Portfolio Compass 2017-Q4

Global Portfolio Advisory Group, Scotia Capital Inc.

September 29, 2017

Report Highlights
Global Macroeconomic Outlook: The global economic recovery cycle remains robust and broad with growth hitting cycle-highs while economic momentum accelerates throughout all regions. Unemployment rates continue to slide and inflation is troughing. An increasing number of central banks are moving to dial back ultra-accommodative monetary policy settings through interest rate hikes or reduced quantitative easing (QE).
Portfolio Strategy: Our indicators suggest that while we are in the late stages of the business cycle, the next recession is unlikely to begin until 2019, at the earliest. We remain overweight equities and underweight fixed income on bullish growth/inflation/yield trends. A cyclical bias across asset classes, sectors, countries, etc. is maintained.
Global Equities: We maintain our Overweight allocation to equities as recession risks for the coming 12 months remain very low. Valuations remain attractive versus fundamentals and on a relative basis versus bonds. We remain overweight cyclical sectors (industrials, resources, financials, etc.), styles (value) and geographies (Canada, Europe, Emerging Markets).
Global Fixed Income: Tighter monetary policy is set to flatten yield curves over the medium-term. A tightening Bank of Canada along with increasing yields in the U.S. could drive Canadian yields higher. Corporate credit spreads remain at cycle tights amidst few signs of an imminent reversal.
Commodities: Oil prices benefit from a better demand-supply outlook although U.S. shale producers remain a long-term wildcard. A soft USD and China’s efforts to cut supply could help support base metal prices.
Currencies: Narrowing monetary policy differentials could further soften the USD relative to other currencies in the medium-term, while short-covering and profit-taking could trigger an occasional rebound in Q4. CAD has returned to its long-term average. Economic growth in Emerging Markets (EM) and a recovery in commodity prices should support EM currencies, in our view.