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Market outlook: First quarter 2020

13 December 2019 by National Bank Advice
Q1 market outlook

In this analysis of the financial markets, National Bank Trust Inc.'s portfolio managers provide an overview of the last quarter and share their outlook for early 2020. National Bank Trust Inc. manages the NBI Tactical Asset Allocation Fund included in the NBI portfolios1.

Our market overview

When factors continue to exert downward pressure on the long-term return potential of traditional asset classes, the higher volatility expected in the context of an aging business cycle also implies a strong value-added potential for those who, through flexible asset allocation, can take advantage of these ups and downs.

Market perspectives

The rise and fall of geopolitical tensions undoubtedly introduce mispricing opportunities, potentially beneficial from a tactical perspective, but the resulting fog of uncertainty nevertheless renders the elaboration of a clear economic outlook more arduous. In addition, we feel, the growing involvement of central banks in financial markets arguably challenges certain forward-looking signals which have proven to be very successful in the past.

Our baseline scenario calls for global economic growth to stabilize in the coming months, with no recession in sight.

Our baseline scenario calls for global economic growth to stabilize in the coming months, with no recession in sight. The combination of a de-escalation of trade tensions and largely accommodative monetary policies increases the odds of a cyclical rebound in economic activity over the next year, but the exact timing of the bottom in growth and the actual content of a prospective trade deal remain uncertain.

Strategy going forward

Today’s investment backdrop lends itself especially well to tactical asset allocation. The importance of asset allocation in achieving long-term investment objectives is undeniable, but the relative rigidity of a strategic asset mix often implies missing out on opportunities presented by rapidly evolving economic and market conditions.

In other words, the benefit of a tactical fund is its ability to enhance overall portfolio returns when markets are doing well, and conversely, to mitigate downside risks in periods of financial stress.

In order to identify opportunities, we use our market sentiment indicator illustrated below. It allows us to see the dominant trend of market positions: buy or sell signals. 

img-graph-BNI-en-773x5922 300january 18april 18july 18october 18january 19april 19july 19october 19january 202 4002 5002 6002 7002 8002 9003 0003 100NBI Market Sentiment Indicator (MSI) vs. S&P 500100806040200Extreme PessimismExtreme OptimismS&P 500Market SentimentCIO Office (data via Refinitiv). As of October 30, 2019

Under these circumstances, we believe equities should outperform bonds, although the current level of valuations and earnings prospects suggest that single-digit returns are to be expected. Our strategy, from a short-term perspective, is to overweight equities versus fixed income, yet our overall positioning generally remains rather cautious for now.

Legal disclaimer

1 The NBI Tactical Asset Allocation Fund and the NBI Portfolios (the “Funds”) are offered by National Bank Investments Inc. (NBI), a wholly owned subsidiary of National Bank of Canada. Commissions, trailing commissions, management fees and expenses all may be associated with investments in the Funds. Please read the prospectus of the Funds before investing. The Funds’ securities are not insured by the Canada Deposit Insurance Corporation or by any other government deposit insurer. The Funds are not guaranteed, their values change frequently and past performance may not be repeated.

The information herein are subject to change. National Bank Investments Inc. has taken the necessary measures to ensure the quality and accuracy of the information contained herein at the time of publication. It does not, however, guarantee that the information are accurate or complete. The services described are only provided to investors who have entered into an agreement with National Bank Investments Inc.

The information and the data supplied in the present document, and comments of the portfolio managers, including their opinions and forward-looking statements as well as those supplied by third parties, are considered accurate at the time of their printing and were obtained from sources that we consider reliable. We reserve the right to modify them without advance notice. This information, these data and these comments are supplied as informational content only. No representation or guarantee, explicit or implicit, is made as for the exactness, quality and complete character of this information, these data and these comments. The opinions expressed are not to be construed as solicitation or offer to buy or sell shares mentioned herein and should not be considered as recommendations. The information presented does not create any legal or contractual obligations for National Bank of Canada or any of its subsidiaries.

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