As bonds provide costly havens, equities foreseen to pick up

Steadyhand’s midyear outlook sees a revival in the languishing equities market as the cost of avoiding volatility through bonds has increased

As bonds provide costly havens, equities foreseen to pick up
As the low-yield fixed income environment persists throughout the world, the implicit price of stability has increased significantly, Steadyhand Investment Funds President Tom Bradley observed during the company’s mid-year review.

“If I had to say that there’s one really big feature in the market today that overwhelms Brexit and all these other things, it’s the fact that safety is extremely expensive,” he said. “You go [into a bank] to buy a GIC, and you get a yield on it of 1 something [per cent]… government bond yields [are] almost approaching zero in North America and negative in parts of Europe and in Japan. For those who want to go and hide and get away from the volatility of the stock market and other more risky assets, you’re losing ground to inflation.”

According to Bradley, lower yields on fixed-income assets have brought investors to the point where they have to wonder what to do with their money rather than keep it in the bank. The answer, according to him, is to diversify their portfolio into other asset classes–including stocks.

While he acknowledges that news coverage of stocks have been rather negative of late, with reports indicating a stall in equities over the last year, the firm is optimistic that stocks will bounce back to “somewhere between 5% and 7% per year.” He outlined several points that would be integral to a revival of performance among stocks:
  • Dividend yields for stocks in general on the TSX as of July 14 were at 3%, reaching even higher percentages in overseas markets;
  • Macroeconomic factors, such as decreasing energy prices, low interest rates, and a competitive currency landscape will aid growth in corporate profits;
  • On the microeconomic level, consolidation of companies through low-interest-rate financing is leading to more rational pricing and consistent profitability.
“I think what we have to remember when we’re investing and we’re reading those horrific headlines is that we’re not investing in governments; we’re buying companies that generate profit over a long period of time [and] ultimately pay out dividends, and that’s what our managers are looking for every day is to find those kinds of things,” Bradley suggested.

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