Mackenzie Minute: November 2, 2018
Benoit Gervais, Portfolio Manager on the Mackenzie Resource Team, talks about the broader impact of recent economic events and his outlook on the economy and resources sector.
BENOIT GERVAIS: Rising interest rates, Chinese worries, trade barriers seem to have broken the long-term trends in equity markets that started in 2011. Of particular interest, we think, trade barriers continue to have a negative impression on people. We're reserving judgement. We think there are 30 years of economic models that were based on globalization, we have to revise this. Of specific interest, we think that repatriation of some of those operations in the U.S. should help the bottom half of wage earners in the U.S. which, by the way, have not seen a wage increase in forty years. So most of the last forty years or four decades have been accruing to emerging markets workers, so we'll see what the net impact is in all of this, but it is not all negative.
We continue to watch for five key indicators to turn negative before calling the end of this economic cycle. There are four that are clearly in the positive, namely… Inflation is still tame. Wage inflation is still low. The yield curve is positive. Capex hasn't peaked. The only negative is probably global auto sales, which seem to have peaked. So, the more likely scenario is that this is an equity correction, not an economic recession. So, if you want to set up for this, then you watch for a change in leadership.
If our scenario proves to be correct, and this economy continues to grow moderately, and this is simply an equity correction, we would expect resources to do quite well. Physical commodities are showing us that prices are still healthy, utilization remains high. Now is not the time to underweight resources, we think.