Decision by Committee (April 11, 2024)

This commentary is authored by the Guardian Capital LP Asset Mix Committee (AMC)1

The global macroeconomic backdrop has generally improved since the AMC last met in April. The economic dataflow points to continued underlying strength in the US economy underpinned by a resilient consumer while there are growing signs of nascent improvements in economic momentum in Europe, Japan, and Emerging Markets (including China). While there are downside risks to growth — negative spillovers from geopolitical tensions chief among them — the outlook appears to be fairly upbeat at the moment, with ongoing moderate positive growth as the base case.

As well, there has been further progress worldwide on the inflation front, with gauges of underlying price pressures continuing to moderate from earlier highs as supply-side issues subside and restrictive monetary policy weighs on demand at the margin. Inflation is anticipated to continue to drift lower toward central bank targets over the forecast horizon, though, it will likely be at a fairly measured pace compared to the disinflation seen over the previous year.

All in this represents a fairly sanguine economic backdrop and outlook that has permitted global central banks to begin the process of moving toward a less restrictive policy stance. To date, the Bank of Canada and the European Central Bank have made their first cuts to policy rates; the US Federal Reserve has indicated its intention to cut rates in the second half of the year. The generally positive economic momentum, however, suggests that this easing cycle will be considerably more protracted than previous ones that were predicated on material downturns.

The current outlook is constructive for fixed income as the direction of travel for interest rates represents a tailwind for the broad asset class. The near-term uncertainty over the timing of the policy cuts in the US, however, suggests that there will be continued volatility in rates through the summer.

Moderate but positive growth, declining inflation and lower rates are also supportive of the prospects for corporate earnings and equity markets in the months ahead, speaking to a continued preference to tilt the AMC’s asset mix in favour of this asset class.

Further, while broad equity market valuations would appear to be stretched, this is the product of the significant outperformance of just a few US-based mega-cap stocks (that are market leaders whose strength is arguably justified). Elsewhere, equity valuations appear considerably more reasonable, given the earnings outlook, and suggest that there is still plenty of value to be found — there is no indication of an all-encompassing bubble in markets; investors have been highly discriminating rather than showing broad euphoria.

Indeed, there are historic valuation gaps between the US and other markets that represent opportunities — and these other areas are likely to fair relatively better should there be a retrenchment in enthusiasm over the potential impact of artificial intelligence that has created the divergence in recent years between the leaders in the space and everything else.

US dominance, however, is unlikely to be challenged soon, given its relatively stronger outlook that can sustain its premium, and the American market continues to be viewed as “essential.” As such, the AMC has no appetite currently for scaling back exposure here.

In terms of other regions, Canada, in particular, appears attractive at the moment as its historic relative valuation gap, head start on the easing cycle (which is beneficial to its heavily weighted Financials sector), exposure to commodities (particularly oil) and its proximity and trade relationship to the US all appear to represent tailwinds for this market.

The AMC decided to increase its allocation to Canadian Equity to reduce the underweight relative to its Strategic Asset Allocations, with an emphasis on those strategies more exposed to Energy and more cyclical sectors. The modest increase was funded by a drawdown of Cash balances — the prospect of declining domestic short-term interest rates makes deploying cash more compelling.

As a result of these decisions, the AMC Asset Allocations have modestly increased their overweight to Equity and reduced the allocation to Cash while Fixed Income was left unchanged at its current market weight. Equity allocations are biased toward Global Quality Growth; Fixed Income allocations are skewed toward corporate credit and modestly below benchmark duration.

The AMC will continue to monitor economic and market developments closely in the coming weeks and stands ready to tactically exploit opportunities that may present themselves.

 

Asset Mix Committee Summary Views2
Conservative Asset Allocation

Fund Benchmark* New Target Allocation** Changes from pre-decision positioning**
Equity 30.0% 34.4% +0.2
Canadian Equity 17.5% 17.1% +0.2
Canadian Equity 7.2 –
Canadian Growth Equity 5.0 –
Canadian Focused Equity 4.6 –
Canadian Equity Income 0.4 +0.2
Global Equity 12.5% 17.2% –
Global Dividend Growth 5.8 –
US All Cap Growth 4.1 –
Fundamental Global Equity 3.9 –
Emerging Markets Equity 2.0 –
US Equity Select 1.0 –
International Equity Select 0.5 –
Fixed Income 65.0% 62.5% –
Canadian Bond 48.0 –
Investment Grade Corporate Bond 12.5 –
Short Duration Bond 2.0 –
Cash 5.0% 3.1% -0.2

*Benchmark= portfolio strategic asset allocation **Figures may not add up due to rounding

 

Growth Asset Allocation

Fund Benchmark* New Target Allocation** Changes from pre-decision positioning**
Equity 70.0% 76.9% +0.5
Canadian Equity 40.0% 38.0% +0.5
Canadian Equity 14.8 –
Canadian Growth Equity 13.3 –
Canadian Focused Equity 8.9 –
Canadian Equity Income 1.0 +0.5
Global Equity 30.0% 38.9% –
Global Dividend Growth 13.8 –
Fundamental Global Equity 9.6 –
US All Cap Growth 9.2 –
Emerging Markets Equity 3.4 –
US Equity Select 2.0 –
International Equity Select 1.0 –
Fixed Income 25.0% 21.1% –
Canadian Bond 17.4 –
Investment Grade Corporate Bond 2.5 –
Strategic Income 1.3 –
Cash 5.0% 2.0% -0.5

*Benchmark= portfolio strategic asset allocation **Figures may not add up due to rounding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1 Guardian’s Asset Mix Committee (AMC) consists of investment professionals and asset class specialists and is charged with overseeing the development and management of multi-asset investment portfolios, specifically addressing asset mix composition/allocation and areas for advice or communication to such clients as it relates to the makeup of their
portfolio.
2 These Asset Allocations represent the Asset Mix Committee’s tactical views given their assessment of market conditions and performance expectations.

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Published June 13, 2024