What if There’s a Recession (And Central Banks Start Cutting Rates)?

December 5, 2023 | By: Ling Han, Wai Tong, Grace Huang, Georgina Goldring, John Kratochwil and Abhishek Ashok

What if There’s a Recession (And Central Banks Start Cutting Rates)?

AGF Investments’ analysts explain how an economic downturn and/or looser monetary policy in the United States and other parts of world could impact the equity sectors they know best in 2024.




Bittersweet Remedy

Ling Han

Healthcare stocks have a reputation for being inherently resilient in the face of a recession, largely because demand for the sector’s services and products tends to remain stable even during bitter periods of negative economic growth. But not all Healthcare stocks are created equally and the potential protection they offer may vary across subsectors in 2024.  

Pharmaceutical companies with large market capitalizations, for instance, may be the most defensive, thanks to attractive valuations and a demand for medical innovation that is less sensitive to economic cycles.

The medical equipment and device subsectors may also exhibit a high degree of resilience should a recession arise next year, but outcomes could be more mixed. Indeed, while some consumable devices are likely to benefit from an expected increase in procedure volumes next year, more expensive medical equipment is susceptible to potential purchase delays if health providers reduce capital expenditures. 

Beyond these subsectors, managed care stocks boast relatively stable demand dynamics as well, and could offer investors their own level of defense despite the possibility of an economic downturn that might adversely affect employer-sponsored plans due to increased unemployment.

Meanwhile, the life science tools subsector could help further buffer the impact of a recession, but only if it can rebound from a particularly difficult year in 2023. Additionally returns of these stocks may be dependent on bio-pharmaceutical firms and putting an end to their inventory de-stocking cycle.     

Short of that, the Healthcare sector’s overall performance is likely to be influenced by many other factors, including the upcoming U.S. election, which could be a headline risk in the lead up to the vote next November, but more of a positive catalyst in the year following the election if history is a guide.

And if central banks do end up cutting rates in 2024, investors may see a big relief in bio-technology funding that could boost the Healthcare’s sector overall ecosystem and fortify its reputation as one of the equity market’s better defensive plays in the process.




Turning Point to Build On

Wai Tong

It should come as no surprise that the fastest interest rate hiking cycle in U.S. history has led to a huge decline in new construction activity (see chart) and the postponement or re-evaluation of many large engineering developments.

After all, there are few sectors more impacted by higher interest rates than Infrastructure, which is associated with projects that are long in duration, require significant financing and have long gestation periods to unlock returns on investment.


National Architecture Billings Index

Source: American Institute of Architects as of November 2023. The ABI indicates the spending and demand for non-residential construction activity.

But 2024 may end up being a turning point for the sector. In fact, with inflation moderating in recent months to just over 3% in the United States, it may be the case that the U.S. Federal Reserve (Fed) is finally done hiking this rate cycle and, based on current market expectations, could end up cutting rates as many as four times over the next 12 months.

Of course, should this happen, it may be a significant tailwind for Infrastructure companies and the sub-sectors that rely on construction activity for business, including industrial distributors, engineering and construction (E&C) firms, construction machinery OEMs and building materials suppliers. 

While lower rates will lead to lower financing costs, higher financing availability, better return on investment, for these types of cyclical stocks, we are particularly bullish on E&C companies with exposure to U.S. infrastructure construction projects that should be supported for years to come by trillions of dollars in government programs like the Infrastructure Investment and Jobs Act (IIJA) and the Inflation Reduction Act (IRA), as well as ongoing reshoring and energy transition initiatives.



Real Estate

Realistic Expectations

John Kratochwil

As capital-intensive businesses that rely on borrowing money to fund growth, real estate investment trusts (REITs) flourished on the back of rock-bottom interest rates that defined markets for most of the years since the Global Financial Crisis in 2008. But that all changed starting in March of 2022, when the Fed kicked off its current rate-hiking cycle and dramatically increased its target rate from near-zero levels to a current peak of 5.5%. In fact, from the time that the U.S. central bank began to increase interest rates, the S&P United States REIT index has underperformed the S&P500 by around 25%, the weakest performing sector over that period.

Now though, all indications are starting to point in the other direction, namely because of falling inflation rates, which the market is taking as a sign that the Fed will begin lowering rates sometime in 2024.

While declining interest rates would take time to be reflected in REIT earnings, history suggests that sentiment on the sector begins to turn positive ahead of time, with real estate stocks beginning to bottom approximately 18 to 24 weeks ahead of a rate cut announcement, according to research from UBS.

In our opinion, even moderate interest rate declines would be quite positive for the sector, and 2024 could start a run of outperformance for REITs that has been a long time coming. In particular, we believe Healthcare REITs are set up for a better year of performance, based on improving occupancy levels driving stronger margins.




Spending and Trending

Grace Huang

An economic downturn may not be the best of outcomes for a sector that has seen its fair share of struggles in the past few years, but there are several reasons why we remain cautiously optimistic about tech stocks moving forward despite the potential risk of a recession in 2024.

First, while the pace of Information Technology spending is expected to remain below long-term averages next year, it is still set to accelerate from the pace of the past two years and hit 8% year-over-year, according to Gartner, a technology research firm, as businesses continue to make technology a strategic priority to enhance competitive positioning and drive business growth.

Technology stocks are also in a relatively good place heading into the new year from a fundamentals standpoint. Largely, that’s because many of the end markets associated with the sector have already been through a downcycle over the past two years, including the markets for personal computers and smartphones, which may now have bottomed and look poised for recovery.

Of course, the biggest catalyst of all may be artificial intelligence (AI), which continues to drive growth and create interesting investment opportunities across the sector. In fact, a recent CIO survey by Morgan Stanley notes that 66% of respondents say generative AI (and large language models) are directly impacting their IT investment priorities, while PwC predicts the total AI market to reach US$15.7 trillion in size by 2030.

Ultimately, growing interest in the mega trend of artificial intelligence could bring huge revenue and efficiency opportunities to the Technology sector, and we remain generally bullish on companies that have a legitimate stake in it going forward.




Power Play

Georgina Goldring

The S&P 500 Utilities Index is presently trailing the S&P 500 Index by close to 30% this year and is on track for its second-worst year in the past four decades. The underperformance can be attributed to investor preferences for higher-growth, less interest rate-sensitive sectors, yet higher interest rates have also made utility companies’ yields look less attractive relative to bonds and have put pressure on utilities’ profitability. This is particularly true for renewable power generators, whose capital-intensive projects have been impacted by increased borrowing costs.

But as market perceptions shift toward the idea of interest rates peaking and eventually being cut, utility stocks could soon return to favour with investors. In fact, as rates decline, historically the sector has provided increasingly attractive yields, making it an appealing option for those seeking what has historically been a predictable return stream.

Moreover, Utilities could be one of a few sectors that help shelter investors from the potential fallout of a recession, much like they have in the past (see chart). In particular, traditional utilities offering essential services like electricity, water and gas are generally viewed as defensive investments because they usually generate a set rate of return and provide relatively stable earnings and dividends regardless of economic conditions.

That said, not all utility stocks are impervious to recessionary effects, and we believe investors pursuing a more defensive position may need to be selective, starting with a focus on liquid stocks of companies with strong balance sheets operating in constructive regulatory jurisdictions.

Relative Performance of the Utilities Sector Prior to Recessions

A bar graph showing relative perform between the Dow Jones and S&P 500 Indexesance of utilities

Source: UBS, US Utilities: Halftime 2023, June 6, 2023. Time frame for returns is one quarter before past U.S. recessions noted in the chart were officially declared by the National Bureau of Economic Research. Past performance is not indicative of future results. One cannot invest in an index.

What About Factors?

Abhishek Ashok

As much as a rate cut will impact equity sectors to varying degrees, it could also have a differentiated effect on stocks that are characterized by certain attributes (aka factors).

In fact, based on our analysis of the past three rate-cutting cycles, defense has been a driving force of factor returns. Large cap stocks uniformly outperformed smaller ones following the U.S. Federal Reserve’s (Fed) first move, as did high-quality stocks (over low-quality),  and low-beta names (over high-beta).

But as the following chart also shows, outperformance (or underperformance) among and across factors ranged widely from cycle-to-cycle and may do so again this time around.  

Relative Factor Returns Six Months After the Fed’s First Rate Cut



Source: AGF Investments using data from Factset. Factor returns based on historical S&P 500 Index constituent returns, and categorized by the AGF Quantitative team. Past performance is not indicative of future results. One cannot invest in an index.

For the purposes of this analysis:
Size refers to the market capitalization of each stock in the index.
Growth refers to the trailing sales, operating income, and margin growth profile of each stock in the index.
Value refers to the trailing and forward price to earnings profile of each stock in the index.
Quality refers to the return on equity and return on invested capital profile of each stock in the index.
Momentum refers to each stock’s 12-month price momentum.
Beta refers to each stock’s price variability in relation to the overall market.

Relative performance spreads are calculated by ordering S&P 500 constituents based on their factor profile within each sector and subtracting the average return of the bottom quintile of ranked names (i.e., the smallest, lowest, most expensive…) from the average returns of the top quintile of ranked names (i.e., the largest, highest and cheapest…).

A recession and a rate cutting environment could have negative impacts on the overall equity and or bond market. There is no guarantee that the sectors detailed above will be profitable or respond in the way the analysts have described. The comments made above are based on the individual analysts' research and do not necessarily reflect how AGF Investments is invested now or will be in the future.
Ling Han
Ling Han, M.Sc., MBA, CFA®
AGF Investments Inc.
Wai Tong
Wai Tong, MBA, P.Eng., CFA®
Senior Analyst
AGF Investments Inc.
Grace Huang
Grace Huang, MBA, CFA®
Senior Analyst
AGF Investments Inc.
Georgina Goldring
Georgina Goldring, CFA®
AGF Investments Inc.
John Kratochwil
John Kratochwil, MBA, P.Eng.
Senior Analyst
AGF Investments Inc.
Abhishek Ashok
Abhishek Ashok, M.A., MFE, CFA®
AGF Investments Inc.

Ling Han is an Analyst focused on the Chemicals and Healthcare sectors.

Ling brings more than a decade of investment experience to this role. Prior to joining AGF Investments, she worked as a consultant and as a sell-side equity research associate covering the North American Healthcare sector. Ling has also held a variety of roles at large financial institutions, banks and Canadian start-ups, gaining experience in risk and performance attribution analysis and corporate social responsibility/sustainability consulting.

Ling holds a B.Sc. degree in Electronic Engineering from Peking University in Beijing. She also earned a Master’s degree in Engineering Physics from McMaster University and an MBA from Boston University.

CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.
Senior Analyst

Wai Tong is a Senior Analyst focused on the Industrials sector. Since joining AGF Investments in 2006, Wai has been working closely with the equity portfolio management team, contributing both top-down and bottom-up equity analysis. His contribution to the generation of ideas for the portfolios includes financial modeling and meetings with the management of companies considered for the portfolios.

Wai's career in global capital markets includes three years in equity research with BMO Nesbitt Burns, where he focused on telecom equipment and industrial equipment market segments. Prior to that, Wai spent two years in investment banking with the media and telecom group of Bank of America Securities. Prior to joining the investment industry, Wai worked as an engineer for IBM Corp. and Nortel Networks.

Wai earned a B.Sc. in Electrical Engineering from Queen's University and an MBA from the Richard Ivey School of Business, University of Western Ontario. He is a CFA® charterholder and a licensed professional engineer.

CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.
Senior Analyst

Grace Huang is a Senior Analyst focusing on the Information Technology and Communication Services sectors.

Prior to joining AGF Investments, Grace was a principal at Altima Advisors Americas LP in New York, where she was responsible for Asia ex-Japan equities, and at American Century Investments, where she specialized in Emerging Market (EM) and international equities. Prior to that, she was with the Caisse de dépôt et placement du Québec analyzing EM and international equities. In China, Grace was an assistant credit manager with Crédit Agricole Indosuez and, prior to that, a senior investment analyst the Bank of China.

Grace earned an MBA from the Richard Ivey School at the University of Western Ontario and a B.Econ. in International Finance (Dean's List) from Fudan University, a leading university in China based in Shanghai. She is a CFA® charterholder and is fluent in English, Mandarin and Cantonese.

CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.

Georgina Goldring is an Analyst focused on the Communication Services and Utilities sectors.

Prior to joining AGF Investments, Georgina served as a senior treasury analyst at a leading enterprise information management software company.

She earned an Honours Bachelor of Arts in Economics from Queen’s University and is a CFA® charterholder.

CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.
Senior Analyst

John Kratochwil is a Senior Analyst, specializing in the Materials (ex-Chemicals) and Real Estate sectors.

John came to AGF Investments from Canaccord Genuity where he spent more than seven years in equity research covering the mining sector. The scope of his previous role included providing insight to international institutional clients and managing various operational/financial models. Prior to joining the investment industry, John worked in various roles at senior mining companies focused on precious and base metals.

John has an in-depth technical background, completing a Bachelor of Applied Science in Metallurgy and Materials Engineering from the University of Toronto and is a licensed professional engineer. He also holds an MBA from the Rotman School of Management, University of Toronto, specializing in finance and corporate strategy.


As an Analyst, Abhishek Ashok is involved in developing and interpreting a broad suite of quantitative tools distilling company fundamentals, factors and the macroeconomic environment into investable outcomes. He also provides data management and process support for AGF Investments’ Quantitative Investment team.

Abhishek began his career with AGF Investments as part of the Highstreet* Investment Management team and has progressively taken on more responsibility to expand his role.

Abhishek earned a Master of Financial Economics from Western University, an MA in Economics from York University, and a B.Sc in Economics and Management from Purdue University. He is also a CFA® Charterholder.

*Highstreet Asset Management Inc. is a wholly-owned subsidiary of AGF Investments Inc.

The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF Investments.

Commentary and data sourced from Bloomberg, Reuters and other news sources unless otherwise noted. The commentaries contained herein are provided as a general source of information based on information available as of December 5, 2023 and are not intended to be comprehensive investment advice applicable to the circumstances of the individual. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however, accuracy cannot be guaranteed. Market conditions may change and AGF Investments accepts no responsibility for individual investment decisions arising from the use or reliance on the information contained here.

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