For advisors, inflation and rising interest rates have rattled clients, who have seen their portfolios negatively impacted and their food and gas bills soar. However, Nia remains optimistic that capital markets, over the long term, can continue to provide the return profile investors need to meet their long-term goals. He believes there are always opportunities to make money, in any environment, he added, with real assets joining dividend growers in having the ability to weather inflationary periods.
“It’s about having the ability to find those opportunities and, more importantly, considering investing in them despite what the headlines might say,” Nia said.
Embracing these opportunities and staying the course will be vital over the coming months. While a severe recession is not Manulife Capital Markets Strategy team’s base case given the strong employment figures, the team does not discount the prospect of a mild, or technical, recession, believing that most of the negativity is already priced in. Nia explained how his team splits bear markets into two camps – baby bears, which happen outside a recession, and big bears, which happen in a recession. The current ‘baby bear’ is one of seven out of 15 going back to 1950, with the average drawdown of a ‘baby bear’ 23% and that of a ‘big bear’ 37%.
So, while a recession of the depth of 2008 is not the most likely scenario, inflation in 2023 looks set to be north of 3%, bringing quality dividend payers to the fore. These companies typically remain resilient through different economic cycles, have a high percentage of recurring revenue, the ability to invest in organic growth while expanding margins, and have the chance to grow market share.
Nia said: “So many investors hear the word dividend and think income, and it’s boring. But that’s not necessarily the case. When you look at the total return of the S&P 500 by decades, for longer term investors, about half of that return is due to dividends.2 They shouldn’t be deemed as boring because they’re so important for the total return of market.”
