BlackRock: How to invest the rest of this year
BlackRock’s chief Canadian strategist on how to invest the rest of this year
Should investors be taking profits ahead of second-quarter earnings announcements as management outlooks may be cautious?
No, I don’t think I would be necessarily taking profits here. I would still be looking to investing with an eye towards the next six to 12 months.
Our message is that protectionism and geopolitics are going to drive macro outcomes and that’s going to potentially drive some volatility in markets but because we have central bank monetary policy support, this is likely extending the economic cycle relative to what it might otherwise be. Financial conditions are easier as a result. Earnings growth is holding up and the markets are not particularly expensive here. I would be favouring holding an overweight to equities.
One idea – it’s been a great year for bond investors, 6 per cent or so returns in government bonds and maybe 8-per-cent returns if you went into investment-grade or high-yield bonds. Those are great numbers for a bond investor. Where I may be thinking about taking a little bit of risk out of the portfolio is more on the long end of the government bond market where yields are quite low. For investors who may be making more changes to their portfolios than others, something to think about is shortening the maturity profile of their government bond holdings and considering if they want to take the proceeds and raise cash or if they need income, investing in investment-grade bonds. If they are willing to take risk, perhaps even looking into emerging market debt.
When your 10-year Canadian government bond is only three basis points higher than the two-year and it’s only giving you a yield of 1.6 per cent today, it may make sense to think about what risk that poses for the portfolio if in fact instead of interest rates continuing to fall, rather they move a bit higher.
From a valuation perspective, how much potential upside do North American stock markets have?
When I have said the equity market looks fair, I have been speaking about the U.S., which is effectively in line with its five-year average [on a price-to-12-month forward earnings basis]. Canada, on the other hand, is almost 10 per cent below its five-year average. The energy [sector] is 50 per cent below its five-year average.
Returns over the next year or so are not necessarily going to come from multiple expansion but rather from earnings and dividend growth. Looking out over the next year, earnings growth is [forecast to be] in the mid- to- high single digits for both the U.S. and Canada.
Are the sector laggards, such as energy that has lagged the performance of the S&P/TSX composite index year-to-date, value traps?
Broadly speaking, value managers have just been through an extended period of underperformance.
I think it’s probably safe to say that, with oil prices at the higher end of their recent range but probably range bound, energy represents something of an opportunity – but I would probably be selective here. I would be careful with some of the companies that are just in the business of production and maybe think more about the companies that are involved in the pipeline or mid-stream energy companies or companies that are integrated and have broader operations. I think there are opportunities within energy. There are always opportunities within the value space.
In June, gold rallied to a six-year high. What is your outlook for this subsector?
I think there are pluses and minuses around gold. For sure, the geopolitical risk equation is driving gold prices higher. There has been a revision of economic forecasts and central banks have stepped in and said if they need to they are going to respond and that’s pushing down interest rates at a time when inflation expectations are moving lower. That means that real yields are falling and whenever real yields fall, gold prices tend to rise. Gold doesn’t provide any income. It is your store of value or safe-haven asset, so when your income-producing vehicles like government bonds start yielding less in inflation-adjusted terms, gold starts to do better as an asset.
Do we think that interest rates are going to continue to move down? I think in some geographies – maybe in Europe where they have committed to an aggressive easing campaign and they are likely to deliver – you could see further downward movement in real yields, I think that is reasonable, but we are probably pretty near the cycle lows. Gold does have that optionality on it if geopolitical tensions more broadly or U.S.-China tensions should get worse.
You believe the Bank of Canada will keep rates on hold for the balance of this year, is that correct? Also, when there is a rate change announced, what direction will it be – up or down?
Yes, it is. I think that the path of least resistance is probably another rate cut over the next year. If inflation is a little bit above their target and growth is good are they going to rush to raise rates? Probably not. On the other hand, if business investment or sentiment around capital spending plans should turn down and it happens amidst a decline in commodity prices, I think that would probably be enough to get the Bank to cut rates, but I don’t see that right now.
Right now, our forward-leading indicator for Canadian [economic] growth seems pretty solid at around 1.75 per cent over the next 12 months, and that’s been moving higher since the beginning of the year. Canadian [economic] data has been sequentially surprising to the upside. Cheap currency, fading effects of NAFTA uncertainty, stable commodity prices, quite possibly also the growing appeal of technology within Canada, I think that will be an increasingly relevant topic to think about. I don’t mean semiconductors, servers and cloud, but I mean green tech, clean tech, resources tech, AI [artificial intelligence] and machine learning, robotics and e-commerce. There is a lot there that we can look to as future support to growth.