'I would suggest for foreign investors to look at Canada': Ouimet on portfolio diversification

Here's a comprehensive summary of the YouTube video transcript:

Key Concepts

• Market Outlook: Current decline, expected year-end stability, and projected rally in the following year.
• AI Impact: Revolutionary potential, uncertainty in productivity gains and employment shifts, and potential for service sector growth.
• Tech Stocks: Continued positive outlook driven by earnings growth.
• US Economy: Expected rebound in 2024, driven by fiscal stimulus, deregulation, fixed asset investment, and consumer spending.
• Federal Reserve Policy: Anticipated decline in interest rates, supporting equity markets.
• Canadian Banks: Positive outlook due to net interest margins, lower loan loss provisions, and capital markets activity.
• International Diversification: Strategic allocation to Europe (Germany), Japan, and emerging markets.
• US Dollar: Expected depreciation due to narrowing interest rate spreads.
• Canadian Equities: Undervalued potential for foreign investors due to high earnings revision ratios.

Market Performance and Year-End Outlook

The markets are experiencing a decline at the start of the final month of the year, with Bitcoin falling below $86,000 USD, which is adding pressure to stocks. Pierre Mantis, Head Investment Strategist at UBS Canada, anticipates that equity markets will likely end the year around their current levels. He notes that the economic backdrop is not particularly buoyant, and while the third quarter was strong, a relatively weak fourth quarter is expected, potentially extending into the first quarter of the following year. This environment is not conducive to pushing ahead with risk assets. However, beyond the first quarter, Mantis believes the "coast is clear for markets to continue to rally through next year" due to numerous supportive elements.

Evolution of the AI Story

Regarding the Artificial Intelligence (AI) story, Mantis expects it to evolve similarly to its current trajectory. He foresees increased spending in AI, acknowledging its revolutionary nature. However, there is significant uncertainty surrounding the magnitude of productivity gains, which are expected to take "a few years" to materialize. Similarly, the impact on employment remains unknown, with questions about how many jobs will be eliminated and how many new ones will be created. While proponents suggest a surprising number of new jobs will emerge, Mantis expresses reservations, stating, "surprise me, I'm willing to be surprised, but I think it's going to be difficult in terms of employment going forward as well in terms of increasing employment." He notes hope for growth in manufacturing employment but expresses reservations, while anticipating further gains in the service sector.

Risk Assessment for Tech Stocks

Despite the uncertainties surrounding AI and employment, Mantis remains "relatively positive on tech stocks." The primary driver for this positive outlook is earnings. He explains that earnings are currently growing at "eight to nine percent" and are projected to reach "double digits, probably in the low teens" by mid-next year. This projected earnings growth is expected to "help sustain equity prices going forward."

US Economic Rebound and Consumer Strength

Mantis anticipates a rebound in the US economy, potentially starting in the first quarter of the upcoming year relative to the fourth quarter of the current year. Several factors are expected to contribute to this rebound:

• Fiscal Bonus: A significant fiscal stimulus is anticipated for the next year.
• Deregulation: A push towards deregulation is expected.
• Fixed Asset Investment: Substantial investment in fixed assets, particularly in the manufacturing sector, is projected. This will likely initially manifest in construction jobs.
• Growth Projections: While not expecting 4% growth, Mantis foresees growth rising "above 2%, 2 and a half, or maybe even 3% going forward."

The US consumer is also seen as a sustaining force. Although low-income consumers are "stretched," the "wealth effect" and continued spending by the "top two co-quintiles or the top 40% of income earners, potentially the top 20% of income earners" are helping to sustain consumer spending.

Supportive Federal Reserve Policy

A crucial element supporting the US economy and equity markets is the anticipated "supportive Fed." Mantis expects interest rates to decline next year, with the Fed funds rate potentially reaching as low as "three and a quarter percent." This reduction in interest rates is seen as a positive factor for "equity markets and risk taking."

Outlook for Canadian Banks

Canadian banks are expected to report "relatively good news." Key drivers for this positive outlook include:

• Net Interest Margins: Improvement in net interest margins.
• Loan Loss Provisions: Potentially lower loan loss provisions, depending on the specific bank.
• Capital Markets Activity: Heightened activity in capital markets.

Mantis expects this positive trend to continue into the next year. He also highlights that Canadian banks with US operations will benefit from "less of a regulatory burden," which should aid institutions like "GMO, TD, even Royal Bank." Overall, the outlook for Canadian banks is considered "relatively good."

International Investment Diversification

Mantis suggests looking outside of North America for investment opportunities. UBS has already diversified into Europe, primarily due to "the significant change in the fiscal situation in Germany." This includes substantial government spending on infrastructure and defense, which is expected to benefit the European and Eurozone economies. Diversification has also occurred in Japan.

Furthermore, emerging markets are considered "relatively attractive." This attractiveness is partly linked to the expectation that the US dollar will not significantly appreciate, and may even decline. As US rates decline and interest rate spreads narrow, the "path of least resistance for the US dollar to go down" is anticipated, which would benefit emerging markets with strong earnings.

Canada as a Diversification Opportunity

Interestingly, Mantis points out that while global investors may not be actively focused on Canada, it presents a compelling diversification opportunity. He notes that Canada has one of the "highest earnings revision ratios" globally. A significant portion of what drives earnings in Canada is "very little to do with the domestic economy," suggesting that foreign investors should consider Canada for diversification.

Conclusion

The current market sentiment is cautious due to a declining trend, but the outlook for the next year is optimistic, driven by expected earnings growth, a rebounding US economy supported by fiscal stimulus and consumer spending, and a dovish Federal Reserve policy. While AI presents revolutionary potential, its immediate impact on productivity and employment remains uncertain. Investors are advised to consider diversification into Europe, Japan, and emerging markets, and Canada is highlighted as an undervalued opportunity for foreign investors due to strong earnings revisions.