Podcast: It’s Still ‘Too Early’ for Cuts
The Bank of Canada kept its benchmark rate at 5% for the fifth consecutive time, saying it’s “too early” for cuts. In today’s episode, Portfolio Managers Omanand Karmalkar, Matt Montemurro, and your host, Erika Toth, examine the dynamics of inflation and explore what the future could hold. They also discuss tailwinds in the Utilities sector, a barbell strategy to add duration, and Japan’s market outlook.
Erika Toth is a Director of ETF Distribution at BMO ETFs. She is joined on the podcast by Omanand Karmalkar and Matt Montemurro, Portfolio Managers and ETF Specialists at BMO Global Asset Management. The episode was recorded live on Wednesday, March 6, 2024.
Bank of Canada Rate Announcement
The Bank of Canada once again held rates steady at 5%. Governor Macklem acknowledged that the higher interest rate policy is working as expected, cuts are coming in the future, but it’s still too early to consider lowering rates now. They are concerned about the stickiness in underlying inflation and want to see more cooling of price pressures before they commit to cutting rates. They don’t want to announce an early victory yet. Markets are pricing in three rate cuts for 2024, with the first cut coming in July. So once the Bank of Canada opens the door, the market is expecting rate cuts for multiple meetings in a row.
Utility Sector
An artificial intelligence fueled growth rally prompted money to flow from traditionally stable or defensive sectors, such as utilities, to more growth-oriented sectors like technology. Leaving the utility sector lagging in 2023, but there are tailwinds for the sector in 2024 and beyond, including the potential path of interest rates downward and the growth story around utilities in the renewable energy transition. To get exposure in the sector for investors who are more defensive and want more income on a monthly basis, BMO Covered Call Utilities ETF (Ticker: ZWU) is a great option. For clients who don’t need that extra income, investors can look to BMO Equal Weight Utilities Index ETF (Ticker: ZUT).
Fixed Income
To start the year, markets were pricing in six rate cuts for both Canada and the U.S. for 2024. Those rosy expectations went away pretty quickly. We are now seeing three cuts for the year starting in July, priced in. In terms of our fixed income positioning, if you anticipate more cuts than expected you may want to extend duration in your portfolio. We expect Canada to align with the US, if not cut more or faster than the US. If you are looking to add duration, one option to consider is BMO Aggregate Bond Index ETF (Ticker: ZAG). Another strategy could be a barbel approach, using the BMO Ultra Short-Term Bond ETF (Ticker: ZST) and pairing it with the BMO Long Federal Bond Index ETF (Ticker: ZFL) to capture the yield on the short end while still being positioned to potentially benefit from rate cuts.
Japanese Equity Market
Japan’s main stock index hit an all-time high after about 35 years. We believe the drivers of growth have been positive changes in corporate governance as well as economic and demographic shifts. The Tokyo Stock Exchange introduced a bold policy initiative aimed at enhancing corporate value. Centered around the cost of capital, capital efficiency, which ignited a wave of positive change across the Japanese corporate landscape. From an economic and demographic perspective, Japan is able to mitigate its aging population because a lot of its demand comes from outside the country. Japan is undergoing an economic transformation as it transitions from a prolonged period of deflation to a new era of inflation. BMO Japan Index ETF (Hedged Units) (Ticker: ZJPN.F), BMO Japan Index ETF (Ticker: ZJPN).
ZWU, total returns as at 2024/02/29: 1yr: -2.09%, 3yr: 2.59%, 5yr: 2.19%, 10yr: 3.19%, SI: 3.71%
ZUT, total returns as at 2024/02/29: 1yr: -8.56%, 3yr: -3.74%, 5yr: 6.00%, 10yr: 6.75%, SI: 6.27%
ZST, total returns as at 2024/02/29: 1yr: 5.37%, 3yr: 2.53%, 5yr: 2.26%, 10yr: 1.88%, SI: 1.95%
Annualized Distribution Yield: This yield is calculated by taking the most recent regular distribution, or expected distribution, (excluding additional year end distributions) annualized for frequency, divided by current NAV. The yield calculation does not include reinvested distributions.
Weighted Average Yield to Maturity: The market value weighted average yield to maturity includes the coupon payments and any capital gain or loss that the investor will realize by holding the bonds to maturity.
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