Minimizing portfolio risk amid macro uncertainty

Trade tensions and potential interest rate hikes present fixed-income gurus with some dilemmas

Minimizing portfolio risk amid macro uncertainty

Managing risk and seizing opportunity; tenets of investment that ring truer than ever as interest rates creep higher and the world is seemingly on the precipice of a trade war.

For those in the fixed-income game, it’s a time to evaluate strategy to make sure your portfolio is resilient enough to withstand and potentially benefit from future events.

Barring any late changes – or tweets – President Donald Trump will impose tariffs on $34 billion in Chinese imports on Friday, with China primed to strike back with retaliatory levies.

Aubrey Basdeo, head of fixed income at BlackRock Canada, said the heightened macro uncertainty is driving risk assets to cheapen up and that investors should be looking at taking on some of that exposure – if they get cheap enough.

He said: “Unless we are going to full blown trade war, some of this will offer an opportunity down the road. So we would look to emerging markets where there is a significant cheapening up of assets. If a trade war doesn’t manifest itself, these would be a very good exposure to have.”

Meanwhile, the Bank of Canada must decide whether to raise its benchmark rate from 1.25% on July 11. If it does, it will be the second hike this year, with opinion split on whether this will actually materialize.

In order to minimize risk, Basdeo said there are areas investors can look at within their portfolio.

He said: “Look at the duration of your fixed income assets and if you’re anticipating that the bank of Canada still has a lot more to do, think about reducing the interest rate risk of your exposure and shorten up the duration.”

He added that taking on more spread exposure would help mitigate a rise in rates, while the third option would be to look at the world markets.

He said: “Given the divergence in monetary policy in that Canada and the US are hiking, Europe is not and Japan is clearly nowhere close to doing anything, diversifying to global exposure is another way of reducing that risk.”

He added that home bias, while a common theme, is something advisors should still be looking to minimize if the search for yield gets tougher.

He said: “The awareness [is growing] that Canada is only a very small part of global fixed income markets for about 3%. And if you’re looking for higher income - the Canadian 10-year is currently yielding 2.08% - and you’re targeting 3-4% of income return from a portfolio, you are not going to get that by focusing on Canada. So you really need to think about if that is my target, how can I achieve it.”