Recession risk falls as global stimulus kicks in

The possibility of a Canadian recession is diminishing as monetary policy and fiscal spending starts to stimulate the economy, says Eric Morin, director of global macro and strategy in the multi-asset and currency management group at CIBC Asset Management.

Morin said factors that reduce the chance of a Canadian recession — currently pegged at about 35% — include a globally large monetary and fiscal stimulus pipeline, contained and diminishing effects of tariffs, and growing global tailwinds from inelastic demand for investment in tech, mining and military equipment globally.

“For those reasons, we think that, with the passage of time, the probability of a recession may decline over the course of the next 12 months,” he said in an Oct. 29 interview.

Listen to the full conversation on the Advisor To Go podcast, powered by CIBC Asset Management.

However, Morin said there are two main concerns that could increase recession fears in Canada — and both of them originate in the U.S. A slowdown in the U.S. labour market and a resurgence in inflation south of the border could negatively impact Canada, he said.

“So we have this on our radar,” he said.

These factors, combined with Morin’s expectation that the U.S. Federal Reserve will cut its policy rate by 125 basis points in the next 12 months, are why he recommends a “small tactical equity overweight.”

“When the Fed cuts and there is no recession — which is our baseline — historically, that was associated with outperformance of equity markets in the U.S. and in most countries,” he said.

Tech remains a compelling story, he said, because tech cycles typically last two to three years and this one strongly supports U.S. and other tech-heavy markets like Japan, Taiwan, Korea and China.

Morin said a global broadening of tech investment, especially in data centres and power infrastructure, could cause him to increase his positioning.

“Where we could be surprised is that the timing of that broadening of tech investment globally could take place sooner than later, and that is something that could force us to increase further that position,” he said.

Natural resources is another sector to watch. As countries aim to secure natural resources, investment in infrastructure and military equipment is rising, he said, benefiting global equity markets, including Canada. But if the probability of a recession rises, Morin said he would adjust his recommendation of investment in natural resources to neutral.

Emerging markets could also surprise to the upside, Morin said, benefiting from global stimulus and strong natural resource investment. And Fed rate cuts would give emerging market central banks room to ease further, supporting both equities and higher-yielding local debt.

Morin’s outlook for Canadian equities “remains constructive” due to attractive valuations and dividend yields.

“Canada offers investors the opportunity to diversify some U.S. tech exposure with attractive names in the cyclical and material/natural resources sector,” he said.

Canadian equities, Morin said, should also benefit from domestic and global stimulus, further Bank of Canada rate cuts, reduced U.S. trade uncertainty, and a strong federal infrastructure agenda.

“Overall, we are constructive on cyclical sectors. So the cyclical names in the TSX could outperform, and also the material/natural resources names are other segments that could benefit from our global macro outlook.”

This article is part of the Advisor To Go program, sponsored by CIBC Asset Management. The article was written without input from the sponsor.