Mackenzie Minute: March 23, 2018
Portfolio Manager Adelaide Kim says the Mackenzie North American Equities Team is assessing risks to equity markets and the global economy from a potential trade war involving the US.
ADELAIDE KIM: Ongoing discussions on potential trade wars and increased protectionism could pose a risk to equity markets and the global economy, though OECD has indicated that a 10% rise in trade costs could impact the economy by 1.0 to 1.5 percentage points. However, we are uncertain as to where these discussions may go; Canada and Mexico were later exempted from the US import tariffs on steel and aluminum. And despite all this, the global economy continues to be strong with global volumes up 4% year over year.
Keeping all of this in mind, the risk of rising trade tensions could be offset by continued strength in economic data and earnings growth. Labour markets remain tight, yet healthy, both in Canada and the US. We are mindful that equity valuations are near the top-end of historical ranges; however, if earnings continue to grow and accelerate, market multiples could continue to rise.
The speed of Fed tightening could actually pull forward a recession. While it's not indicative of the future, as history has shown, as the yield curve inverts, which is indicative of a recession to come, equity markets could continue to rise for a year and maybe even two years, based on the last four recessions. That being said, we remain fully diversified as to not miss out any potential upside. And we mitigate portfolio risk by managing fully-diversified portfolios, focusing on valuations with a dividend focus.