It’s a bad time for home bias.
“Canada has a housing problem. The debt-income ratio is high. We’re starting to see softening,” says Sadiq Adatia, chief investment officer of Sun Life Global Investments.
In response, he’s shifting investments south.
Read: Consider U.S. large caps
“Canada is an expensive market. For the same amount of risk, I get more reward in the U.S. than in Canada, because the downside is limited there” and valuations are still relatively good.
He adds the American housing market has strengthened, signaling recovery.
Adatia is so concerned about our economy that he hasn’t ruled out a rate cut.
While he agrees with Scotiabank’s latest forecast, which sees rates at 1% until 2015, “I would not be surprised if the next rate move is down,” he says. “If we see a downturn — if housing falls more than 10% or 15%, employment creeps up, and consumers don’t cut back on debt — what are they going to do to spur the economy? Cut rates.”
Nevertheless, he’s wary of Canadian bonds.
“Yields are going up, and focusing on regular rather than high-yield or emerging-market bonds poses the risk of not having the protection you expected,” he says.
And when it comes to North American equities, “You’re not going to see a strong bull market of four-to-five years anymore. We’re lucky if we see strong returns this year, but it won’t last,” he cautions.
So he recommends looking to dividend stocks for income.
“Because corporations are cash rich and they’ve had good earnings, the best way to play it is get 4%-to-5% from the market, 3%-to-4% from dividend yields, and you’ve got 8%-to-9% total return.”
Beyond the U.S., he sees opportunities in emerging markets, particularly China and Turkey. “[EMs] aren’t caught up in the credit crisis or housing problems because they pay for things through cash,” he adds.