Podcast: Markets Take a Tumble15 sept. 2022
Following a red-hot inflation print earlier this week, many investors opted for an immediate sell-off, creating turbulence in the markets. In today’s episode, portfolio managers Alfred Lee, Matt Montemurro, and your host, Mark Raes, anticipate the Federal Reserve’s response. They also discuss opportunities to hedge outside of gold, positioning equities in a barbell approach, and finding the best bargains in a volatile environment.
The episode was recorded live on September 14, 2022.
Economic data has been volatile and inflation fears re-emerged yesterday as U.S. CPI numbers came in higher than expected. We may see inflation stay higher for longer than initially projected. The market repriced risk on the CPI print and a 75bp increase from the Fed seems more certain with a possibility of 100bp increase. We think advisors may want to increase their quality FI and use ETFs such as ZQB - BMO High Quality Corporate Bond Index ETF and ZST - BMO Ultra Short-Term Bond ETF to compliment on the short end of the curve. We feel that taking on risk by adding long duration right now might be a little too early to do. ZBI - BMO Canadian Bank Income Index ETF has the quality of Canadian banks and uses the entire capital structure such as bonds preferred shares and LRCNs (minus equity). ZBI has a 5.3% yield with a duration of 2.5. For equities we recommend a pairing such as ZLU - BMO Low Volatility US Equity ETF and ZNQ - BMO NASDAQ 100 Equity Index ETF – BMO U.S. ETF Blended Strategy
Many investors are wondering why isn’t gold up when inflation is? Gold’s main drivers are inflation, geopolitical/economic risk and a weaker USD. The main reason we aren’t seeing a big pick up in gold is because we are seeing a stronger USD. We see global infrastructure as an inflation hedge in this current environment ZGI - BMO Global Infrastructure Index ETF.
For fixed income ZTIP.F - BMO Short-Term US TIPS Index ETF (Hedged Units) is a great way to protect your portfolio from the impacts of inflation. We have seen breakevens move from approximately 6% to below 2% in less than 6 months (as the Fed continues to raise rates the market is expecting inflation to come down). After the CPI print yesterday, we saw breakevens jump to approximately 2.5%. If one were to believe that inflation will be higher than 2.5% in 1 year, then you’d want to be in something like ZTIP. If you believe that inflation will be lower than 2.5% than you’d want to be in something like “regular treasuries”. We believe inflation will come in higher than the current breakevens and we think ZTIP and ZTIP.F to be a great compliment to a fixed income portfolio. ZTIP can protect you from CPI print surprises.
Banks are currently offering a 30% discount to the market. The big 6 Canadian Banks share price has underperformed the market YTD as banks have been increasing their loan loss provisions. Canadian Banks are independently regulated and prudently managed (capital tier 1 ratios are reflective of this). The forward earnings for Banks on average are 60% higher than the average TSX company. The earnings on banks are expected to remain strong. Overall, it is rare that the banks do get this cheap and looking at the banks as a long-term exposure right now is a great entry point with a high dividend. ZEB - BMO Equal Weight Banks Index ETF, ZWB - BMO Covered Call Canadian Banks ETF.
Opportunities in the Market
There are some great opportunities in the market currently specifically…. For more on this please listed to our podcast at https://www.bmoetfs.ca/trade-ideas-podcasts
The viewpoints expressed by the Portfolio Manager represent their assessment of the markets at the time of publication. Those views are subject to change without notice at any time without any kind of notice. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance. Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance.
The BMO ETFs or securities referred to herein are not sponsored, endorsed or promoted by MSCI Inc. (“MSCI”), and MSCI bears no liability with respect to any such BMO ETFs or securities or any index on which such BMO ETFs or securities are based. The prospectus of the BMO ETFs contains a more detailed description of the limited relationship MSCI has with BMO Asset Management Inc. and any related BMO ETFs.
NASDAQ®, and NASDAQ-100 Index® or NASDAQ-100 Index® Hedged to CAD, are registered trademarks of Nasdaq, Inc. (which with its affiliates is referred to as the “Corporations”) and are licensed for use by the Manager. The ETF(s) have not been passed on by the Corporations as to their legality or suitability. The ETF(s) are not issued, endorsed, sold, or promoted by the Corporations. The Corporations make no warranties and bear no liability with respect to the ETF(s).
Commissions, management fees and expenses (if applicable) all may be associated with investments in mutual funds and ETFs. Trailing commissions may be associated with investments in certain series of securities of mutual funds. Please read the ETF facts, fund facts or prospectus of the relevant mutual fund or ETF before investing. The indicated rates of return are the historical annual compounded total returns including changes in share or unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Mutual funds and ETFs are not guaranteed, their values change frequently and past performance may not be repeated.
For a summary of the risks of an investment in BMO Mutual Funds or BMO ETFs, please see the specific risks set out in the prospectus of the relevant mutual fund or ETF. BMO ETFs trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.
BMO Mutual Funds are offered by BMO Investments Inc., a financial services firm and separate entity from Bank of Montreal. BMO ETFs are managed and administered by BMO Asset Management Inc., an investment fund manager and portfolio manager and separate legal entity from Bank of Montreal.
BMO Global Asset Management is a brand name that comprises BMO Asset Management Inc. and BMO Investments Inc.
®/™Registered trademarks/trademark of Bank of Montreal, used under licence.