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 Soundbites, we’re talking about the outlook for global equities with Jennifer O’Hara Martin, vice president and portfolio specialist for global equities with T. Rowe Price. We talked about risks, opportunities, regions and sectors. And we started by asking her about her expectations for the year ahead.

Jennifer O’Hara Martin (JOM): I think, as we head into 2023, there are five big issues that we’re continuing to monitor. I’d start with ‘Recession is our base case.’ That’s become the consensus view. Capital markets have really largely priced in a significant global economic slowdown. It could be one of the most well-telegraphed recessions that we’ll experience in our lifetime. We think the U.S. is on track for a mild recession. And, Europe may be on track for a more meaningful recession. But when you think about underlying businesses, they’re doing better than many think. Company management teams don’t have their heads in the sand. They know a storm is coming. But I think the conclusion for us is, for every company we own in our portfolio, we’re underwriting it as if it will hit a recession. The second point — Russia-Ukraine — I would share that we haven’t owned anything in Russia for more than a decade. Russia is hunkered down in eastern Ukraine, and they’re just grinding it out. We don’t see an off-ramp for Putin. And the new normal is that we’re likely in a prolonged war in Europe, with prolonged sanctions. The third point would be interest rates. We think the largest move in the 10-year has already happened. But there’s more uncertainties surrounding the level of terminal rates. The new normal cost of money has increased. And valuations will be lower than we thought, and growth year valuations will be lower than we thought. You know, if you think about Covid reopening, which would be the fourth point, we think it is fair to say that we are largely moving to an endemic phase, except for a couple of countries. As long as you’re vaccinated and boosted, Covid largely now appears to be a really kind of bad flu. We’re not out of the woods, but we’re in a much different period than we were just 18 months ago. And the final point would be China. China is globally important and relevant, and it remains investable, however they need to grow. They need to have employment and those Covid restrictions really hurt their own GDP growth, let alone the secondary impacts that they’re having to other economies.

Risks on the horizon

JOM: We’re continuing to monitor quantitative tightening — or QT, which you hear some of the financial press refer to. It’s quite plausible that central banks will tighten more than is necessary to bring inflation back to target. If they underestimate the consequences of quantitative tightening for the real economy, this could exacerbate any recessionary dynamics in affected economies going forward.

Opportunities

JOM: One area that we talk a lot about on our research platform is time arbitrage. That’s a very large advantage for us. And what that means is the market is very short-term focused, and a longer-term view often plays to our favour. I mean I feel like during upticks in volatility, we’ve sought to really capitalize on market capitulation. They create really attractive entry points for truly special long-term growth businesses that we think will add significant value.

Promising sectors

JOM: I’d say one area that we think looks really interesting is financials, particularly the large U.S. money centre banks and insurance providers. Money centre banks weren’t even on our list over the last couple of years, given the low-interest-rate environment. But that’s different now, with most central banks taking on more hawkish views on interest rates to try and combat escalating inflation. And so, we started a position in Bank of America, while continuing to maintain a sizable position in [New York, NY-based] JPMorgan Chase [& Company]. We have a position in [Cincinnati, OH-based] Fifth Third [Bank] and we’ve been adding to our existing position in [Columbus, OH-based] Huntington Bancshares. The setup is also very good for insurers who’ve become strong with underwriting profits and improving income. And so, we added to MetLife [New York, NY-based MetLife Inc.], AIG [New York, NY-based American International Group], and we maintain exposure to name such as Chubb [Warren, NJ-based Chubb Corp.], AIA Group in Hong Kong [AIA Group, Ltd.], and Marsh & McLennan [New York, NY-based Marsh & McLennan Companies, Inc.].

And finally, what is the bottom line on investing in equities this year?

JOM: If we take a two- to three-year view, we still think people will want to own amazing businesses, in amazing end-markets, with great growth and great management. And we remain incredibly focused on identifying those idiosyncratic set of names across sectors and countries with the ability to deliver that durable long-term growth.

Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to Jennifer O’Hara Martin of T. Rowe Price. Visit us at investmentexecutive.com where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.

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