Martin Lefebvre
Hi everyone. Welcome and thank you for tuning into our National Bank Investment Podcast Series, the first of 2023. I'm your host, Martin Lefebvre, Chief Investment Officer at National Bank. Today, we're kicking things off with a bang with one of the most successful investment strategists of 2022, our guest, Candice Banks, owner of Fiera Capital. Candice is a Vice President and Portfolio Manager, Global Asset Allocation. She's a member of the Asset Allocation Committee, focusing on central banks and fundamental macro analysis, and actively participates in the development and communication of the firm's asset allocation strategy. Candice has more than 15 years in the investment industry, including several years as an investment research analyst for a global investment management firm. Candice, thank you for joining us today.
Candice Banks
Thanks so much for having me.
Martin Lefebvre
Candice, Montreal's investment community is a small world as you know, and we've known each other for a few years now, but not many people can guess what brought a girl from the prairies to embrace finance in the first place and move to Montreal. So before we start, could you tell us a bit about your background and career and then describe to us a little regarding the Global Asset Allocation Committee at Fiera Capital? Basically, we wanna know what goes on behind the scenes.
Candice Banks
All right, sounds good. So as you mentioned, I am from Western Canada, born and raised in small town Saskatchewan, but my career began in Calgary. I was working at Franklin Templeton Investments doing a lot of the same macro analysis, global asset allocation for the retail potential program up until about 2010. From there, I moved over to a private wealth firm in Calgary called Canadian Wealth Management, where I was also managing some equity portfolios, Canadian and US, as well as doing asset allocation there as well. And then we were acquired by Fiera in 2012. So that's really the Montreal connection. A couple of years after that, I joined the global asset allocation team here in Montreal. That was 2014. So, you know, it's been a number of years now and having a great time. When it comes to the asset allocation team, our role, as you can imagine, is really just to position portfolios, both from a private wealth perspective, as well as our institutional balanced accounts, positioning around our clients' long-term strategic objectives and targets to best capitalize on our expectations for financial markets on a tactical 12 to 18-month basis. So we're really positioning between cash, stocks, and bonds. And the process really hinges on two key pillars and you'll hear me talking a lot about these throughout our conversation today. And that is really the global economy and central bank policy. And the reason we focus so much on these two pillars of our investment process is that when we're trying to decide how to be positioned between cash, bonds, stocks, we're ultimately looking for the next recession, which is obviously coincides with a bear market. And what is typically driving a recession is a central bank tightening event. So that's why we really spend a lot of time on those two factors in deciding how we want to be positioned, whether it's risk on or risk off. So I'll talk a little bit about that later when we get into the strategy.
Martin Lefebvre
Yeah, so my understanding is that the asset allocation committee focuses a lot on macro analysis. You've mentioned inflation, central banks and the risk of recessions. And we all know how challenging 2022 was. And as I mentioned earlier, you've made some great market calls last year. So could you take us back to some of the key events that occurred in 2022 and how you were able to foresee some of them and position accordingly?
Candice Banks
Yeah, so right out of the gate in 2022, the key highlight was inflation. We were coming out of the pandemic. We had all of this stimulus-fueled pent-up demand running up against very little in the way of supply. We were dealing with supply chain disruption stemming from the pandemic. China was still closed down. This was, of course, amplified by the war in Ukraine in March of last year, February, March. So all this together created this perfect storm for inflation where you had all of this demand running up against very little in the way of supply or goods. And this, of course, created some significant inflationary pressures early on last year and then of course prompted a very aggressive response from central banks. And the end result as we all know was an extremely volatile year and an extremely historic and unprecedented year for both stock and bond markets. Seeing negative double-digit returns for stocks and bonds in the same year, really something we haven't seen in several decades for that matter.
Martin Lefebvre
Yeah, absolutely. I mean, you guys have been positioned underweight, you know, bonds for so many years. It must have been some form of relief to see yields go up that much, although there's always a client at the end that's, you know...
Candice Banks
Yeah, it was long overdue, but at the same time, remember when policymakers adopted this average inflation targeting, they wanted to overshoot inflation for a significant amount of time after undershooting the target for so many years. Well, of course, they got what they wished for and more, and that's created, of course, a lot of worry and volatility in the financial markets.
Martin Lefebvre
They were certainly successful at doing that. How do you feel the investors are reacting and all of that? How have these events shaped the environment for investors, do you think?
Candice Banks
Yeah, so I think first and foremost, what 2022 showed us was that the traditional 60-40 equity bond portfolio is not meeting the objectives and needs of clients. And we've been talking about this for a number of years at Fiera, the need to diversify into private market strategies, strategies that are less correlated to public market asset classes, the need for stability, the need for yield. All of this, you know, really came to light in 2022. And, you know, the extremely volatile market environment for bonds and stocks just underscored the merits of diversifying a portfolio into the private market space in search for those attributes that were needed in a year like 2022, like stability, income, and yield. So I think that was really the key lesson for investors. We've definitely noticed more investors willing to move into those asset classes. Because as you can imagine, in years previous when the MSCI country world is hitting a new record every day and bond markets are generating positive returns, clients are saying, well, I don't need private markets. Why would I move? But it really takes an event like 2022, like I said, unprecedented numbers, to really reinforce the case for the asset class.
Martin Lefebvre
Yeah, but now that yields have moved up, do you feel like the 60-40 is not back in vogue?
Candice Banks
No, I mean, regrettably, our outlook for 2023 isn't that much better than it was for 2022. Like I said, while 2022 was all about inflation and the aggressive response from central banks, we think that 2023 is going to be about the implications of that tightening and the implications for the global economy. And here, you know, there's a couple of things. Obviously, you know, we're approaching, if not already in restrictive territory, this is going to eventually weigh on economic growth and throw the economy into some sort of recession. The magnitude is still unknown. The debate is between shallow, deep recession, but also on the fixed income front, we're not convinced that central bankers are done. You know, there's been a lot of excitement the last few weeks, even in December, about cooling inflation and this allowing central bankers to pivot, pause, maybe even cut rates by the end of this year. We think these expectations are completely misplaced. And if anything, central bankers have to do more. Because if you look at the details in the inflation reports that we've seen, all of the deceleration has been in goods. Well, that's not a big surprise. Commodity prices have come off. Supply chains are now correcting following the pandemic. Used car prices, new car prices, you can see those are coming down. But where we're not seeing any progress is on the services front. And this is what central bankers are really focused on and where they have control.
Martin Lefebvre
Services and stuff like that.
Martin Lefebvre
So I guess the bit of a market reversal that we're seeing right now, you don't think that's sustainable and clearly there's more downside. Last time I checked, I guess your forecast was pretty on the pessimistic side. You still in that camp?
Candice Banks
Yeah, we're of the view that this latest rally in both stock and bond markets is a bit of a head fake. And like I said, it's based on these expectations for central banks to pause early and even start cutting rates by the end of this year. Our sense is that, like I said, central banks need to do more. This is going to have a more profound impact on the economy. They essentially have to inflict more damage on the economy in order to, you know, to cool off the labor market and to remedy those imbalances in the labor market as well that are keeping wages elevated and keeping services inflation elevated. So we think that's going to necessitate some pretty significant economic deterioration in order to bring inflation down to levels that they'd be more comfortable with. So that taken together, long story short, suggests that we still see more negative returns for stocks and bonds heading into this year.
Martin Lefebvre
So how do you think investors should prepare for that?
Candice Banks
Well, as we mentioned earlier, diversification is key. Having a mix of asset classes, having some exposure to private market strategies where appropriate, and then of course, you know, maintaining a longer-term horizon. I think that's another key lesson. Just because you see volatility in the short run, it doesn't mean that your long-term strategic objectives are off the table. So having that long-term view, I think, is really crucial.
Martin Lefebvre
Well, thank you very much, Candice. It's always enlightening to hear your perspective on these markets and our economy.
Candice Banks
Thank you.
Martin Lefebvre
Well, that's it for today. Thanks for tuning in, and we look forward to sharing more insights with you in our next episode.
Martin Lefebvre
