Earth surrounded by foam / concept of volatility / Prill

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

The coming year is likely to see sluggish economic growth and volatile stock markets, thanks to continuing attempts by central banks to bring down inflation.

With the S&P 500 composite index down by 14.4% for the year to Nov. 30, Charles Burbeck, an independent global equities investor based in London, U.K., and Matthieu Arseneau, deputy chief economist with National Bank Financial (NBF), said there could be a further drop of 10% in the first half of 2023. François Bourdon, managing partner with Nordis Capital Inc. in Montreal, said the broad U.S. index could even drop another 20%–30%. All three see equities recovering in the second half, when they expect central banks to stop raising interest rates.

Structural changes in the North American economy — including rejigging supply chains and transitioning to green energy — will affect companies’ operating costs as they find new sources for essential inputs and diversify their suppliers.

But there may not be as much onshoring as many people expect, said Avery Shenfeld, managing director and chief economist with CIBC. He believes companies are likely to lessen their dependence on China by shifting to other low-cost countries instead.

While many economists expect inflation will drop to a range of 2%–3% by the end of next year as sluggish growth or a recession decreases consumer demand, the economy’s structural changes probably mean long-term inflation will average 3%–4% once growth resumes, Bourdon suggested.

Further reasons include elevated resource prices, fewer workers and less globalization, Bourdon added. Higher inflation will then lead to higher interest rates, also adding to companies’ operating costs. These conditions mean fixed income will regain its attractiveness, however.

Purchases of new bond issues and GICs will be a “very viable option,” said Sébastien Lavoie, chief economist with Laurentian Bank Securities Inc. in Montreal.

The biggest risk is that central banks overshoot their rate increases, pushing North America into a recession and resulting in deeper downturns in the U.K. and Europe.

Burbeck said when central banks have tried to slow demand during the past 50 years, most of the time they raised rates too much and caused recessions.

In terms of asset allocation for 2023, NBF’s latest recommendations are to overweight Canadian equities, underweight U.S. equities, underweight foreign equities, be neutral in fixed income and overweight cash.

Investors with cash available can take advantage of underpriced equities, Burbeck said. He advised looking for well-managed companies with good balance sheets.

Here’s a look at the major issues by region:

North America

Canada and the U.S. are in better shape than most of the industrialized world. Unemployment is low and pandemic-related government benefits have left many consumers with relatively high savings. American consumers can access fixed-term mortgages of up to 30 years, making them less vulnerable than Canadian consumers, who must renew every five years. But Canada’s resource companies are benefiting from high commodities prices, particularly for oil and gas.

Arseneau said he expects Canada’s GDP to grow by 0.7% in 2023, while the U.S. will grow by 0.3%. The picture improves in 2024: he anticipates 1.5% growth in Canada and 1.4% in the U.S.

Europe and the U.K.

Europe is coping with high inflation and high interest rates, as well as the threat of Russia cutting off crucial gas supplies. The continent has made huge progress in reducing dependence on Russia, but more will be needed. Since May, Russian gas imports to Europe and the U.K. have made up 12% by volume compared with 39% over the same period in 2021, said Beata Caranci, chief economist and senior vice-president with Toronto-Dominion Bank. If Europe can continue to reduce its dependence on Russian gas, the region could see a pretty good recovery, she added.

The U.K. also is facing high inflation and interest rates. Further, Brexit reduced potential exports to Europe while new trade deals with other countries have yet to be negotiated, Caranci noted.


The country’s zero-Covid policy has led to lockdowns that strangled production capacity and, more recently, led to rare protests against the communist regime. The problem is China won’t use the West’s effective mRNA vaccines and hasn’t yet produced effective equivalents, Burbeck said. And property values are dropping amid a worsening property debt crisis.

Arseneau estimated China will grow by a sluggish 3.3% in 2022. He forecasts recovery in 2023, estimating 4.4% growth. Caranci, however, said she struggles to see how China can get back on track with so many issues, including losing exports as foreign companies diversify their supply chains.

Further, China is furious that the U.S. is pushing domestic production of semiconductor chips and blocking access to certain technologies. U.S. support of Taiwan also is an irritant, but Bourdon said China has too much to cope with domestically to try taking Taiwan now. He believes, however, that China could try in the next 10–15 years.

Emerging markets

The strong U.S. dollar is a potential risk factor, as many emerging economies have a lot of dollar-denominated debt. However, the diversification of supply chains means many low-cost countries will have opportunities to pick up business.