Is now the time to reposition portfolios?

A chief investment strategist tells WP what factors investors should be examining in the current environment

Is now the time to reposition portfolios?
With the Bank of Canada expected to raise interest rates again in October, many investors are keeping a close eye on the bond-proxy allocations in their portfolios. Interest rate-sensitive assets, like utilities, telecoms and REITs, usually underperform against the market when rates rise, so should investors be concerned about those bond-proxy sectors?

“The relative valuations of bond proxies were much more stretched in the middle of 2016 than they are today,” says Kurt Reiman, BlackRock's Chief Investment Strategist for Canada. “But, I do think that further interest rate increases from here, and rising bond yields, would likely keep some pressure on the more interest rate sensitive areas of the stock market – that’s an important point.”

In the current environment of relatively compressed returns and rising rates, sector positioning becomes increasingly important. In the current landscape, Reiman recommends investors have more exposure to value sectors.

“For Canadian investors, that will mean energy and financials as well as some exposure to secular growth, which will mean looking outside of the country for opportunities in technology and selected opportunities within healthcare,” Reiman says. “Looking outside of Canada will be important for investors.”

Talk around valuations has been relentless this year but in many cases investors are missing the point. That chatter, combined with the new interest rate environment, seems to be spooking some investors. But the data doesn’t back up that view; global equity earnings revisions, for example, are setting a pace that hasn’t been seen for five years.

“That’s an important point especially given the perception these days that stock markets are fully valued, have already done very well and might not have much room left,” Reiman says. “We have to keep in mind that we buy stocks because of the earnings environment and even if interest rates do move higher they still remain low on a historical basis. If rates move higher in a gradual way, that should not threaten the current economic expansion and decent earnings backdrop.”

Current valuations are not nearly as stretched as they were in 2000, or even 2006, and there is a lot more money tied up in ‘safe’ assets relative to riskier assets at the moment.

“Things like government bonds and cash still make up a large portion of investor portfolios and if those assets were unleashed on the stock market, it could turn out to be positive,” Reiman says. “In a way, there is just as much risk in being under-risked, and investors should be thinking about that today given that we think this expansion has years left to run and not quarters.”


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