How are rising interest rates affecting your strategy?

“We are cautious not to overweight high-yield, leveraged bond or emerging market debt strategies that look attractive but increase return risk.

Bonds serve two purposes by providing non-correlated returns to equities and a steady income stream. There is a large liquidity premium today – investors give up returns for liquidity. Investors can benefit from alternatives like private debt, factoring or development loans, offering higher cash flow and reduced volatility when rates move higher or markets fall. Investors who don’t need access to a percentage of their portfolio can lock money into term GICs, which have the same liquidity risks as alternatives.”

“Rising interest rates might negatively affect mutual funds that hold bonds, as well as broad equity funds in some cases. But some mutual funds may be positioned to benefit from higher interest rates. Floating-rate bonds, financial equities and cyclical equities tend to be strong performers during these periods because they benefit from higher rates.

In short, rising interest rates will likely have a negative impact on the financial markets since the cost of borrowing has increased. Bond funds may have the most to lose from rising rates. The good news is that some sectors may actually benefit from rising interest rates.”

“There has been solid earnings growth in the third quarter, and 2017 may post the best global GDP growth rates since 2011. With this, investors now have to come to terms with higher interest rates, especially in the US.

We are not dramatically concerned with this development. Looking at US corporate revenues, firms with more global exposure experienced 5.8 times the revenue growth of domestic companies. We are overweight in US multinationals, Canada, Europe and Japan in the context of our long-term strategic asset mix. In fixed income, we have short- and mid-duration governments, corporates, and high-yield, with a sprinkling of preferreds.”