Chief Investment Strategist, Morgan Stanley Wealth Management Canada
Chief Investment Strategist, Morgan Stanley Wealth Management Canada
Title: 2024 Canadian Financial Market Outlook: “Dear, Tiff. Are We There Yet?”
Welcome to Canadian Insights, where Morgan Stanley Wealth Management offers the Canadian perspective on global macroeconomic events, while as always, adhering to a long-term approach.
I’m your host, Stu Morrow, Chief Investment Strategist for Morgan Stanley Wealth Management Canada.
In this episode I am going to focus on our recent report titled “2024 Canadian Financial Market Outlook: “Dear, Tiff. Are We There Yet?”.
Our 2024 Canadian Financial Market report features our thoughts on what lies ahead for the Canadian economy, and Canadian financial markets.
Our base-case scenario is that Canada will avoid a recession in 2024, but that does not mean there is an all-clear signal ahead for investors.
We do see risks on the horizon.
While Canada avoided a technical recession in 2023, economic momentum has slowed down over the last few months under the weight of the Bank of Canada’s previous rate hikes.
We expect these past rate hikes will have had a lagged impact on economic growth into 2024.
As per the title of our report, we anticipate the most frequently asked question amongst Canadian investors in 2024 will be, ‘Are we there yet?’, with respect to falling inflation and the timing of interest rate cuts by the Bank of Canada.
This question is top of mind for investors, lenders and companies who all are expecting between 75 to 100 basis points of rate cuts in 2024.
As for inflation, we expect it starts moving closer to the Bank of Canada’s target rate of 2% over the next year, which should allow the Bank to reduce its policy rate and provide some relief to Canadians by mid-year. That’s the base case…
But where can things go wrong next year?
We believe the downside case for the Canadian economy and financial markets rests with the path forward for inflation, which would in turn impact the Bank of Canada’s policy rate.
If the Bank of Canada does not end up cutting rates in 2024, likely due to high and sticky inflation, recession risk begins to increase in 2024 and possibly into 2025.
The Canadian housing and mortgage market will certainly be challenged in such an environment, where growth would likely be declining, while unemployment would be rising while rates remain high.
It’s likely in this scenario that already rising insolvency rates in Canada become much worse, posing a threat to Canadian bank profitability and dividend expectations.
There are potential mitigants to these risks to the housing and mortgage market, as detailed in our report, but nevertheless this is our number-one concern for next year, and we’ll be watching it closely.
From a portfolio perspective, our tactical asset allocation recommendations have not changed as we enter 2024. We recommend investors remain defensively positioned for what we expect will be an environment of heightened volatility.
We expect that bond, stock and commodity volatility will remain high in 2024, as investors digest any surprises in the growth and inflation data.
As such, investors need to stay diversified across asset classes, regions, and currencies. From a tactical perspective, we continue to recommend investors maintain an overweight to global fixed income, while being underweight global equities. We are market-weight in Canadian equities, based on our assessment of fundamental, valuation and technical indicators, as detailed in our report.
Thank you for listening, please visit our website at www.morganstanley.ca for more information about our 2024 Canadian Financial Market Outlook.
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