Global Asset Allocation Perspectives
October 2023
To help guide the positioning of Scotia Portfolio Solutions, the Multi Asset Management team of Scotia Global Asset Management meets regularly to discuss and debate the current macro environment and what it means for portfolio positioning. The following report captures the team’s current views.
Key macroeconomic themes
Global economic themes that are most likely to influence our views on portfolio asset allocation over the next 12-to-18 months.
Continued slowing of economic growth
Global growth will likely be challenged as the lagged impact of higher interest rates takes hold on the global economy. A recession is possible, however, if one were to happen, we do not expect it to be deep or prolonged.
Stubborn inflation and higher for longer interest rates
Overall, central banks of developed countries remain hawkish as continued interest rate hikes are likely, albeit at a slower and less consistent pace, in the ongoing campaign to normalize inflation which remains elevated.
Risks are increasing
As the lagged impact of higher interest rates and the general perception that interest rates will remain higher for longer takes hold, risk-on assets like equities will likely experience increased volatility.
Asset allocation perspectives
Equity outlook
After delivering solid performance in the first half of the year, equity markets pulled back. The S&P/TSX Composite Index declined by 2.2%, the S&P 500 Index dropped 1.2% ($C), the MSCI EAFE Index slipped by 2.0% ($C), and the MSCI Emerging Markets Index dipped by 0.5% ($C) over the quarter.
Notably, value stocks outperformed growth stocks in the third quarter, reversing the trend seen over most of the past year.
Considering the high degree of uncertainty regarding the outlook, any rallies in risky assets may create the opportunity to take a more defensive position.
Fixed income outlook
The Canadian bond market declined 3.9% over the quarter, giving back earlier gains and slipping into negative territory year-to-date.
Inflation ticked higher after steadily declining over the past year, prompting central banks to raise rates further.
Earlier this year, markets were expecting interest rate cuts by mid-2023, which shifted to late 2023, before shifting out further to mid-2024.
Fixed income remains attractive over the long term as yields have moved higher, offering return potential from both income and capital appreciation perspectives.
Canada
The Bank of Canada increased rates by 0.25% in July, before holding steady for the rest of the quarter. The Bank remains prepared to increase the policy rate further if needed. Yields have moved higher.
Canadian stocks performed well at the beginning of the quarter, before slipping in August and September. The S&P/TSX Composite index, experienced losses in nine of its 11 sectors with the Energy sector benefitting from rising oil prices and Materials pulling back on weaker metals prices.
The Canadian market should continue to benefit from secular strength in commodity prices and better prospects for relative growth.
U.S.
The U.S. Federal Reserve increased rates by 0.25% in July and continues to suggest additional rate hikes will come if needed to bring inflation under control. Yields climbed higher on signs of U.S. economic strength and sticky inflation.
Performance was broadly weak across American stocks, with nine of 11 sectors down in the quarter – the S&P 500 Index pulled back 1.2% in Canadian dollar terms.
The U.S. economy continues to show fairly solid performance. The U.S. market continues to have secular relative strength with strong fundamentals.
International
The Bank of England raised rates another 0.25% in August and the European Central Bank increased rates twice, totalling 0.5% over the quarter.
The MSCI EAFE Index slipped lower in the third quarter, down 2.0%, but remains up year-to-date. The U.K. led the way, while Germany, France, and Japan gave up some of the gains from earlier in the year.
Economic data in Europe has continued to show a slowing economy, with manufacturing and services both losing momentum. Inflation in Europe continues to trend lower, yet remains elevated, leading to continued monetary tightening.
Emerging Markets
The war in Ukraine, the unfolding situation in the Middle East, along with continued monetary tightening provides significant uncertainty for global growth.
Emerging markets declined slightly in the quarter in Canadian dollar terms, with a positive translation impact coming from a weaker Canadian dollar. China and Hong Kong declined in the quarter, which was partially offset by a solid performing India.
Being a major component of the emerging market index, China is of particular concern. It’s unclear if recent weakness is a blip or a signal of a more significant slowdown. Stimulus efforts have been modest to date, but investors continue to watch for announcements of more material stimulus efforts.
For further information, download the full Global Asset Allocation Perspectives Report.
All data as of September 30, 2023.
Commissions, trailing commissions, management fees and expenses may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed or insured by the Canada Deposit Insurance Corporation or any other government deposit insurer; their values change frequently, and past performance may not be repeated.
This document is provided for information purposes only. It is not to be relied upon as financial, tax or investment advice or guarantees about the future, nor should it be considered a recommendation to buy or sell. Information contained in this document, including information relating to interest rates, market conditions, tax rules, and other investment factors, are subject to change without notice, and The Bank of Nova Scotia is not responsible to update this information. All third-party sources are believed to be accurate and reliable as of the date of publication, and The Bank of Nova Scotia does not guarantee its accuracy or reliability. Readers should consult their own professional advisor for specific financial, investment and/or tax advice tailored to their needs to ensure that individual circumstances are considered properly and action is taken based on the latest available information. This commentary may contain forward-looking statements based on current expectations and projections about future general economic factors. Forward-looking statements are subject to inherent risks and uncertainties which may be unforeseeable and such expectations and projections may be incorrect in the future. Forward-looking statements are not guarantees of future performance and you should avoid placing undue reliance upon them. This publication and all the information, opinions and conclusions contained herein are protected by copyright. This publication may not be reproduced in whole or in part without the prior express consent of The Bank of Nova Scotia.
To the extent this document contains information or data obtained from third party sources, it is believed to be accurate and reliable as of the date of publication, but Scotia Global Asset Management does not guarantee its accuracy or reliability.
Scotia Global Asset Management is a business name used by 1832 Asset Management L.P., a limited partnership, the general partner of which is wholly owned by Scotiabank.
Scotiabank® includes The Bank of Nova Scotia and its subsidiaries and affiliates, including 1832 Asset Management L.P. and Scotia Securities Inc.
ScotiaFunds® and Dynamic Funds® are managed by Scotia Global Asset Management. ScotiaFunds and Dynamic Funds are available through Scotia Securities Inc. and from other dealers and advisors. Scotia Securities Inc. is wholly owned by The Bank of Nova Scotia and is a member of the Canadian Investment Regulatory Organization.
® Registered trademarks of The Bank of Nova Scotia, used under licence.
© Copyright 2023 The Bank of Nova Scotia. All rights reserved.