Welcome to Soundbites: weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life.
For today’s Soundbite, we spoke with Lenny McLoughlin, chief investment strategist with Irish Life Investment Managers. The conversation covered a wide array of topics, including a recap of 2020 and the outlook for 2021.
Lenny McLoughlin (LM): In terms of longer-term outlook for investors, we believe equities will be the asset of choice. Over the medium to long term, we are expecting returns from equities of somewhere in the region of 5% to 6% per annum. That’s based on a strong growth cycle that we believe will be in place for the next number of years and, with that, improving earnings outlook.
Here he is on the short-term future for equities:
LM: Despite the turmoil that we’ve seen in equity markets, equity markets are up 12% year to date both in local currency terms and in Canadian dollars and are actually up about 60% from the March lows. Despite that, we still see upside of mid- to high-single digits in equity markets over the course of 2021. Typically, when we exit recession and we move into the recovery phase of the cycle, as we’ve seen from March of this year, you get very, very strong returns in equity markets. However, as you transition into the growth phase, equity markets still typically tend to do well, and we expect that to be the case over the course of 2021.
In absolute terms, valuations for equity markets do look expensive when you look at things like P/E multiple. We are currently trading at a multiple of 19.9 times. The long-term average is about 15.7. When you look at things like dividend yields and price-to-book, equities do look expensive versus the long-term averages. However, when you compare equities to bonds and cash, equities do look very, very attractive given the low yields that are available in those assets. For U.S. equities, looking at the earnings yield gap in the U.S., it is suggesting the U.S. equity market should be trading at a P/E multiple of 27 times compared to the current level of 22, suggesting a 20%-plus upside in equity markets.
On bond markets:
LM: Bond markets have done well this year though we don’t expect the type of returns that we’re seeing this year to be repeated. But we do believe that yields generally will remain low for a number of reasons. One is that central banks have committed to maintaining low levels of interest rates over the next couple of years. And central banks have also committed to continuing ongoing levels of QE [quantitative easing] or asset purchases — and we believe that will help maintain yields at lower levels.
On global growth in 2021:
LM: The global economy has suffered a contraction in growth this year of about 4%. Looking into 2021, we believe that the global economy will grow by about 5% over the course of next year. The growth outcome will be determined by a number of things, one being the path of the virus; two being the level of stimulus that is provided both in the fiscal and the monetary side of things; and thirdly, probably more importantly, is the deployment of various COVID-19 vaccines over the course of next year. Now, I think the growth path through 2021 for the global economy can be split into three very distinct stages. I think the first quarter will see slower growth, with growth on an annualized basis for the global economy probably running somewhere in the region of 2% to 3%. As we move into the second quarter and third quarter of next year, however, we believe that we will see significant pickup in growth, somewhere in the region of 6% to 7% on an annualized basis. Now as we move into the latter part of the year, I think growth will begin to ease back a little bit again toward around 3%. But that will still be above the long-term trend growth for the global economy of about 2.5%. And, net-net, when you combine those things, that probably leaves growth for the global economy at around 5% next year.
And finally, on the investment impact of Brexit.
LM: I think the asset most sensitive to Brexit issues would be Sterling. Currently cable is trading about 1.31. I think if you get to a situation where you get a no-deal Brexit, I think cable would fall to about 1.25 to 1.27. And I think U.K. equity markets would also potentially fall, probably, no more than 5%. [As for] European equities, I think the fall there would be less. I think it would be somewhere in the region of 1% to 2%. In terms of the overall impact on global markets, I think it’s quite minimal — the reason for that is, while being a large part of Europe, the U.K. accounts for just over 2% of global GDP. I don’t think you will see any significant reaction in global equity markets as a result of this.
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Well, that’s today’s Soundbite, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Lenny McLoughlin, chief investment strategist with Irish Life Investment Managers.
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TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
