by Jean-Sébastien Nadeau, Daniel Chivu, Fixed Income, AGF Investments
October 18, 2023
No recession in sight, but storm clouds are gathering
The last 18 months have conditioned Fixed-income investors to think twice before allocating to their bond portfolios, as a resilient global economy has kept pressure on central banks to continue hiking interest rates. After several head fakes at the beginning of the year (e.g., a temporary pause in Canada and Australia, the March banking turmoil), yields have continued their trek higher, and seemingly thumbing their nose at the brave few who increased their bond allocations earlier in the year.
Investors have looked for refuge in Cash and Cash proxies, whether in the form of GICs or money market funds, as sitting on the sidelines seemed like the better option compared to bonds. After the toughest year for fixed income in decades, and a frustrating start to 2023, who can blame them? Still, there is a risk that investors could be succumbing to recency bias and allowing recent outlier events to influence their long-term thinking.
Earnest Hemingway famously said that change comes about in two ways: gradually, and then suddenly. As we enter the 2nd half of 2023, mixed economic data will likely continue for a little while longer, but some cracks are beginning to show in the Canadian and European economies. Global consumer spending is moderating, manufacturing data in Germany has been collapsing, and the much stickier service inflation has started coming down as well worldwide.
Does all of this mean an imminent recession? It is not the Fixed Income team’s base case. However, it does show that investors are operating in a different environment than in 2022, and basing their allocation decisions on what was rather than what will likely be, could prove to be a mistake.
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