Mike Philbrick, chief executive officer, ReSolve Asset Management

FOCUS: Exchange-traded funds 

MARKET OUTLOOK:

In the ever-evolving financial landscape, investors must be vigilant about economic indicators and technological advancements that shape market trends. One such indicator that has been historically linked to recessions is the yield curve inversion. As we witness a current yield curve inversion amid contrasting macroeconomic circumstances and a burgeoning AI revolution, investors are presented with a unique blend of opportunities and challenges. This outlook explores the lessons from historical yield curve inversions and the potential implications for investors in the present-day market.

A yield curve inversion occurs when short-term interest rates surpass long-term rates, often seen as a recessionary signal. Looking back at past inversions, the 1928 and 2006 instances reveal striking similarities to the present. Both periods experienced stock market rallies and low unemployment rates shortly after the inversion, followed by severe economic downturns. This "best of times, worst of times" scenario underscores the importance of recognizing the unpredictability of recessions despite the perceived favourable initial economic indicators.

The inversions of the 1970s and 1980s, induced by oil shocks, are stark reminders of how external factors can amplify recessionary pressures, highlighting the "worst of times" within the financial realm.

While yield curve inversions and macroeconomic challenges demand caution, the present market also enjoys the benefits of AI productivity booms. The technological advancements in artificial intelligence have opened new avenues for businesses, driving efficiency and innovation. Companies leveraging AI capabilities are likely to gain a competitive edge, positioning investors to benefit from this "best of times" trend in technology.

Embracing innovation also presents opportunities, as companies harnessing AI's potential may yield long-term benefits. Investing in AI-focused sectors can be a prudent strategy, capitalizing on the "best of times" in technology advancements.

In navigating these volatile times, investors should consider a balanced approach to their portfolios. Diversification remains crucial, spreading risk across different asset classes to mitigate potential downturns. Historically, treasury bonds and alternative strategies in the Managed Futures area have proven resilient performers after yield curve inversions, offering an appealing hedge against market uncertainties.

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TOP PICKS

3iQ Bitcoin ETF (BTCQ TSX)

The ETF seeks to provide unitholders with exposure to the digital currency bitcoin and the daily price movements of the U.S. dollar price of bitcoin, and the opportunity for long-term capital appreciation by investing in long-term holdings of bitcoin.

In the early months of 2023, the cryptocurrency market experienced a strong and vigorous start. At present, the market is witnessing a surge in upward momentum, driven by favourable global macroeconomic conditions and a moderation in inflation data. Notably, the global cryptocurrency market capitalization has risen to $1.19 trillion, fueled by significant trading volumes. This positive trend has contributed to the market's overall growth and investor confidence in the crypto space.

The ETF invests in the digital currency bitcoin. Given the speculative nature of bitcoin and the volatility of the bitcoin markets, there is considerable risk that the ETF will not be able to meet its investment objectives. An investment in the ETF is not intended as a complete investment program and is appropriate only for investors who have the capacity to absorb a loss of some or all of their investment. An investment in the ETF is considered high risk.

Global X MSCI Argentina ETF (ARGT NYSEARCA)

It seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the MSCI All Argentina 25/50 Index.

Emerging market equities have stabilized and formed a large bottoming pattern and are in the process of breaking the downtrend off the February 2021 highs due to the stabilization of global macroeconomic conditions – this is a bullish development. When this occurs, momentum investors look for “leading areas” within emerging markets, like Argentina (and much of Latin America) to allocate capital to. Argentina is the best major country performance so far year to date and the G-20 South American powerhouse specializing in agriculture, energy, metals and mining as well as manufacturing. There is also the potential tailwind of re-shoring and near-shoring of supply chains that may benefit Latin-American countries like Mexico and Argentina in the long term.

iShares India Index ETF (XID TSX)

It seeks to provide long-term capital growth by replicating the performance of the CNX Nifty Index, net of expenses. This is exposure to equities of 50 of the largest Indian companies, by market cap, in a single fund.

The surge in Indian equities is a reflection of the strength and potential of the country’s economy. The International Monetary Fund expects India to outperform all major emerging and advanced economies this year, logging 5.9 per cent growth in gross domestic product. India recently overtook China to become the world’s most populous nation, with 1.43 billion people, representing an enormous pool of potential workers and consumers that companies. As low-cost labour alternative to China, companies like Apple are already moving production to India. India is projected to have double the gross domestic product growth of the U.S. over the next two years.

PAST PICKS: January 9, 2023

Purpose High Interest Savings ETF (PSA TSX)

• Then: $50.06
• Now: $50.18
• Return: 0.2%
• Total Return: 3%

Horizons CDN Select Universe Bond ETF (HBB TSX)

• Then: $45.26
• Now: $45.15
• Return: -0.2%
• Total Return: -0.2%

BMO Mid-term U.S. IG Corporate Bond Hedged to CAD ETF (ZMU TSX)

• Then: $12.69
• Now: $12.50
• Return: -1%
• Total Return: 1%

Total Return Average: 1%