The Multi-Asset Management Team discusses 2024 market performance, 2025 outlook, central bank policies, and Trump's potential impact on markets.
Jan 09, 2025
Speaker Key:
GS Gregory Sweet
CM Craig Maddock
WB Wesley Blight
VO Voiceover
GS: 00:00:00
Welcome to our listeners. I'm your host, Greg Sweet. Today we like to bring you a new podcast to continue empowering our clients and help them make important financial decisions. Today I'd like to take some time and look back with our portfolio managers and discuss the driving forces for markets in 2024 and what we can expect from the year ahead.
I've asked Scotia's multi-asset management team to chat with me here today, and our special guests are Craig Maddock, senior portfolio manager and head of the multi-asset management team, as well as Wesley Blight, vice president and portfolio manager on Craig’s team. Welcome Craig and Wes. Thanks again for being here.
CM: 00:00:35
Good to see you, Greg.
WB: 00:00:37
Thank you very much for having us.
GS: 00:00:40
In 2024, the Fed cut rates by 100 basis points. What is the outlook for interest rates and fixed income in 2025?
WB: 00:00:44
We're still dealing with sticky inflation, but we have had at the same time stronger than expected growth be realized in the US in particular. When we entered 2024, so think back to that point in time, the fear of inflation was really high. There were six cuts expected from the Federal Reserve at that point in time. Now we did get cuts, as we all know, and that was reflected in both the bond market early and realized ultimately when the Federal Reserve started to cut its policy rates back in September. The cuts that were realized were fewer cuts than what had been expected at the beginning of the year. And now we're in an environment where there are still cuts expected in the next 12 months, not as many cuts as had been previously expected. And that's largely due to the economy being in a better spot than where it was expected to be earlier. Economic growth overall has been more robust. Earlier this week we got services results showing up a lot stronger than the market had expected and that's been playing through both at the front end of the yield curve and more importantly at the back end of the yield curve in that we've seen bond yields at the back end move up meaningfully higher and that's coming from that forward looking inflation expectation being maybe a little bit higher than what it had previously been expected to be and then economic growth being more significant. And there are other factors, maybe a little bit deeper and underneath the hood that are also playing a role in the bond market and driving a higher term premium at the back end as well. So all told, looking out the next 12 months, we still think that there are going to be more cuts coming from the US Federal Reserve, but we don't think they're going to be as significant as what was previously implied. That sets a really good backdrop in our view for fixed income to continue to provide a positive contribution to portfolios because we still have a pretty high starting place from a yield point of view. So that should give investors a lot of confidence.
GS: 00:02:54
Let's turn the conversation to equities. Another incredibly strong year in the US market. 2024 provided significant return in the US what's the outlook for the US equity market moving forward?
CM: 00:03:09
So in this interest rate backdrop so far stock markets have been doing really, really well. We've actually seen some really strong performance out of equity markets over the course of last year, in particular the US stock market. And that's on the back of high interest rates and now even slightly moderating interest rates. But to the extent that the weight of that interest rate policy is still with us, and it is still with us, that's perhaps the wild card that could change the context of what I'm about to tell you on equity markets.
Our base case would suggest we're likely to head into something that we would call a soft landing. This reduction in interest rate policy is probably going to be a positive backdrop for the economy that stock markets can continue to perform relatively well against that backdrop. The US consumer, irrespective of these higher interest rates, is actually still in pretty good shape. They're still willing and able to spend. At least it seems like that's the case. So, if all that continues and the soft landing scenario is really the fact that they won't get laid off, right. So, if companies are actually able to grow and expand in this backdrop, which we believe is continue to be possible, then they continue to hire more workers and aren't laying off people. That all would suggest that the strength we've seen under the US stock market likely can continue into 2025.
GS: 00:04:17
On that one, I think there's obviously some investors out there that are thinking can we really do it three years in a row? Right. Double digit performance out of US equities three year running. Like is that thesis plausible in 2025, carry on that trend?
CM: 00:04:32
The probability of that actually happening is really quite low. It's more likely that another market actually takes the leadership in 2025 instead of the US. Now that doesn't mean the US has to have negative returns in 2025 for that to happen. Right? So can the US produce positive returns? Sure. Our long term capital market assumptions would suggest that the US stock market can deliver a solid single digit return long term. So I would not, you know, put all your eggs on the US basket. In fact, we believe prudently you should diversify your portfolio and have exposure to all kinds of markets. That's our normal long-term thesis. I think that's probably more true today, Greg, than it has been historically. I think you should hope and expect some other part of your portfolio, do the heavy lifting in 2025 and not rely so heavily on just the US stock market.
GS: 00:05:22
So Wes, lots of Conversation last year around concentration of returns in the US market. Maybe your thoughts around that concentration and whether that will broaden out across the US.
WB: 00:05:31
So concentration risk is there. We do have a small number of US names that dominate the US equity market. So those are the “Mag 7” technology related companies that have driven the bulk of the US equity return over the last couple of years. They have also driven the bulk of the return globally. And that right now we've got over 70% of the global equity market concentrated in the US and we've got 30% of the US equity market concentrated in these same seven names.
They have been outperforming for rational reasons in the sense that the earnings growth expectation for these businesses were really high. The earnings growth expectation for the remaining 493 names in the US stock market. So the S&P 500 were really low. The earnings growth expectations for these companies, even though they were really lofty, they were actually being exceeded.
So the companies were able to generate earnings growth that were stronger than the expectations throughout 2024 and they've been appropriately rewarded for that with sentiment. So valuations being driven a lot higher. Right now we have an environment where that concentration risk is high. Where that concentration risk actually starts to show up is if these companies start to miss those growth expectations or create signals that they aren't going to be able to deliver against the lofty returns. So you do have an environment where if those concentrated names start to underperform, it could create a scenario where absolute returns are underwhelming, which also creates a really good opportunity for us, in the way that we've constructed our portfolios to not be as concentrated in those unique names, to preserve some capital in an environment where a concentrated number of names is dragging down equity returns globally. We think we can actually preserve capital in that environment through the prudent, diversified selection of businesses that we own across our portfolios.
GS: 00:07:31
There's obviously another big factor in the US right now and that is President Elect Donald Trump's policies and what that means for the US economy. Maybe some of your thoughts around the Trump effect for 2025.
CM: 00:07:45
That's the wild card right now. So, I'd love to tell you I know exactly what he is going to do and exactly how that's going to impact policy. I don't think anybody knows exactly what he's going to do, and we definitely don't know exactly what the outcome of those policies could be. Could interest rates continue to go down from here and is that positive for the economy? I think, you know, checkbox, that's probably likely true except if some of the policies that Trump is looking at doing, which there are some that would be viewed as potentially inflationary.
So for instance, tariffs. Right. So if he does not just threaten but actually through with massive amounts of tariffs of all kinds of US trading partners, the byproduct of that would be increased input costs which most likely gets passed on to consumers, which means increased final prices which of course is directly tied to inflation. And I think he knows that. I think a lot of people know that, which is why hard to know exactly. Probably going to be a lot less tariffs than he's actually suggesting. Might be the case. Maybe don't get too concerned over that. He's also talking about deregulation in a variety of ways that’s also very positive for business. Probably shouldn't be inflationary but could if it spurs a whole bunch of increased demand. And then I'd say the last one from a policy standpoint is really his policy around immigration. So, I mentioned we don't expect layoffs from companies, but if your labour force is somehow removed from your ability to use them, that will impair companies’ ability to generate the kind of profits and grow. I think there'll be sensitivity around what that actually looks like. The market will probably price in some of that volatility as we get closer to or you know, post his actual announcement. Those are the to be determined. But any number of those things sadly could either supercharge the US economy and make that back to back three in a row. Wonderful, possible. Or could throw a wrench into those works and could cause really the sentiment of investors. Because let's face it, what's really baked into the US economy right now, people's belief on the US dream and what it can do and how these especially a select group of companies can continue to perform really well. That's what's been priced into things. If for a minute people second guess that that's when you can actually see the US stock market pull back substantially and that would be the environment where other markets can in fact take the leadership role away from the US and perhaps be your better drivers of performance going forward. So I think that's really if we sort of look at the backdrop, it's generally positive. No reason for major issue or concern. I don't think I would suggest the US should have three back-to-back outperformances relative to Everything else, the market can probably take a pause here and still have the US market go up. But something else take the leadership role in the next year. And I wouldn't be shocked or surprised if that was the case given the backdrop of what we just talked about. Especially when you're mentioning these new potential policies coming in from a new administration. Could be viewed as positive. Could also be disruptive. The wild card there suggests that maybe don't bet too heavily on the US being the only horse in the race next year.
GS: 00:10:41
Let's turn to Canada. If you think about the bank of Canada, they've increased rates in 2024 by 175 basis points. You know, Wes, where do you think we go from here?
WB: 00:10:52
I think we're likely in a spot where we'll continue to see rate cuts. So those cuts that we had play through from the bank of Canada year to date have been really significant. So the Bank of Canada was the first G7 country to have their central bank cut rates in 2024. That happened back in June. We've since had further cuts coming. I like the term the “jumbo cut” that came from the Federal Reserve in September. We've had two separate “jumbo cuts” in Canada. When you look forward, the number of price cuts that are embedded into the market's expectation right now are similar across the bank of Canada versus the US federal Reserve. The difference is we've already in Canada seen the central bank move further through its rate cutting cycle. So the 30-year mortgage in the US it's very different in Canada,
it's a five year term. The total amortization period is longer than that. But you're rolling every five years. So the impact of policy rate decisions in Canada is more significant than it is in the US it's not like the US Book of mortgages is going to roll as quickly as the Canadian mortgage book rolls because the terms are a lot longer in the US. So the impact of having lowered rates in Canada is more significant for the consumer and the consumer's ability to spend money on other things because the rate cuts are actually playing through in the mortgage market. So that easing cycle that we're in is going to be more impactful than Canada than what we're seeing elsewhere.
So you think about that from a consumer perspective, it allows greater spending, more flexibility to drive growth from a consumption perspective in Canada, it's almost the exact same thing from a Canadian business perspective. So you've got businesses in Canada that are better able to raise financing at lower costs. That gives them the opportunity to grow at a higher rate. And I think that further feeds Craig's comments on the equity side about the ability for other areas around the world that are similarly having to cut more aggressively, be able to outperform going forward. Yes, there's a lot of policy uncertainty, but that is showing up around the globe. A lot of that's being driven out of the US right now. But I do think that in Canada, even though we are in a weaker economic state, the policy backdrop on the monetary side is a lot more stable, not necessarily true on the fiscal policy side. And we've got a material interest rate differential between Canada and the US right now that's driven the dollar lower. I think the international confidence in the Canadian dollar because of the political situation that we've got right now where the incumbent PM is not going to be the PM come our election later on this year, I think that uncertainty has fuelled a little bit of the lower Canadian dollar relative to the global basket. But the real issue on that front has really been the interest rate differential.
GS: 00:13:50
So we've talked a lot about policy and the impact that policy can have on obviously fixed income, but also equity markets. How do we think future policy might impact the equity market in Canada?
WB: 00:14:02
From a monetary policy perspective, we're in really good shape. There's lots of support from a monetary policy perspective in that overnight lending rate easing that we've just gone through is going to be very strong, a strong positive tailwind for Canadian equities. You also have the global backdrop that has helped to drive some of the US exceptionalism around those tech laden mega cap names. That has actually played out in Canada as well and that Shopify is the biggest part of the IT sector in Canada. The technology sector in Canada has actually performed really well. Canadian equities, broadly speaking, have performed really well. The first half of Q4 was performing really well in Canada as well because we have such a huge allocation to gold stocks. Some of the materials as Geopolitical tension has really risen over the last little while. That's played through in price appreciation of gold specifically, which has disproportionately had a positive impact on Canada.
From a fiscal policy perspective, I don't think there's really a huge headwind for Canadian equities. Where I do get a little bit concerned, and this is a short term perspective, is the international confidence as you go through some political turmoil in you may not see a lot of foreign flow continuing to come into Canada. I don't think that that's going to be a material driver of short term dislocation in Canadian equities relative to the rest of the world. But I do think that on the edges that may play a little bit of a role. All told, I think that relative to our long term capital market assumptions, we're in a really good spot for Canadian equities to be able to deliver against the long term expectation we have. And that means middle to upper single digit returns, not the double digit returns that we've seen over the last year.
CM: 00:15:47
Maybe to add to that, Wes, you mentioned the Canadian dollar and I think that's an important distinction. We talked about the equity markets being at or near all time highs and that very true in the US as a Canadian investor, we need to convert our Canadian dollars into US Dollars in order to make that purchase at a time when the Canadian dollar is at a very depressed level. So not only is the market expensive, you've got an extra premium as a Canadian investor to buy into US stocks in order to make that transaction. So you think back to you mentioned policy in Canada. Yeah. We are further through the cutting cycle. Economically it is easier for Canadians to borrow money, which should mean from an economic standpoint, we are at the earlier stages of the next recovery where the US is still pumping along. They're doing ok. But it's not cheap in the United States. It's actually cheap in Canada to borrow now relative to where it was not so long ago. Right. That will have a positive impact on Canada. We're obviously now in Canada facing an election this year and of course there's tariff talks around Canada and US right. And if we change our government, if that was to happen, that's going to have some impact and some timing impact on some of those things. So I think that maybe puts us at a slight risk or disadvantage from a Canadian perspective at the beginning of the year. But I think as those things firm up, I actually think that puts us in a fairly strong position from a Canadian economic standpoint going forward. So I do think backdrop on US, backdrop on currency, possible change in Canadian government and we're at the early stage of a cycle. I think it actually bears out fairly well for Canadian stock market on a go for it. So is that the one that will take the leadership versus the US next year? Don't know. Do we have it in our portfolios just in case that's the case. 100%.
GS: 00:17:27
Let's turn to our portfolios. Let's turn to the solutions that we help our clients with every single day. What drove portfolio success in 2024 and kind of what's the outlook as we look forward?
CM: 00:17:37
Good news is kind of everything worked. It's not every year we get to say that. Greg, we've had a few years in the past where we've talked about these, where bonds and stocks both didn't work. Right. That was a horrible outcome for a lot of people and I think it was a surprise when it happened. Good news is we've had a few good years of equity performance. We've also now seen some good years of bond performance. So, you know, bonds and stocks both contributed quite well to portfolio performance over the course of last year. So short answer is anybody looking at their portfolio should be happy. Like we're ecstatic. The return, the absolute returns have been able to generate in portfolios, thankful because of the way the markets have performed. If you looked at your portfolio, you should be very happy. You've made good money. The problem that a lot of people are looking at is they go, well, I could have made a lot more because they are looking at the one thing or the two things that went up so much because we've had some exceptionalism. We talked about US Stock market back-to-back. Not just great years like exceptional, phenomenal. It's really easy for people to get lured into thinking, oh my goodness, I've missed out on that. Now I need to get into it. And you know, I would have loved to say if you could back up the truck up two years, load up, you can't do that today, right. So you would be buying at a high. And it's unlikely that you'd see three back-to-back years of that exceptional.
So I think there is an undercurrent of investors right now of either they're looking at things that were so good and wondering why they didn't get that, you know, fear of missing out is prevalent. The other one is that now they're worried because it's gone up so much. So it's almost like you get these two extreme behaviours showing up right now. We try to diversify all the time. It's like we always want good exposure to all these things because we try to figure out when we think something will do better than another and position accordingly. We know we're never going to all those things perfectly, so we do those at the margin. But good news, most things worked really well. Canadian stocks up in the 20% return last year that contributed well to portfolios. US stocks phenomenal. Getting into the international markets, slightly lower than Canada, but still really strong returns. None of the equity returns would you ever look at in the last year and go, I'm not happy with that. Some you're really happy with, but all of them you should be happy with. Bonds positive, which is good. Not as positive as we would have liked because at the back end of the year, interest rates did back up, which kind of took the shine off. But the best part of that, the starting return or the yield we were able to generate in bonds to begin with, was an ample cushion for that volatility, which we didn't have a few years ago. Which is why when back in 2022 when we felt the pain of the bond market, it's because we had no cushion. Interest rates were starting so low, we actually were starting with a much higher return now. So that cushion actually helped exactly as we would have expected. So to me, it's like I look through our portfolio. Yes. What I've loved to in hindsight, put everything into things that just went up the most. Of course, that would have been wonderful. We don't do that. We diversify portfolios and I look at all the different components, it's like, wow, everything actually worked as it was supposed to. Contributing really strong return and setting us up really well right now for that potential uncertainty that I described earlier. Right. While the backdrop looks positive, there's definitely still some cracks that could emerge and I think we're well positioned in case they show up.
GS: 00:20:37
Markets always provide opportunities to be reminded of key lessons regarding investment fundamentals and the good discipline for long term investors. Can you maybe just give a little bit of your comments around what were some of the lessons that we were reminded of over the past year?
WB: 00:20:53
The fear of missing out and what that drives is a lot different than actually missing out. And I think the dislocation that we went through as investors in 2022 created such a big discrepancy between what clients expected to get and what they actually got. That led to a lot of investors, a lot of Canadians missing out on the returns that were realized over the last year. And what the market just gave us was a fantastic reminder to get invested in the right strategy that's right for you and stay invested in that strategy. There's a study that's done out of the US and I reference this study a lot. It looks at the average investor return relative to individual asset classes and relative to inflation. Over time the average investor return is lower than any individual asset class, because of investors, generally speaking, moving from one strategy to the next on that fear of missing out and that behaviours driving their investment decision that resulted in actually missing out on a forward-looking basis. And I think Craig talked about this as well. I think we're in a really good spot for our portfolios to be able to deliver outsized returns. I think those outsized returns are aligned with our long-term capital market assumptions. If we do get an economic slowdown from where we're at now because of that higher starting yield that we talked about, the ability to weather the storm through monetary policy action that would come swiftly if you get a recession, gives us the opportunity to offer that balanced approach, offer a better, more stable return, preserving some capital. Because if you did get that economic growth slowdown, equities likely falter from where we are. But you've got that ballast that hasn't been there in the past from fixed income.
GS: 00:22:49
I think this is probably the right place to tie this conversation into a bow today Craig, Wes, a massive thank you for coming and joining me today and having such a valuable conversation ensuring really important insights with our clients. You know, it's these types of conversations that really give our clients the confidence to make smart long term investment decisions.
And to the listeners of the podcast, I'd like to thank for investing your time with us today. Keep well and happy investing.
VO: 00:23:12
This audio has been prepared by Scotia Global Asset Management and is provided for information purposes only. Views expressed regarding a particular investment economy, industry or market sector should not be considered an indication of trading intent of any of the mutual funds managed by Scotia Global Asset Management. These views are not to be relied upon as investment advice, nor should they be considered a recommendation to buy or sell. These views are subject to change at any time based upon markets and other conditions, and we disclaim any responsibility to update such views.
To the extent this audio contains information or data obtained from third party sources. It is believed to be accurate and reliable as of the date of publication, but Scotia Global Asset Management does not guarantee its accuracy or reliability. Nothing in this audio is or should be relied upon as a promise or representation as to the future. Commissions trailing commissions, management fees and expenses or may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return are the historical annual compound total returns, including changes in unit values and reinvestment of all distributions, does not take into account sales, redemption or option changes or income taxes payable by any security holder that would have reduced returns.
Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. Scotia Global Asset Management is a business name used by 1832 Asset Management L.P., a limited partnership, the general partner of which is wholly owned by Scotiabank. Registered trademarks of the Bank of Nova Scotia. Used under license. Copyright. The Bank of Nova Scotia. All rights reserved.
