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THIS WEEK WITH SADIQ

The Recession That Never Arrives

July 3 to July 7, 2023

Weekly Commentary

Asset Class Views




WEEKLY COMMENTARY


Recession

Have you heard the story of Schrödinger's cat, the theoretical feline who
simultaneously both exists and doesn’t exist? That’s a bit like the recession
that may or may not be on the horizon. Recent macroeconomic indicators point to
a relatively strong economy. The big question is—are they a temporary blip, or
is a downturn really no longer likely? In short, we think that a recession is
still in the cards. What the data highlights, however, is that it is likely to
be shallow and short-lived. Recently, we’ve been speaking with some third-party
researchers who see a much stronger recession scenario; labour market
numbers—which have been viewed by most analysts as a sign of the economy’s
resilience—are backward facing, and these researchers believe that leading
indicators like Purchasing Managers’ Index (PMI) numbers coming off and
consumers increasingly tapping into their savings signal a higher likelihood for
a hard landing. Though their assessment differs from ours, we still want to take
it seriously. But our view remains that the economy is holding up relatively
well, and that markets are likely to keep chugging along until we see greater
job losses or some kind of major negative surprise, like a spike in inflation or
the U.S. Federal Reserve doing something totally unexpected. We don’t anticipate
any of those potential developments occurring in the near future.

Bottom Line: The potential for no recession has gone up, but a relatively mild
recession remains the most likely scenario.

Central Banks

Last week, leading central bankers from around the world met in Sintra,
Portugal, for the ECB Forum, where they reaffirmed the need for more policy
tightening to combat inflation. While nothing from the meeting altered our
thinking on geographic allocation, the comments do reinforce our view that
Europe will continue to be more aggressive with interest rate hikes because
they’re at a different stage of the cycle than other developed economies.
Inflation in the Eurozone remains much higher than in North America. The
European Central Bank (ECB) is thus faced with an interesting conundrum: Do they
follow the path of the Fed and Bank of Canada (BoC), both of which have paused
in recent months? Or do they hike aggressively to catch up? We expect the
latter, which tells us that there will be pressure on European consumers and is
why it’s wise to be slightly underweight that market. Canada and the United
States, conversely, are holding up fairly well, hence our neutral position on
those regions. The one question mark relates to housing—is it stabilizing, or is
it just taking a breather on the way down? Much of the evidence points to a
stabilization, which is a good sign because it will begin to positively impact
consumer sentiment. That, ultimately, will cause people to keep spending.

Bottom Line: It’s important to be aware of where each region is situated on the
rate path and inflation cycle, because that will affect the consumer psyche.

Nvidia

Nvidia shares have been soaring the past few months, and some investors have
raised questions about the sustainability of the recent artificial intelligence
(AI) boom. In our view, Nvidia has a great story ahead—in fact, they’re really
the only AI beneficiary whose stock surge is justified by their earnings. That’s
important, because while other companies have been given a boost by the AI
theme, they don’t have the same actual revenue tied to AI. Nvidia has moved
tremendously in a short time span, but unlike their competitors, they have a
history in the AI space to back it up. If there is one concern on the horizon,
it’s the Biden administration’s talk about banning chip exports to China. We
view this as a real political risk, and it has already caused both Nvidia and
AMD’s stock to pull back somewhat. Going forward, it could slow growth, but the
demand for Nvidia’s products is likely to increase further as more and more
companies dip their toe into AI. One might question Nvidia’s valuation in the
moment (which is completely fair), but in the longer term, it’s a great company
with a great story, and its outlook remains strong.

Bottom Line: Nvidia is tied to all the right themes—and unlike others in the AI
space, it has proven itself time and time again.

Positioning

Economic data continues to support a balanced position. There’s no doubt that
some parts of the economy are softening, but there’s nothing indicating that the
economy is weakening severely. That means that it’s business as usual for
markets, and that the Fed and other central banks don’t need to make any
dramatic moves. There’s little question that markets will remain volatile—in
recent weeks, we’ve seen a persistent back-and-forth between up days and down
days. That further reinforces our neutral position, as the constant up-and-down
makes it difficult to ascertain which direction markets are heading in the
longer term.

For a detailed breakdown of our portfolio positioning, check out the latest BMO
GAM House View Report, titled Know When to Hold ’Em.


As Chief Investment Officer, Sadiq S. Adatia’s views directly influence the BMO
ETF Portfolios.


MARKET UPDATE


 * Half of 2023 is now in the bag and financial markets have had plenty to chew
   on.
   
 * The broad macroeconomic backdrop shows an economy holding on relatively well
   despite widespread concern about recession—many buffers in place for the
   economy are proving their worth.
   
 * The flip side is that inflation remains stubborn, leaving both the Bank of
   Canada and Federal Reserve to grapple with short-term core metrics that are
   still well above their comfort range.
   

Thank you for reading!





Access the archive >


Disclosures:

The viewpoints expressed by the Portfolio Manager represents 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 provided
herein does not constitute a solicitation of an offer to buy, or an offer to
sell securities nor should the information be relied upon as investment advice.
Past performance is no guarantee of future results. This communication is
intended for informational purposes only.

BMO Global Asset Management is a brand name under which BMO Asset Management
Inc. and BMO Investments Inc. operate.

Any statement that necessarily depends on future events may be a forward-looking
statement. Forward-looking statements are not guarantees of performance. They
involve risks, uncertainties and assumptions. Although such statements are based
on assumptions that are believed to be reasonable, there can be no assurance
that actual results will not differ materially from expectations. Investors are
cautioned not to rely unduly on any forward-looking statements. In connection
with any forward-looking statements, investors should carefully consider the
areas of risk described in the most recent simplified prospectus.

This article is for information purposes. 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.

Commissions, management fees and expenses (if applicable) all may be associated
with investments in mutual funds. Trailing commissions may be associated with
investments in certain series of securities of mutual funds. Please read the
fund facts, ETF facts or prospectus of the relevant mutual fund before
investing. Mutual funds are not guaranteed, their values change frequently and
past performance may not be repeated. Distributions are not guaranteed and are
subject to change and/or elimination.

For a summary of the risks of an investment in the BMO Mutual Funds, please see
the specific risks set out in the prospectus. ETF Series of the BMO Mutual Funds
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 managed by BMO Investments Inc., which is an investment
fund manager and a separate legal entity from Bank of Montreal.

®/™Registered trademarks/trademark of Bank of Montreal, used under licence.



ASSET CLASS VIEWS



MONTHLY PERSPECTIVES








ASSET MIX

 * The U.S. economy is proving more resilient than feared despite the aggressive
   monetary-policy tightening as job creation remains robust.
 * The U.S. Federal Reserve’s and BoC’s hiking cycles are nearly complete;
   safe-haven bonds are attractive in a sub-trend growth environment with rising
   odds of a recession.
 * We upgraded equities to neutral but remain slightly defensive in the
   portfolios with an overweight to fixed income, funded by cash.




EQUITIES

Strongly Bearish
Bearish
Slightly Bearish
Neutral
Slightly Bullish
Bullish
Strongly Bullish


FIXED INCOME

Strongly Bearish
Bearish
Slightly Bearish
Neutral
Slightly Bullish
Bullish
Strongly Bullish


CASH

Strongly Bearish
Bearish
Slightly Bearish
Neutral
Slightly Bullish
Bullish
Strongly Bullish



EQUITY

 * We upgraded U.S. equities to neutral as the resilient labour market delays
   the recession while AI frenzy might run for a bit longer.
 * We lowered EAFE to a small underweight as the momentum of economic and
   earnings growth is showing signs of inflection once again; high risk of
   recession into Q3 for Europe.
 * We remain overweight EM equities as we still expect the Chinese economy to
   benefit from positive growth, in sharp contrast to DM countries where growth
   is slowing.




CANADA

Strongly Bearish
Bearish
Slightly Bearish
Neutral
Slightly Bullish
Bullish
Strongly Bullish


USA

Strongly Bearish
Bearish
Slightly Bearish
Neutral
Slightly Bullish
Bullish
Strongly Bullish


EAFE

Strongly Bearish
Bearish
Slightly Bearish
Neutral
Slightly Bullish
Bullish
Strongly Bullish


EM

Strongly Bearish
Bearish
Slightly Bearish
Neutral
Slightly Bullish
Bullish
Strongly Bullish



FIXED INCOME

 * We are nearing the peak of the hiking cycle while the pace of economic growth
   is cooling to a sub-trend pace with rising odds of a U.S. recession into
   2024.
 * Ongoing banking stress is increasing the recession odds, leaving us
   overweight to interest-rate duration.
 * We remain cautious on high-yielding corporate bonds as we prefer safer,
   higher quality, investment grade bonds.




IG CREDIT

Strongly Bearish
Bearish
Slightly Bearish
Neutral
Slightly Bullish
Bullish
Strongly Bullish


HIGH YIELD

Strongly Bearish
Bearish
Slightly Bearish
Neutral
Slightly Bullish
Bullish
Strongly Bullish


EM DEBT

Strongly Bearish
Bearish
Slightly Bearish
Neutral
Slightly Bullish
Bullish
Strongly Bullish


DURATION

Strongly Bearish
Bearish
Slightly Bearish
Neutral
Slightly Bullish
Bullish
Strongly Bullish



STYLE/FACTOR




 * We continue to like quality companies, but we downgraded low-volatility
   equities to neutral.




VALUE

Strongly Bearish
Bearish
Slightly Bearish
Neutral
Slightly Bullish
Bullish
Strongly Bullish


QUALITY

Strongly Bearish
Bearish
Slightly Bearish
Neutral
Slightly Bullish
Bullish
Strongly Bullish


GROWTH

Strongly Bearish
Bearish
Slightly Bearish
Neutral
Slightly Bullish
Bullish
Strongly Bullish


VOLATILITY

Strongly Bearish
Bearish
Slightly Bearish
Neutral
Slightly Bullish
Bullish
Strongly Bullish



IMPLEMENTATION

 * Gold continues to look attractive heading into elevated macroeconomic
   uncertainty and rising recession risks.




CAD

Strongly Bearish
Bearish
Slightly Bearish
Neutral
Slightly Bullish
Bullish
Strongly Bullish


GOLD

Strongly Bearish
Bearish
Slightly Bearish
Neutral
Slightly Bullish
Bullish
Strongly Bullish




EXPERT


SADIQ S. ADATIA


CHIEF INVESTMENT OFFICER

Mr. Adatia joins BMO from Sun Life Global Investments, where he most recently
held the role of Chief Investment Officer. Prior to that, he held investment
roles at Russell Investments Canada and Mercer Canada. He holds an Honours
Bachelor of Mathematics degree in Actuarial Science & Statistics from the
University of Waterloo. He is also a CFA Charterholder and is a Fellow, both of
the Society of Actuaries (Investment Specialty Track) and the Canadian Institute
of Actuaries.

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®/™Registered trademarks/trademark of Bank of Montreal, used under licence.

BMO Global Asset Management is a brand name under which BMO Asset Management
Inc. and BMO Investments Inc. operate. Certain of the products and services
offered under the brand name, BMO Global Asset Management are designed
specifically for various categories of investors in a number of different
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services are only offered to such investors in those countries and regions in
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before investing.

Exchange traded funds are not guaranteed, their values change frequently and
past performance may not be repeated.

BMO Mutual Funds are managed by BMO Investments Inc., which is an investment
fund manager and a separate legal entity from Bank of Montreal.

Commissions, trailing commissions (if applicable), management fees and expenses
all may be associated with mutual fund investments. Please read the ETF facts,
fund facts or prospectus of the relevant mutual fund before investing. Mutual
funds are not guaranteed, their values change frequently and past performance
may not be repeated.

For a summary of the risks of an investment in the BMO Mutual Funds, please see
the specific risks set out in the prospectus. ETF Series of the BMO Mutual Funds
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.

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variable insurance contract referred to in the Information Folder and the
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