, according to Desjardins Group.

In a new report, the firm’s analysts noted that U.S. trade policy is “fracturing long-standing relationships with global peers and dismantling institutional norms.” They said this is degrading business and consumer sentiment, and discouraging spending and investment amid heightened political and economic uncertainty.

“Ultimately, the continued weaponization of uncertainty is likely to push most developed market economies into or close to a recession in the coming year,” it said.

The global equity markets are also facing an array of U.S.-related risks, in addition to the destructive impact of a global trade war.

“Some fear that U.S. technology stocks could experience a dot-com-style unwind, while others fret that the hundreds of billions in U.S. AI-related capital expenditure may be wasted,” the report said — adding that there are also concerns that efforts to cut the U.S. government will lead to a weaker U.S. labour market.

These factors are driving a shift away from U.S. equities and toward other global stocks, it noted. 

“Rest-of-world equities are now expected to outperform this year relative to North American counterparts,” Desjardins said, given that Canada and the U.S. in particular are now on track toward recession. 

“A mild recession typically sees equities bottom out in the early stages of the downturn and hit average drawdown of 25%. As such, equities are likely to drift lower over the next two quarters before rebounding towards the end of the year,” the report said. 

At the same time, the slowdown in growth is expected to drive lower interest rates.

“While in the near term the Bank of Canada is likely to deliver a more hawkish tone to protect against a further increase in inflation expectations, we believe the central bank will ultimately need to cut its policy rate by another 100 basis points this year,” the report said.

As a result, “the Canadian yield curve is at risk of flattening in the first half of the year before continuing to steepen in the second half,” it noted.

U.S. Treasury yields are also “likely to move lower in the coming months as economic activity slows,” it said, adding the interest rate differential between Canada and the U.S. should start to narrow this year.