With equity valuations high, fixed income rates at historical lows and credit spreads tightening, obvious opportunities are extremely limited in markets at the moment. The markets look expensive and there continues to be plenty of broad headline risk on a daily basis. It’s not an easy environment for investors, but is it all doom and gloom?
“On the positive side, overall, there is a lot of value in diversification, and that’s the overriding principle for everything,” says Kathrin Forrest, Portfolio Manager at Sun Life Global Investments
. “We have seen reasonably strong economic fundamentals in the U.S. for some time, but we’ve also seen that improve overseas – that’s probably the biggest story over the past few months. Although there has been mixed news here in Canada over the past week, which has put some pressure on the domestic market.”
Emerging markets have been performing well this year and there is also positive news coming out of Europe as fundamentals continue to improve and the political uncertainty shifts back to North America “We do see good potential in the U.S., in terms of tax cuts and infrastructure spending and that’s something for markets to get excited about, but there is risk around the execution of those policies and that’s something to be very mindful of,” Forrest says. “Although some of the more positive developments of overseas stocks have been reflected in their prices, we find them to be less expensive and maintain an overweight position in overseas stocks.”
Forrest sees ample opportunity in some emerging markets, but does urge investors to exercise caution in areas that have struggled and continue to face headwinds. “China is one of those that has struggled, and it’s one of the markets that dominates the broad emerging market index,” Forrest says. “Be careful with how you access those markets and make sure you don’t expose yourself to broad market risk; have a more differentiated approach.”
With returns in many developed markets expected to be limited for a sustained period, taking on more risk in the search for returns becomes tempting for some investors. However, it’s not a strategy that Forrest recommends, especially in an environment where valuations are stretched. “In a market where credit spreads are very tight, do you really want to take money out of your safer government bonds and deploy that indiscriminately into higher yielding credit without knowing what you’re getting yourself into,” she says. “Make sure you are very clear about your objectives and constraints and stay within that – don’t reach for investments that are inconsistent with your risk profile.”
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