Ashleay: The question on everyone's mind: Where will growth and opportunities come from in 2023? My name is Ashleay. I'm here with Sébastien Mc Mahon, our Chief Strategist and Senior Economist at iA Financial Group, as well as Marc Gagnon, Vice-President, Portfolio Manager for North American Equity at iA Financial Group. Sébastien, Marc, thank you for joining us today to launch 2023.
Marc: It's my pleasure, Ashleay.
Sébastien: So, Ashleay, I mean, good to be back and, you know, how to better start 2023 than with our friend Marc here. So, we had you for the last two episodes of 2022 recapping the year. So, if we're to look ahead, might as well bring our Top Gun friend with us again and discuss what should be a very interesting year once again.
Ashleay: Absolutely, absolutely.
Marc: Yeah. You're bringing me back for the tough job though; forecasting the next year is always…
Sébastien: Yeah, of course. I'll just set you up here and I'll let you opine on the year.
Marc: Oh, that's great. Thank you.
Ashleay: Well, speaking of forecasting, over the last two episodes, we recapped 2022—a tough year on multiple fronts. So, now it's time to discuss maybe what we can expect in 2023. So, gentlemen, where will growth come from?
Sébastien: And that's the thousand-dollar question because, you know, markets give you returns because there is economic growth; That's kind of markets 101. And economic growth depends on four things. So, there's consumption, investment, government spending and global trade. So, if we look at them very quickly. So consumption, which is the largest part of the economy, well, the willingness and the ability to spend are both impaired; if you look at the consumer confidence surveys, they're getting worse and worse. The weight of inflation is just eating away at spending power of households. The labour market is still strong, but what central banks are trying to do to slow down the economy is to slow down the labour market. So, we should expect some weakness through the year. Housing prices are under correction right now, so the wealth effect of households, their willingness to spend should be impaired. So, consumption, it's not likely that it's going to be, you know, be a tailwind for growth in 2023. Investment: We have business confidence that's still very low. The need for better productivity. Inflation, it's delaying some investment projects. Same thing with residential housing, of course, which is part of the investment component. So, investment should not be the source of growth in 2023. Government spending: Well, as we discussed in the episodes on the recap of 2022, the experiment in the UK probably makes all governments around the world maybe on the sidelines until the fight against inflation is done. And when you look at global trade, well, it's a bright spot for Canada because we export lots of commodities whose prices have risen but, will China be able to contribute to growth in 2023? With COVID-zero, it's a big question mark. Europe: The energy crisis over there should be a tough year for Europe next year or this year, rather, in 2023. So, where will growth come from? It's hard to tell.
Marc: It's an excellent way to, I think, to look at it. But another way maybe I will introduce is I think that 2023 will be a bit like the mirror year of 2022. I think that it's all going to end where it started. I mean, inflation is what needs to come down. So, you said it. There's not a lot of growth that's coming, but that's going to help inflation to come down. And that's the, I think, the good side of that situation. And with inflation eventually coming down and hopefully it will settle around three, even maybe below, that will be perfect. Then we will have the famous, we will talk a bit about the famous pivot that we are all waiting about. So, all in all, I think that, yeah, it's not going to be a great year on the economic front, but it might be a much more interesting year in term of financial markets though.
Sébastien: Yeah, of course. I mean the economy, even if it's, if the scenario that we expect in 2023 comes to fruition, I mean, markets are always forward looking. And of course, when we look at asset prices today, a lot of that is already in the price.
Marc: Yeah. And if I come back though, on your vision of 2023 in terms of the economy, there might be a slight area where I'm a little different than you, let's say. It's on global trade. I think that Europe might do a little better than expected. We take care that the energy situation is turning to be a little better, especially for natural gas. We were afraid of having significant power cuts during the winter, all kind of industries, the auto industry coming to a stop. It seems that it's not going to be as worse as that. So, it's really positive. And another point or another aspect that I'm a little more positive and we have that discussion from time to time, you know, and I could picture us at the car, you know, sitting by the fire during the vacation, the holidays, seeing us talking about that with a glass of scotch is what's going to happen to China in terms of COVID and what I would call the great reopening? That's something you see much later in 2023. I think that by the summer, most of it will be done. We're helping them to reopen and hoping not to go back to the kind of measures and situations they were living through the first part of 2023. And as you said it, you know, full circle, it's going to come back in Canada again. So, I think that, you know, I think interest rates eventually going down will help also the US market. But Canadian market had a much better year than the US in 2022. And I think that, you know, with commodities and energy, you know, being helped by the resurgence of China, I think that is going to be, again, a good year for Canada, the Canadian stock market.
Sébastien: Yeah, good point.
Ashleay: And what about the central bank pivot?
Sébastien: Yeah, the pivot. That's the key to the markets in 2023 or 2024 because we did some work on that recently in the strategy team looking at when could central banks pivot and you know, just the definition of pivot here would be when central banks start cutting rates. Of course they will be telegraphing that. But when do they effectively start to cut interest rates? And history suggests—it's not the laws of physics that we're discussing here, but this is our best guess—that maybe it's a story for early 2024 where central banks say the fight against inflation is done. We can start cutting rates. And then when that happens, probably that's going to be the birth of a new bull market, a new economic cycle. So, you're being positioned for that, positioning for the exact moment where this happens. I mean, it's more luck than skill, but that still means that being invested in 2023 for that eventual pivot, that's going to be key.
Marc: Yeah. And I think that the bond market could do and should do better in, you know, but not to the same extent that where we're going to live. When are we going to hurt and we're first going to start to hurt about that famous pivot. I can see that as, you know, being sitting in for my F1 car and seeing all the light turning green, you know, and all with all the other parts spent on the stock markets, you know, it's going to be a heck of a start. I mean, everybody will race for cyclical stocks, economic-sensitive stocks that are pretty cheap. They're not going to wait to see the earnings coming back. They know that this will be coming. They're just going to take position and take position and keep buying. And that's going to be the best part of the rally. The best returns will come from those days, those days that when you will looking around at the real economy, it’s going to be as bad as it has been the last three or six months. And then you come back home, and you hear on the news that it's been a great day on the stock market and you're going to think once again, you know what, all these investors, in what planet are they living? We're just living in a planet six months ahead of the real economy. And that's the interesting part of that job, I guess.
Sébastien: Yeah. And, you know, the old saying that it's time in the markets rather than timing the markets, that's key for investors.
Ashleay: Absolutely, absolutely. And so now, what can we expect for the markets?
Sébastien: So, next, maybe I'll start with the bond market and I'll, let me be, Marc is really the expert here on the stock market. So, the bond market had a terrible year in 2022 because interest rates were at rock bottom at the start of the year and now, they're the highest since 2007, 2008, depending on what bond you're looking at. So, interest rates rising, meaning the price of bonds goes lower. So, the year was terrible for bonds, but now if you have a coupon of about 4%, depending on where you invest along the curve, well, bonds are interesting. So, as part of the portfolio, they will do their job if there is an economic slowdown and you get a good coupon. So, the bond market is a good place to be invested. For the stock market, just for a macro perspective, the valuations now are cheaper than they were last year. The stock market in the US, Wall Street, I’d say still middle of the road. It's not cheap, but not expensive. The TSX, on the other hand, is very cheap compared to its own history in other markets. So Marc, the TSX, you see good opportunities there I suppose.
Marc: Yeah, we see good opportunities. A big question is, is as you said, how much is pricing already in those earnings that are slowly but have already started to decrease? They are down 6%. When we talk about 2023 earnings, they're already readjusted down 6%. Is it enough? That's the big question. So, when you know, I was reading someone that was mentioning, oh, in the last three recessions, they were down 35%. But I talked to myself, wait a minute, we had the tech bubble burst. We had a great recession, Are we talking about…? And there were the crisis in Europe. And so, I think that what we're going to is much, a little more like 1994 when we had the kind of inflation surge and central bank intervention. Rates—short term rates— went up by about 3%. We're already at three and a quarter, probably going to finish close to four and a half, five, So. let's say a little worse than 1994. And by, at that time, profit went down 9%. Wow. So, we're down six, maybe nine to go. Well, maybe a little more, like I said. So, let's say between ten and fifteen. So, a good part of it is almost half is already in that market, if I follow that framework. So how do we adjust for that? Right now in the portfolio, we're a bit prudent. We're looking for good companies. Companies that execute, are very solid management that know, with experience, that can drive the company in that kind of market. We have some defensive too and slowly as the year will start, we'll move slowly but surely into the cyclicals, especially the most value one if I can say the cheapest one, where I know that valuation won't go down a lot more than what it is, where earnings forecasts are already reflecting difficult times and as soon as the market will pick up, you know, I hope to benefit from those companies and I will continue to add to them.
Sébastien: So, you know, at iAim, we're at about 160 investment professionals. So, leave the market timing to us, but spend time, as investors, spend time in the markets. Yes, don't worry. I mean, at some point the bottom will happen and you don't want to miss the rebound.
Ashleay: Absolutely. And do we have any suggestions for reading for those who would like to maybe get a head start on the year?
Sébastien: Sure. Maybe I could start with a book I've been recommending for a while, “The House of Morgan”. You know, I like biographies. I love to read about the history of things, and this is the history of the bank, J.P. Morgan, but through the history, the biographies of the founder, J.P. Morgan, the father; after that, his son Jack, all the way to today. So, you learn about kind of the birth of the American supremacy on the economic side. So, it's a very interesting read. “The House of Morgan” by Ron Chernow.
Ashleay: Very interesting.
Marc: I would go with a more generic suggestion. I would suggest everyone to read about geopolitics a little more as an investor, and not at the economic aspect of geopolitics, really at the geopolitics itself like a game of power. And I think that several events in 2003 could, you know, several surprises could be on that front. I'm going to view a couple of, I'm going to give you a couple of examples. The first one is pretty obvious: How the war in Ukraine will unfold. But I don't know if you've seen but right now there's the Iran government. The Iran people in power are kind of shake, a bit shake these days. So, maybe we're going to have a surprise there. What will be the ambition of China regarding Taiwan is another thing that I think it's quite important to keep on his radar. So, don't hesitate to read about those things because they will influence all the economy and all the financial markets will evolve.
Sébastien: And I agree, it's not always about the economics. It's about, you know, the historical perspective, the psychological perspective, the anthropological perspective. So, being a diversified reader pays off.
Marc: And when we talk about Putin, it was all about human behavior, you know, his pride and his vision of what Russia is. It was not more than that. It was, it's a lot of people agree that was even not rational. But, you know, how do you account for that in a portfolio? How do you account for that in today's life?
Sébastien: So like for Putin, the historians talking about the legacy that Putin wants to put in place. They were more right than the economists.
Marc: Yeah, exactly.
Ashleay: Yep. Very well said. And I think there's also “The Intelligent Investor” by Benjamin Graham that could be…
Sébastien: Yeah, if your thing is security analysis and you want to be good at stock picking. I mean it's always top of the list for anyone's curriculum.
Ashleay: Right. Right. So, if any of our listeners have any other suggestions, please share with us. We'd love to learn more and tune in to what you like. And if you haven't done so already, we invite you to go listen to our “In Your Interest!” podcast for the 2022 recap, which was done in two episodes. And thank you so much. Sébastien and Marc. It was once again very interesting.
Sébastien: Thank you. And have a good year as an investor, everyone out there.
Marc: Yeah, we wish you tremendous returns for 2023 and thank you for having me.
Ashleay: Love this podcast? Want to know more about economic news? Follow our “In Your Interest!” podcast available on all platforms, visit the economic news page on ia.ca, or follow us on social media.
Sébastien Mc Mahon joined iA Financial Group’s economy team in January 2013. Throughout his career, Mr. Mc Mahon has held various positions in several prominent financial institutions, notably at Quebec’s Ministry of Finance and the Autorité des marchés financiers, Quebec’s financial market regulator.
Sébastien Mc Mahon also serves as Vice-President, Asset Allocation, and Portfolio Manager for our subsidiary, iA Investment Management Inc. (iAIM), with assets nearing $15 billion. Mr. Mc Mahon is also a member of the firm’s asset allocation committee.
Sébastien Mc Mahon and Marc Gagnon
This podcast should not be copied or reproduced. Opinions expressed in this podcast are based on actual market conditions and may change without prior warning. The aim is in no way to make investment recommendations. The forecasts given in this podcast do not guarantee returns and imply risks, uncertainty and assumptions. Although we are comfortable with these assumptions, there is no guarantee that they will be confirmed.