CONTRIBUTORS
Ahmed Farooq, CIMA, CFP
Head of Retail ETF Distribution,
Franklin Templeton Canada
2023 is coming to an end and I’m sure you’ll agree that it was another unpredictable year for the world of investing.
For me, it felt like a perpetual Groundhog Day scenario. Every morning I was unsure of what direction the markets would move in. So, I became attached to the same routine – looking at the pre-market futures, fresh economic data, and earning results. My findings would dictate whether it was going to be a positive or negative day in the markets. Unfortunately, it would also dictate my mood for the day. And – like my repetitive morning routine – the same headlines kept reappearing in the financial news on a loop.
Inflation, rate cuts, and recession were 3 of the biggest buzz words for the year.
Though inflation remains sticky, it’s come down considerably, and we’re finally getting closer to seeing interest rates start to drop based on dovish narratives from central banks. Food and gas prices have fallen, while consumer spending has slowed, and unemployment is rising. That said, anything can happen, which is why we’ve watched economic pundits mistime rate cut predictions since the start of the hiking cycle. Today, Bloomberg is showing a potential cut in March of 2024 – but a lot can change between now and then.
We also watched pundits repeatedly debate recession throughout the year. When will it happen? Are we already in one? How should we define it? But the recession narrative wasn’t without pushback. From AI taking off earlier this year, to the newly coined magnificent 7 keeping the markets afloat, there was cause for optimism. Now that it’s December, talks have evolved into more of ‘hard landing’ or ‘soft landing’ conversation. So where does that leave us heading into the new year? Well – in one of my branch meetings last week, most advisors projected a harder soft landing. That’s right, a combination of both – showing just how tough it’s been to envision what ‘the most anticipated recession in history’ will actually look like.
ETF flows have been very interesting to watch. Cash continued to be king, with money market/cash/HISA type ETFs leading flows in the fixed income category. Notably, we did see an appetite for duration late in the year, on the assumption that rates would finally come down based on pauses from central banks. On the equity front, money has finally started to flow back into Canada and into the international and emerging markets.
On the Franklin side, we had great success with our ultra short fixed income mandate FHIS. The strategy raised over $100m for the year, helping advisors play the inverse yield curve with YTM higher than the Canadian bond universe with duration of less the 6 months - all for a management fee of 15bps. On the international front, FLUR—our international passive ETF— has been the perfect building block at a management fee of 9bps, making it one the lowest cost offerings in Canada.*
If you’re like me, and you feel like you spent 2023 trapped in the movie Groundhog Day – don’t fret. That time loop feeling of déjà vu is a signal for us to study the moment more deeply and learn from it. And that is an opportunity to grow. While the last three years haven’t been easy, I hope 2024 restores some normalcy to the markets—we all need it.
ENDNOTES
* Source: Morningstar Research Inc., as of November 30, 2023. Morningstar Category: International Equity. Domiciled in Canada.
WHAT ARE THE RISKS?
Ahmed Farooq’s comments, opinions and analyses are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinion, and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.
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