The biggest risk investors should guard against

Leading investment strategist provides tips on how to restructure portfolio in current market conditions

The biggest risk investors should guard against

Investors have been told to overweight stocks and scale back on interest-rate sensitive sectors by an industry expert.

Kurt Reiman, managing director and chief investment strategist at BlackRock, said that equity markets have on the whole been resilient in the face of rate increases. However, he warned that if investors look “under the hood”, some sectors have not proved as durable – and it’s the ones who are affected the most by rates.

In terms of tilting portfolios to suit current market conditions, Reiman said it’s time to be more invested in stocks and, in particular, companies that are open to growth potential.

He said: “What we’re advising now, in a big sense, is to be overweight stocks at the expense of nominal government bonds or fixed income.

“Within stocks, what we like to do is take exposure to industries that have more sensitivity to growth like, for example, technology and financials because we think the growth outlook is decent.”

He added that BlackRock is shying away from sectors that may pay a high yield but tend to be super sensitive to rising interest rates, which continues to be a talking point after the US 10-year treasury yield moved above 3%, while Canada’s equivalent crept above 2.45%.

Reiman said: “That’s put some pressure on parts of the stock market to compete with bonds for attention for interest, no pun intended!

“But within the bond market I think people don’t need to run to the exits just because interest rates are rising. There are ways to protect a portfolio against rising interest rates and still have exposure to the bond market. One strategy is to not have too much of the portfolio in longer duration, longer maturity bonds. That’s the first thing.”

After underweighting and then reducing exposure to rate sensitive maturities, he said it’s a case of shifting more of your portfolio to bond types that are more affected by the economy, like corporate bonds, high yield bonds or even emerging market debt depending on the individual client’s risk tolerance.

And rather than a recession or geopolitical risk, Reiman believes worried clients – who he says typically have too much cash on the sidelines - should be guarding against the impact of rate hikes above all else. However, he said the landscape has been complicated by a general desperation for yield.

He said: “This has caused investors to do something very strange but not unreasonable, which is to buy bonds like stocks, and more stock like bonds. You find investors have to go for more credit sensitive fixed income, which tends to be more sensitive to changes in the economy and exhibit more stock-like characteristics.

“You’ve seen investors buy high dividend-yielding sectors like real estate, consumer staples, telecoms and utilities in order to get the higher yield in the stock market and unfortunately it’s those bond surrogates in the stock market that are most susceptible to interest rates.”