Economic Fall: Trends and Financial Tips

Ashleay: Welcome to iA Financial Group's “In Your Interest!” podcast. Ashleay here. This week we're talking about the economic and market outlook for fall 2023. As usual, I'm joined by my colleague Sébastien Mc Mahon, Chief Strategist and Senior Economist. Hi, Sébastien.

Sébastien: Hello, Ashleay.

Ashleay: As always, great to have you for another podcast.

Sébastien: Same here.

Ashleay: So tell me, Sébastien, what should we be looking out for in the months ahead? I mean, we're kind of at the end of summer. You know, with September school is starting up again. So, what are the emerging trends and potential risks for investors?

Sébastien: Yeah, you're right: the season's changed. But sometimes the trends in the economy, in the markets change much slower than the seasons. One story in particular that we're looking at that's been long in the making—but which has been inching its way toward the front page of the business section—is the Chinese story. So of course, if you're in the markets, maybe you've heard a lot about China this year. But the interest in the China story should ramp up over the next few quarters, and we think maybe even the next few months, since President Xi’s plan for the middle class has been creating multiple issues there. The plan for the middle class is a good plan that aims to give the population access to real estate. There was this quote from the president saying that houses are for living in and not for speculation. So of course, no one can be against that. However, we saw this as the beginning of some issues for the credit cycle in China because property developers play a large role in housing speculation. These companies were given lots of leverage. Maybe you've heard of Evergrande. Recently, Country Garden is getting a lot of attention. These became huge companies; I mean, these are the companies that actually built the properties. Now they're starting to default, they’re starting to go bankrupt. And we're seeing a risk of contagion within the country. Even now we're hearing that some municipalities, some cities are actually at risk of default. When China came out of Covid after everyone else—they put an end to their zero-Covid policy in January 2023, so later than other countries—many observers were expecting that China would maybe kickstart the economic cycle and that would be a tailwind for the global economy. We’ve now seen that that has not been the case. If China's credit cycle stalls like it appears to be on the verge of, well, that has the potential to weigh on the global economy and markets. So, China would top my list of topics to follow this fall.

Ashleay: All right. And are we planning on any more rate hikes from the Bank of Canada?

Sébastien: You're doing a good job of getting the bad news out of the way early! So, China's economy is a negative thing to watch. As for the Bank of Canada, unfortunately, yes: it is likely that we see one, maybe two rate hikes by the end of the year, but it's still very uncertain. The odds that rates decrease in the fall of 2023 would be pretty much exactly zero, I would say. So rates could go higher because inflation—it's no longer the main issue now, in the sense that inflation is not about to pick up to 6, 7 or 8% again (at least it doesn't seem likely from the data that we have now), but it should rebound to 4 to 4.5% by year-end because of some factors like gasoline prices. So we've seen the Bank of Canada hike in June and July. Based on how they reacted to the data then, it is likely—although not certain—that we could have some more rate hikes by the end of the year.

Ashleay: I see. And which sectors of the economy are currently experiencing price increases and how might this impact investors?

Sébastien: Well, again, fuel. So, gasoline would be top of mind. The price of oil around the world is rising. We've seen Saudi Arabia’s production cuts being kept in place for a few more months. We see that production in the US is stalling, due to a reduced investment in production capacity during the Covid period. Inflation for food: If you go to the supermarket, you'll still see high prices because climate change is pushing the price of food higher. We've seen climate change do a lot of things this summer. We even recorded a podcast on the emerging impacts of climate change. So it’s still going to be the same at the grocery store. As you know, in Canada we have a public health system. And with our aging population, the pressure on the system remains elevated. So inflation in health care also remains an issue. Each of these elements taken together means that inflation might be hard to tame, but I don't think that we're on the verge of seeing inflation start popping up like it did in 2021 anytime soon.

Ashleay: And do you know how investors can take advantage of the current high interest rates and what type of investments are the most attractive right now?

Sébastien: Sure. So, moving from lower rates to higher rates of course hurts the price of bonds. It can also wreak havoc in riskier assets: for example, in 2022 we had negative returns for equities, which was largely due to rising interest rates and dimmer prospects for economic growth. Right now, it's a very good time to invest for the long run in fixed income. So, in bonds (anything that has an emphasis on capital protection or at least safety within a portfolio): when you can get high rates for long-term government bonds, you can lock these rates in; you can buy corporate bonds that give you great returns, compensating for the risk. So, you know, ten years ago, rates were so low that the only place to hide was in equities and, more importantly, US equities. Now it's the reverse. There are just so many opportunities outside of risky equities that it makes more sense than ever, in the last 15 years, to be invested in a well-diversified portfolio.

Ashleay: Do we have any updates on the provincial and federal budgets? And if so, what are the implications for the economy and investors?

Sebastien: Yeah, typically we get those updates from provinces and from the federal government in the fall. We don't yet have the budgets per se. Although sometimes these become mini budgets in exceptional events, like during the pandemic and coming out of the pandemic. This time around, I would say that the economy in Canada and the US has been stronger than expected at the beginning of the year, meaning that governments should have had more revenue than expected. The emphasis was on balancing the budgets and we hope to see a decisive return there. I'm sure every economist that you talk to will say the same thing, especially with unemployment being so low right now. But with the potential slowdown in 2024, it might be tempting to lend a hand, to put some new measures in place. I would say that the updates this fall could be just that: just an update—and it might be more of a non-event compared to the previous few years.

Ashleay: Well, thank you very much, Sébastien. You have once again given us some really helpful clarifications on the topics that we covered this episode. If you would like to learn more about the economic news, please subscribe to our podcast, which is available on all platforms. You can also visit the economic news page on ia.ca and follow us on social media. We'll see you next week!