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In today’s episode, we speak with Lenny McLoughlin, chief investment strategist with Irish Life Investment Managers, about what to expect for the balance of 2022. We discussed global economic projections, and the near-term outlook for equities. And we started by asking about the risks to continued growth this year.

Lenny McLoughlin (LM): In terms of the global growth outlook, it has obviously deteriorated this year. So, we’ve seen growth forecasts for the global economy coming down from about 4.2% to just under 3% currently. In terms of where growth goes from here, when you look at things like business sentiment surveys, consumer confidence in particular, it is suggesting that the outlook for consumption over the next six to nine months may not be as strong as people have thought. When you look at supply issues which many people are talking about, inventory levels have built up to excessive levels. And with those excess inventories, they will have to get rid of those and they will do so by discounting. In term of the possibility of a recession, I do think it’s increasing. When you see some of the data points coming through, they are disappointing, and, as I say, when we see the level of tightening that you’re likely to see from central banks in coming months, I think it does increase the possibility of a recession happening in the second half of next year.

On labour challenges worldwide.

LM: Labour markets have become very tight. That’s a reflection of the fact that, you know, we have seen corporates rehiring as economies have opened, and what we’ve seen is unemployment levels have gone back to more or less where they were pre-Covid. Demographic factors are at play here as well. So, what we’ve seen is slowing population growth, an aging population as well, which has led to a tighter labour market. And given those inflation pressures that we spoke about earlier, what you have seen is wages beginning to rise. And that probably means that corporate margins are going to weaken a little bit compared to what they have been in the past. Lastly, just in relation to the onshoring issue, as corporates look to bring production facilities close to home, or back to their own country, that will lead to increased demands for labour as well, and will probably continue to push up wages.

The outlook for equities.

LM: So, in relation to equity markets, equity markets have fallen year-to-date. And that’s been down to a number of factors. One has been this tighter policy that we’ve seen from central banks, which has caused bond yields to rise, and with that the relative attractiveness of equities versus bonds has been significantly reduced. And equities are no longer cheap versus bonds, which has put pressure on equity markets over the course of this year. In terms of where equity markets go from here, a lot has been discounted in the market at this stage. In terms of when equity markets find the bottom, we need central banks to begin to indicate that they are close to or coming to the end of that tightening cycle.

The outlook for fixed income.

LM: In terms of yield levels, what we have seen is U.S. 10-year yield has moved from a level of 150 at the beginning of the year to a high recently of 350. And again, that’s just a reflection of that tighter monetary policy that we have seen coming through from central banks. In relation to where bond yields are likely to go from here, the Fed is currently suggesting that the Fed funds rate will peak at around 4%. Historically, when you look at where the 10-year yield in the States peaks through the cycle, it typically peaks close to the peak in the Fed funds rate. And that suggests to us that there is still some upside in bond yields from current levels. In relation to other parts of the world, we’ve obviously seen European bond yields similarly rise. It is suggesting that there is still some modest upside in bond yields across Europe as well. In relation to Canada, we’ve seen yields move to similar levels to what you’ve seen in the U.S. The 10-year yield in Canada recently reached a peak of 3.6%. And, again, as the Canadian central bank continues to tighten, you could see further upside in Canadian bond yields as well. But, again, we do think that the bulk of the move in yields is in at this stage.

And, finally, what’s the bottom line on 2022?

LM: The key takeaway from this year, I suppose, is the huge changes in the fundamental backdrop and the policy backdrop that we have seen this year. It has completely changed the outlook and the picture, compared to what we in the market was thinking at the beginning of this year. Looking over the next six months, I think some of the trends that we’ve seen over the last six months will remain in place. But maybe the scale of the move is less than what we’ve seen in the first six months of the year. And, while we do see some short-term downside in equity markets, we believe that most of the downside is actually in equity markets at this stage, with valuations beginning to present some opportunities if we do see some further downside in markets from here.

Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Lenny McLoughlin of Irish Life Investment Managers.

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