Ongoing economic growth means HSBC Global Asset Management Canada remains overweight on global equities and local-currency emerging market government bonds.
However, in its Investor Monthly report, the bank said it believes US and global high-yield credits have moved to a point of implied credit risk premia and recommended that clients would be better served moving that part of the portfolio into equities.
HSBC retains its underweight stance on developed market government bonds and investment grade corporate bonds.
Derek Massey, Head of Portfolio Management, HSBC Global Asset Management Canada, said all things point to further, albeit slower, rises in interest rates but that the noises from the Bank of Canada suggest it would take its time to make sure economic growth was sustainable before doing so.
He said it was encouraging for advisors that while the central banks are focused on raising interest rates, they will do so cautiously. “They don’t want to kill the goose that’s laying the golden egg,” he said.
However, Massey said that returns on fixed income need to be tempered going forward.
He said: “If you look at what advisors are doing with portfolios, most are managing money for clients’ retirements so it’s a combination of bonds and stocks in the portfolio; bonds certainly being the protector. But to differentiate where you put more of your money with interest rates as low as they are, you have a Canada bond that is yielding under 2% versus a stable financial company that has a yield north of 3%. I think it’s a pretty clear picture where you want your money for an extended period of time.
“That being said, fixed income is a valuable part of a clients’ portfolio. It’s just that the returns that have been derived from fixed income the past five years are on a lower interest rate environment – that return needs to be tempered a little bit.”
Massey says fixed income remains vital because of what he believes will be eventual corrections in the equities market.
He said: “We’ve really extended this bull market without any kind of pull back so fixed income is very important in a clients’ portfolio, even in a raising-interest-rates scenario, because it offers you some protection and because it smooths out any volatility we are bound to experience as we go through this rate-increasing cycle.”
Despite high yield credits having been profitable, Massey believes there are now better alternative options.
“The extra credit risk you take when you buy higher yield doesn’t make any sense so the valuation of the bonds have got to a point where we took some profits from investment platforms on high yield credit and we think there would be a better reward in moving that high yield credit, that portion of that portfolio, into equities at this time.”
"It's a 'Goldilocks' environment for investors"
Why it's time to harvest gains
More market talk: