Introduction The global economic outlook is improving. The headwind to growth posed by central banks is declining, and broad financial conditions seem reasonably balanced. Currently, political risks appear to pose
a more important challenge to markets. Volatility related to political events
has already risen in a number of markets, including in Europe and Latin America. And the most significant political risks may
still lie ahead right here in North America. I’m Michael Sager. Welcome to the 2024 summer edition of Perspectives. Outlook After surprising on the upside earlier this year, global growth
has cooled in recent months. Much of this is centered on the US,
including the labor market, for which supply and demand appear
to be better aligned than in past years. Concurrently, the breadth of the global
growth recovery has actually increased with more countries reporting
improvement in economic activity. Inflation remains above central bank targets in most countries, but is expected to gradually decline. Overall, the global economy is neither
overheating nor particularly weak. Financial conditions are neither too easy
nor unnecessarily restrictive. We remain in a broadly constructive
investment environment. We expect equity markets
to make further progress to the upside, albeit perhaps more limited
than seen in the past year for the US. The more important challenge
to asset markets in the next 12 months could come from political events. Potential risks include November's
presidential election in the US, additional European elections, as well as Chinese relations
with the US and Europe. Although we remain constructive,
we don't expect equity markets
to realize abnormal returns. Furthermore, relative
to fixed income, expected equity outperformance
is likely small over the next 12 months. Although this outlook doesn't offer
a high conviction tactical opportunity it does represent good news
for a balanced portfolio of investors who can expect solid returns on the two
main asset classes in their portfolios. Summary The US dollar continued to defy gravity in the second quarter of 2024 gaining further ground for a cumulative year-to-date appreciation of more than 4% on a trade-weighted basis. The strength of the greenback
was consistent with the US economy's continued cyclical growth leadership
that kept the Fed on the sidelines, As highlighted in the last edition of Perspectives, the greenback's overvaluation
isn't something new. The currency has screened
as expensive for nearly a decade. This certainly hasn't helped the US
economy reap the full competitive benefits of the substantial productivity gains
it has realized over recent years, particularly against the likes of Canada and the Eurozone. As a result, the US trade deficit
with the rest of the world is now much bigger than it was ten years ago. With the US elections looming, US trade balances will likely take center stage again with increased
prospects of another trade war and important implications for market
volatility and currency valuations. The Canadian dollar remains stuck
in the doldrums against the US dollar through the second quarter of 2024, hovering around 73 cents to the US. This is close to the bottom of its trading
range of the last two years, and a long way from our estimate of a fair value of 85 cents to the US. The Canadian dollar has actually screened
as undervalued for nearly a decade, similar to the US dollar. Canada's productivity performance has been
key to the behavior of the loonie. Canada is experiencing a multi-year
negative productivity shock. In addition, we remain downbeat
on the short-term outlook for the price of several of Canada's key commodity
exports, including crude oil. Monetary policy is likely to be broadly neutral. But as noted above, political risk might begin to put downward pressure
on the Canadian dollar if trade war speculation
becomes increasingly prevalent. For the full Summer Perspectives report, visit the CIBC Asset Management insights hub.