Wall Street forecasters have been saying all year that a slowdown in the bull market might be in the cards thanks to inflation and growth concerns. The average projection from strategists for the S&P 500 at the end of 2022 represents a mere 3% advance from current levels. Candice Bangsund, vice president and portfolio manager of global asset allocation at Fiera Capital, joins “What Goes Up” this week to talk about her outlook for the upcoming year and the risks she sees ahead.
Hi, and welcome to What Goes Up a weekly markets podcast. UM Voldana hire across Asset Report at Bloomberg, and I'm Crystal Kim, Crypto reporter at Bloomberg, filling in for Mike Reagan and this week on the show. Wall Street forecasters have been saying all year that a slowdown in the bullmarket will be in the cards thanks to any number of reasons. The average projection for the SMP at the end of represents a mere three percent advance from current levels. We'll get into all of that with a first time guest, but first, Crystal, I want to welcome you to the show. Thanks so much for joining us, Thank you, thank you a lot to be grateful for joining you on this podcast. The endless number of pies waiting to be eaten, and of course what will be served up hot at Thanksgiving UM this year is the conversation. From what I read, seems like the talk around the Turkey will be crypto. UM Macy's isn'to n f t S, so is the NFL and Odell Beckham Jr. Martha Stewart is into it. Quentin Tarantino is into it. N f d s have become an all encompassing subject and it'll be fun to discuss. Maybe we can get into all of that with our guests as well. I want to bring in Candice Banks, and she's a portfolio manager of Global asset Allocation at Fierra Capital and Nnchial. Candice, thanks so much for joining us this week. Hey, thanks for having me. Just to start out, I'm hoping you can just lay out your strategy for us, what sectors and areas of the market you're favoring right now, and then how you're starting to think about two as the year closes out. Yeah. Absolutely. While our base case scenario is calling for a reflationary recovery, this is essentially an extension of the post pandemic recovery that inevitably results in appear an extended period of strong and above trend global growth. Now in our base case UM, this visibility of the cycle is extended UM, given that policymakers take a very measured and gradual approach to policy normalization UM and essentially supporting the economy going forward. So this is very much a supportive backdrop for financial markets in particularly stocks, over the next twelve to eighteen months UM. Obviously, you know there's been talk about the global economy um you know, moderating here, but the fact of the matter is that it has peaked at a very elevated levels. And um, you know, like I said, we'll remain strong and above trend um without the fear of you know, premature and aggressive policy normalization that would derail that recovery going forward. So we remain quite constructive on the global economic outlook. UM. We think the devish reaction function from central banks and the increased tolerance for higher inflation will allow for that more cautious and gradual approach to policy normalization in the coming twelve eighteen months, and together this will um again create um, you know, a favorable backdrop for stocks versus bond. Now that being said, we do expect a more challenging environment for equities in the next in the coming year. We've obviously come off a very strong period of UM out performance and and very robust results in the global equity landscape since the lows of March twenty but also here in alone, and our sense is that you know, there's fewer obvious catalysts that will push equity markets significantly higher from here, and that the fundamental tail winds that supported equity markets in the last eighteen nineteen months have deteriorated somewhat, and as a result, you know, while we don't expect a recession or a bear market for that matter, UM, we do expect more muted and volatile equity market returns going forward after the extended stretch of gained since those UM, those march loads. So here are a couple of factors to think about UM. You know, given um our outlook I mentioned UM, you know, the fundamental backdrop, and our senses that when we go down the list, the downside risks are beginning to outweigh the potential for positive surprise, particularly given that much of the good news UH pertaining to the macro backdrop has likely been priced in at these elevated levels, and this, in our view, could leave some scope for more volatility disappointment UM unwanted volatility UM should something go awry. So on the fundamental friend I mentioned, the strong recovery earnings have been soaring, but our senses that you know, the strong recoveries have likely already been discounted. And this comes on the heels of an vironment of rising input prices inflation UM rising wages UM, as the job market continues to recover. All of this has the potential to squeeze profit margins. So some vulnerability on the profit front, and I think most critically is on the policy front. UM. And we've passed the point of peak stimulus, and this is going to UM create some uncertainty and some unwanted volatility as policymakers transition from that extremely accommodative stance towards something less accommodative and incrementally so and while we're not moving to restrictive policy UM or even neutral UH for you know, for that matter, in the next year, UM, that shift from extreme accommodation to something less supportive. Typically UM does inject a little bit of volatility in the market. So taken together, UM, you know those factors, whether it's buoyant earnings expectations, intensifying pressure on margins UM and limited go for further pe expansion. UM. You know basically has UM you know, UH given us them, you know, an opportunity to take some profits and adopt a more neutral stance on equity market for for the time being. Kennessy said, so many great things, and I want to get into like every element of what you've said, but I want to start at the top with UM, with your stance UM, your economic base case of a reflationary recovery. I was wondering if this week's market events thus far affirm your view. Namely, I'm referencing the largely anticipated continuity and FED leadership and thus the continuity of the Fed's posture. Yeah. Absolutely, I think the the outcome of the nomination process has reinforced that base case for reflationary recovery. Essentially, like you said, UM, you know, given that you know Paleal is you know, back in the chair position for another four years. UM. Really for us, UM, you know, reinforces the UM status quo UM from that perspective. So a little bit more visibility on on that front. So again consistent with UM, you know, the narrative where policymakers do adopt or UM you know, take that more pragmatic approach to policy normalization. So encouraging in that respect. And Kenness, I was hoping you would sort of walk us through your thinking about some areas of international markets that you might be preferring right now. In particular, I think in one of your recent notes you said you like Canadian stocks and Japanese stocks, if you wouldn't mind just going over how you're thinking about things internationally. Yeah, So, while we're neutral overall from an equity perspective, we do see particular pockets of opportunity in UM, you know, certain corners of the market, namely the a cyclical value space. So as we all know, you know, the growth defensive stocks have done extremely well UM with interest rates you know, uh tumbling to rock bottom levels. This has basically boosted the valuations of these growth talk growth stocks, particularly in the tech space UM over the last UM you know, eighteen or nineteen months, and a lot of that was a result of all of the liquidity that was being injected into the market by central banks UM, you know, back during the depths of the pandemic. Now, with earnings UM acting as more of a driver, the global economy is on solid ground. UM inflation obviously accelerating interest rates are rising in response, we expect UM that rotation from the growth towards the value space to take hold, and this is where we see an opportunity going forward. From a valuation perspective alone, UM you know, looks like a favorable backdrop for these UM, you know, cyclical value corner corners of the markets. When you think about UM, steeper yield curves boosting financial stocks, higher commodity prices across the board, boosting the resource sectors. UM. This essentially UM underscores our preference for Canadian stocks given the composition of the Canadian stock market, which is about two thirds of these value oriented cyclical sectors of the market. So that's how we play that UM you know, cyclical value opportunity within the global equity space. I thought it was interesting that in your base case for stocks next year, for US large caps specifically, you forecast minus twelve point five UM UH, Canadian large cap is does better than that, and I wondered if that bakes in the sumption that value does better than growth in both regions. So the matrix that you're referring to in the expected returns are all in Canadian dollars. So the reason that sp expectation looks so dire is because we expect the US dollar to weekend in the next year in the Canadian dollar to strength, and so that's actually the currency impact you're seeing there when it comes to the spire though UM we have exceeded our target. We have a forty target, so the total return is still negative or the total expected return, and we still expect some modest upside in Canadian stock. So it's a relative play between Canada and the US. And like I said, from a valuation perspective, the Canadian market has rarely traded this um at this size of a discount to the US, and given that composition and the value oriented bias of the T s X, we think this is UM you know, offering more compelling opportunities for equity upside going forward. And then as Crystal mentioned, we did have the Powell news earlier this week, but the other news that's sort of also happening in the background and happening internationally is the rise in COVID cases, especially in Europe and some of the headlines that we're seeing there. So I'm wondering how you're thinking about that. I know JP Morgan had a NOE doubt earlier this week saying that this new wave is unlikely to be a material problem for stocks, So how are you thinking about it? Yes, so I think it adds to that narrative where the risks are mounting at a time when you know the markets are largely pricing a lot of good news UM. While we don't think that these subsequent waves of the coronavirus will derail the economic expansion UM, it is something that we need to monitor because of course it could UM stall the recovery, like I said, but not to derail it all together. Whether it's given the high vaccination rates, the UM the fact that you know, hospitalizations, mortalities have UM remained very subdued even in the UM in the wake of these subsequent waves just tells us that we're not likely to see that recession scenario even in the wake of more stringent countermeasures. But that being said, it is something that I think you'll see more UM you know, from a financial market volatility perspective. Again, just something for investors to contemplate UM and like I said, the potential for whether it's you know, you know, some lockdowns or UM you know, fear of UM you know, traveling or going out again. If you get some of that UM you know that M deterioration and confidence that could potentially UH damp in growth kind of similar to what we saw in the third quarter UM of this year. But nonetheless we don't expect that to derail or to impact our base case scenario. But I think, like I said, you'll see it more through UM the lens of the financial markets and volatility. UM, you know, as these headlines UM you know, hit the hit the screen. Going back to your base case of a reflationary recovery, I thought it interesting that your firm put it at a fifty probability if I have that right, UM, what would have to happen to give you all greater than a coin toss conviction? UM about a reflationary recovery? Yeah, So the difference between our top two scenarios really hinges on the policymaker response. So in that reflationary recovery scenario, we're essentially assuming that that UM you know, that devish bias from central banks, and that tolerant for inflation to run above target for an extended period of time UM allows for a slower and more gradual approach policy normalization. And like I said, that's essentially UM you know what has reinforced our strong outlook for the global economy and of course UM you know financial markets broadly. Now, the risk to that scenario is if policymakers basically step in prematurely UM start to panic given some of these elevated inflation numbers that we've been seeing, and start to tighten monetary policy, in our view, something that would be prematurely. This would in in response, likely dampen the recovery, if not derail it all together. And that's I think UM the policy error that people should be thinking about. You know, you've I've seen a number of headlines about the policy air being allowing inflation to run at these levels without stepping in. I think the policy air at this point would be stepping in prematurely and derailing the recovery at a time when it is still UM vulnerable. What happens to US stocks if that happens, stock mark is in general UM would sell off in that in that UM stag inflationary scenario. So that's what about that second scenario that you're referring to as stag inflation. And in that scenario, UM, it's UM an unfortunate outcome not only for stocks but also for bonds because of course interest rates would be rising quite aggressively as well. So UM very much a risky scenario for financial markets in general. And it all really hinges on that policy response, which is very difficult to forecast, to navigate. UM. You know, you see a lot of different headlines, many different policymakers speaking, um, you know, some more hawkish than others. That's why those probabilities are so close, because there is very much, um, a lot of uncertainty as to how this will all shake out in the next twelve the eighteen months. I'm glad you mentioned that, but you did steal my question because I was going to ask you if you and your team have projections for what we can expect for interest rate hikes from the Fed. I know. John Author's a Bloomberg opinion had a column this week saying it's a little bit perplexing the way the markets reacted to the Power renomination because Brainard actually tends to vote in the same way the Pole does. So how should we be thinking about that? Yeah, when it comes to the trajectory for UM FED funds, we are much more dubbish than the market. UM. Following the UM renomination of Chair Powell, markets are pricing I believe, close to five rate hikes over um, you know, three, which we think is overdone. Um. Given the you know, given again the narrative where policymakers UM will take that cautious approach. UM, we expect UM only one rate hike from the Fed in two obviously in the back half, because of course by the mid midway through UM our senses that in play shin those that acceleration will have receded. And while we still expect inflation to be sustainably above target, we think the focus then we'll shift to the labor market, and that's where there's still some significant flack. And that's also another precondition for policymakers to start lifting rates UM, you know, from these rock bottom levels. So again, you know, when you bring in that bias to allow UM inflation to run at these levels for UM longer than may have typically been the case. After ten years of underperforming the inflation target, our senses that policy makers will be in a position to take a slow approach to policy normalization. And therefore, you know, my um, my interpretation is that the markets UM are leaning a little bit too hawkish and I've gotten a little bit ahead of themselves from a policy's perspective, and we see that here in in the Canadian market as well as similar a similar narrative. All Right, it seemed to me that earlier this week, Uh, and gold was backing off and the hedges were coming off, and and I wanted to ask you what are good inflation hedges these days? I mean, I would say gold actually broke out of its down trend here just in the last few weeks. I mean, it's been a tough year for gold in and you know, investors are starting to threat about that inflation outlook. And in the last few weeks we've seen gold turn UM decidedly higher UM in response as investors seek that hedge in an inflationary environment. Went again. UM. You know, if we're right and policymakers take a very gradual and you know, measured approach to policy normalization, suggests that real interest rates are going to remain in negative terrain. And this is obviously also a tail wind for gold. UM. That being said our view and at Fierira, UM, you know, we feel that real assets UM, you know, such as real estate, agriculture, infrastructure, for vibe UM the best hedge to inflation over the long term. UM. You know, we expect inflation will remain above two percent target not only in the next twelve the eighteen months, but over the next three or four years. As well. So that's just really um, you know, reinforces the need for real assets in a well balanced portfolio. It's interesting you mentioned those things because I've been I had actually been working on a story for Business Week about some of the best inflation hedges that people had mentioned farmland to me, and they mentioned cattle and things like that. Some of these things I frankly had never heard of as inflation hedges before. And then Crystal, I know you and I haven't talked too much about your new beat yet, but you do cover crypto and bitcoin, and cryptocurrencies come up quite a bit in this conversation. I don't know, Candice, if a lot of your clients are asking you about that as well. It just seems like this big hot topic these days. Yeah, it's definitely something we're seeing more in the headlines these days. From an ass allocation perspective, we are not, um, you know, deploying capital towards the SASA class right now. Lots of speculation built around that and you know, very little in the way of tangible value. So I think, um, you know, from our from our perspective, UM, you know, not something that we're looking at, UM, you know, proactively at this point, I hear you. I mean, though, if we're tapped out in terms of return or yield in traditional places, we've got to find them somewhere else. So if not in crypto, where can we go? That is a fantastic question. And you know, I've talked about a very challenging backdrop for both stocks and bonds in the coming year. Um, as I already mentioned, you know, while we don't expect the bearer market or recession for that matter, the easy money has been made in global stock markets, so those similar double digit returns are gonna be tough to come by going forward. At the same time, given our interest right forecast, particularly at the long end of the curve, you know, the expected returns in traditional bonds, which are supposed to be this you know, the stability and the income generating aspect of the of a balanced portfolio. Um you know, we're expecting negative returns and we've already seen minus five percent here in one alone, and expect something similar for two. So with that, you know, given the you know, unfavorable return prospects and those traditional bond and equity as a classes, this really, you know, reinforces the need to diversify a portfolio into the private alternative space. So this is where those um real asset strategies come into play, whether it's real estate, agriculture, infrastructure, UM, private lending. Obviously you're getting that nice income stream and the stability um of fixed income without the well like the negative return expectation and that that we're expecting for traditional bonds given our expectation for interest. Right, So I think these asset these private alternative, non traditional sources of income will uh provide a very important part in a well balanced portfolio from an income perspective, um, you know, without imploding the volatility of a well balanced portfolio. These are typically more stable strategies. But importantly they also have a low correlation to traditional asset classes, so in a well balanced portfolio, they would tend to reduce your overall portfolio risks. And I want to ask you one more question before we get into our weirdest thing. And as Crystal mentioned at the top of this show, there's a lot to talk about there in terms of Thanksgiving and Krypton, all these other things happening this week, But the one thing we really haven't talked about yet is the state of the consumer. I know, I get a lot of reports about holiday shopping trends. And then we also had Arnie from the you know, big box walmarts and targets and all of them have been passing cost increases onto the consumer and so on. So how much of everything is dependent on the state of the consumer and the well being of the consumer. Well, our senses that the consumer continues to drive the recovery and it's an instrumental source of you know, a strong economy, particularly in the in the US, but also here in Canada and globally as well. And the good news is that the consumer right now does have some ammunition to rising prices. You look at the abundance of savings um that have been stashed over the last you know, several months UM that are right for spending. As you know, the consumer goes out, resumes resumes those normal activities, whether it's taking a vacation or um you know, spending more money on the services side, going out to restaurants, etcetera. UM sour census that the consumer will continue to you know, be a driving force for the economy. At the same time, you know, the job market, in our view, will continue to improve wages will be um on the rise. Already in some parts of the market we're seeing some sizable wage games. So all of this taken together, Um, you know, reinforces are positive. Outlook for the back backdrop for consumption. Stand clear of the craziest things we saw in markets this week. And I know I asked both of you two come prepared with some of the craziest or weirdest things you saw in markets this week, and I feel like we've hinted at a bunch of them already. But Crystal, I feel like you have like a big list of things that you've been watching all week. I hope you I hope you proved me right. Yes, um, I mean it would be so easy to reach for the Volcano bond. That's the world's first sovereign bond that will build a bitcoin city. El Salvador plans to issue one billion dollars in tokenized USD denominated tenure bonds. But that's not my weird thing of the week. By weird thing of the week is this thing called the Constitution DOW that goes back to my crypto beat. This DOW, or a decentralized autonomous organization think of it basically as a club born on the Internet. It's the A O L chat room of the future, but it has an agenda. So the Constitution Now was a group of people who raised something like forty seven million dollars to buy a really old, really valuable physical copy of the Constitution spoiler alert. They failed pretty fantastically. The private individual that outbid them turned out to be none other than hedge fund billionaire Ken Griffin. But what was unusual to me. Maybe no one saw it this way, but to me, the Constitution Now effectively did a spack. They pulled some money to buy something. And in the Wall Street world, when a spack fails, too fail on the promise of I'm going to buy a thing, people are generally disappointed and want their money back. Um. But in crypto world, this Dow failed to do this thing they set out to do, and in the wake of this failure, it would seem they have greater support to do something else. And that's my unusual thing of the week. I love this and the analysis of all of this and comparing it's this acts. This is really good. Candice. I'm sorry, but this is like a really high bar. I feel like I was just going to say, Crystal, that you had the bar extremely high, and I don't think I can match that. I've been sort of brainstorming here as we're as I was listening to your fascinating discovery there about some of the events uh this week, And of course I'm a boring strategist, so I just I think about the headlines that I've seen that sort of make me scratch my head a little bit, and HM, that's interesting. And UM, I think one of them, you know, sort of perplexing market responses that I've seen this week is the renomination or the outcome of the renomination of chair Powell. UM. I was quite surprised to see the markets respond in such a hawkish fashion, given that it's essentially suggesting status quo, um, you know, for for the FED going forward, and you know, by bringing Brainard up to vice chair. Um, you know, I you know it, it seems to me that that's going to add a more devish leaning biases at that vice chair position. So I was quite surprised to see the market adjust the way that it did following that announcement. UM, you know, looking at the rate hike expectations, I think, um, yeah, more than five rate hikes price now by the end of so that seems a little bit overdone given that status quo UM you know, situation at the Federal Reserve. And I think one more thing I point out, I know, ye, well last for one, but just something that's lingering in the in the background now is these um, you know, tensions that have been emerging between oil consumers and producers UM you know, obviously major consuming nations such as the US, but also in coordination with China, Japan, South Korea, India, UM all talking about releasing strategic reserves to get those oil prices UH down a little bit. But at the same time you've got Opec um you know, pushing back and even reportedly reconsidering um their upcoming supply increase. So that will be very interesting to to watch going forward. And I think we'll just um you know again, you know, inject a little bit more volatility into the crude markets after what's been a pretty strong rally. And the interesting thing to me about those headlines was just looking at the list of countries that the US is working with. So we have all these tensions with China and at the same time the US is working with China and Japan and suss Carea and so on on on making this happen. Yeah, no, it's a fully coordinated move, you know. And yeah, we'll have to see how everything um shakes out, but I think there could be um, you know, some volutility around those headlines here in the in the coming week. Well, my craziest thing also has to do with crypto, So we're really crypto heavy on weirdness things again this week. It's just it's so easy to find a lot of really interesting stuff there. But I was looking at the Crypto dot Com deal to rename the Staples Center in l A so that it bears the Crypto dot Com name, and it seems like that has actually already paid for itself in some ways, because the token for crypto dot com has surged something like fifty in the wake of that announcement, which is just, you know, it's there's just so many huge moves happening in the crypto space when it comes to some of these tokens and and some frankly that maybe we've never heard of before until they start making headlines. But I think Katie Grayfield put it best. She said, you know, this deal for the Staples Center to be renamed. It's a twenty year deal, and she said, I thought we were all supposed to be in the metaverse in twenty years, so it's it's really interesting to think about. But it's been really great to have you both on the show, and I'd love to have you back on in the future. Crystal, thank you so much for joining us. I know crypto is is your beat now, but you you do really well as a stock markets reported to Thank you. Thank you, Candice, thanks so much for joining us. Yeah, thank you so much for having me and for one upping me on the craziest Things of the week, both of you. Yours were good. Yours were really good too. Thanks for being on the show again. What goes up? We'll be back next week. Until then, you can find us on the Bloomberg Terminal website and app or wherever you get your podcasts. We'd love it if you took the time to rate and review the show on Apple Podcasts so more listeners can find us. And you can find us on Twitter follow me at Dana Hirich. Crystal Kim is at Crystal Kim with three ms. You can also follow Bloomer Podcasts at at podcast, and thank you to Charlie Pellett of Bloomer Radio. The head of Bloomer podcast is Francesca Levi. What Goes Up is produced by the amazing Tofur Foreheads. This is actually Tofur's last week with us. Tofur thank you for all your amazing work and patients in dealing with Mike Reagan all these years. Will really really miss you, and for everybody else, thanks for listening. We'll see you next time.