Philip Petursson
In light of persistent inflation, Philip Petursson, chief investment strategist with IG Wealth Management, recommends overweighting equities — favouring Canadian, European and Asian markets, and slightly underweighting the higher-valued U.S. equities market. Photo by Jaime Hogge

This article appears in the January 2022 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.

When Philip Petursson began his career in the investment industry in 1994, the Canadian economy was exiting a period of recession and high inflation. So Petursson, who’s been the chief investment strategist with IG Wealth Management since September, is familiar with investing during challenging circumstances.

Petursson joins IG Wealth at another troubling juncture, with inflation at levels not seen in about three decades, and with interest rates forecast to rise as many as four times by the end of 2022.

As part of Petursson’s new role, he evaluates such conditions and builds out IG’s investment strategy to help the firm’s financial advisors and clients.

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Petursson joined IG in September after more than 20 years at Manulife Financial Corp., starting as director of investment marketing at John Hancock Retirement Plan Services in 1999 (which, at the time, was Manulife Group Pensions U.S.). He was Manulife Investment Management’s chief investment strategist and head of capital markets research when he left the firm last year.

At IG, Petursson will continue to analyze the economic forces that will affect investors in 2022.

Petursson said the Bank of Cana­da and the U.S. Federal Reserve Board are out of step with current economic conditions. “The central banks are behind the curve,” he said. “The U.S. economy is quite strong. And yet the Federal Reserve is acting — in terms of how slow they are to remove the monetary stimulus — as if there are concerns with the U.S. economy. But I don’t see any cause for concern for the U.S. economy in 2022.”

Rather, Petursson expressed concern about persistent inflation early in 2021. This year, he said, contributions to inflation will be more static and come from higher rents in both the U.S. and Canada, as well as upward wage pressure due to labour shortages and a higher minimum wage of $15 per hour for workers in federally regulated sectors in Canada, which kicked in on Dec. 29.

But, “ultimately, it comes back to the monetary expansion that we saw in 2020 [and] 2021, with governments and central banks basically injecting cash into economies. That cash alone is going to be a significant contributor to lasting inflation over time,” Petursson said.

Petursson noted some, but not all, inflation pressures will alleviate as supply chain pressures ease.

Higher inflation tends to lead to downward pressure on price/earnings multiples, Petursson said. “That’s simply because future earnings in an inflationary environment are worth less today. So, you have to discount those forward earnings, which is going to put downward pressure on stock multiples in the current environment,” he added.

That pressure was on display early this year as expensive tech stocks sold off, driving equities markets lower. Overall, IG Wealth projects that equities returns for 2022 will hover in the mid-single digit range, following a year when the S&P 500 composite index returned 26.9% and the S&P/TSX composite index returned 21.7%.

“As clients open up their 2021 statements, they’re going to be quite pleased with the returns the market has delivered. What we shouldn’t do is extrapolate that into 2022,” Petursson said. “We’ve seen this over time: following a good year, investors plow into equities. That, I think, in 2022, would be too risky.” He recommended inves­tors adjust their return assumptions “to be more realistic to the environment.”

While 2022 will be a year of moderate economic growth, “that scenario typically bodes well for commodities, equities and, in particular, commodity-related equities or indexes like the S&P/TSX composite,” Petursson said.

High inflation is likely to create “a challenging environment” for bonds, Petursson said. As a result, he recommends overweighting equities — favouring Canadian, European and Asian markets, and slightly underweighting the higher-valued U.S. equities market — and underweighting fixed income.

“The next 12 months may be challenging for the typical 60/40 balanced fund. A reduced weight[ing of] fixed income to 30%, either through adding more equities or alternative asset classes, has advantages,” he said.

Even though IG predicts “low single-digit potential” for bond returns this year, investors shouldn’t abandon their defences, Petursson said, because bonds mitigate volatility.

With interest rate hikes expected to begin in April, Petursson noted, “high-yield bonds tend to be positively correlated to a rising rate environment,” so having some exposure may improve a portfolio’s overall return and reduce interest rate sensitivity.

Petursson also said financial stocks will do well in a rising rate environment because the financial services sector is attractively valued relative to the broader market, and banks should benefit from continued economic expansion.

As chief investment strategist, Petursson said he tries to make economic information accessible to ordinary people by providing real-world examples in both his presentations and write-ups.

“Leave the economic textbooks in the office and talk about the realities of increasing gas prices and what that does in terms of a household balance sheet and how that might alter spending habits, or shift spending habits, within a household,” Petursson said.

Petursson noted IG advisors can expect to see regular communication from him in the year ahead in the form of podcasts, market commentaries, events and more. He’ll address equities, fixed income and alternative markets “to help [advisors] when determining a suitable asset allocation for their clients or even just to gain a better understanding on the current market movements.”

He also established a new investment strategy for IG that takes a data-driven approach to adapt to new information as it becomes available.

“What I’m really trying to avoid is being stuck in my views,” Petursson said. “If you don’t respect the data as it becomes available, you can miss opportunities and put yourself in a position to do harm by sticking too long in one strategy or not recognizing the opportunities in front of you.”

The strategy also involves not fixating on valuations.

The market has been overvalued many times before, Petursson explained: “And [that] doesn’t tell us anything about what is likely to transpire over the short term. So, don’t use valuation as a short-term guide. Respect it, understand it, but don’t manage to it. Because if you do, you could go years of missed opportunities before the realities of higher valuation come to the forefront.”