Despite calls for cooler temperatures and perhaps some more snow and freezing rain in the forecast, our patience and longing for the arrival of Spring is once again being tested. We are becoming desperate for results.
In many ways, our attitudes of late mirror our feelings toward the general malaise of the stock markets and in particular our own Canadian one. No doubt our own market has been and remains somewhat of a laggard, performance wise, when compared to key benchmarks around the globe. However, despite a seemingly growing list of new challenges ahead, does that mean one cannot expect to see a well-constructed portfolio flourish? Hardly.
Like planting crops in the spring and paying attention to longer range forecasts, any well-seasoned farmer/portfolio team should be capable of reading the weather and engineering a field of selections that will yield a decent harvest relative to whatever circumstances lie ahead.
What do we see on the horizon? So far, we’ve witnessed upticks in inflation in some key markets that have been met with central banks entering a tightening mode and increasing interest rates. As rates slowly increase and we experience tighter liquidity constraints, we will witness an increased correlation in stock and bond markets. When this occurs, we can certainly expect some correlation disruptions that we haven’t experienced in previous years. This makes sense as equities lose that competitive edge they have enjoyed on a yield basis as bonds inch upwards.
Globally, there remains signs of coordinated growth suggesting a need to continue to tilt portfolios toward this bias albeit with a close eye on inflation pressures and risk. We also remain in a market where equity valuations remain somewhat stretched. It will be imperative to monitor events and ensure that an investor’s portfolio(s) incorporate equites when Central Banks raise rates to reflect better times while keeping the “beta” or risk under control.
Looking outwards, our fields will be adjusted for that continued macroeconomic growth, continued upward pressure on inflation in key markets like the U.S, monitoring the Federal Reserve’s work on normalizing monetary policy and reversing QE and remaining wary of valuations of the assets we intend on adding into portfolios that will produce the yields we feel 2018 can provide.
Risk is far more than just owing a portfolio that has “X%” in equity. The composition of what makes up that “X” has taken on a whole new meaning in today’s world. This definition even applies to one’s exposure to bonds. If you’re uncertain about how to get your crops in this spring, please give us a call. The time to start planting is just around the corner.
