Although the macroeconomic environment continues to be challenging, CIBC Asset Management’s chief investment officer says the outlook for fixed income may finally be improving.
“You can probably expect, from a fixed income perspective, a little bit better expected returns looking forward than what we’ve just witnessed,” CIBC’s Luc de la Durantaye said in an interview on July 14.
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For example, 10-year federal government bond yields in Canada and the U.S. are above 3%, much higher than around 1.5% where they started the year. Investment-grade corporate bonds in Canada, which started the year a little over 4%, are now offering yields closer to 6%, he said.
According to de la Durantaye, if inflation returns to around 3% at the end of 2022, the real yield could be positive. Further, higher yields mean bonds could play the “balancing role that bonds had typically played in prior cycles,” he said.
In addition, central banks are getting increasingly aggressive with their rate hikes to combat inflation.
“The market is growing more reassured that, yes, eventually inflation could be tamed and therefore you can tip-toe into the bond market,” said de la Durantaye.
On the equity side, he said there has been a “meaningful correction” driven by valuation. Price to earnings multiples (PE) have moved from overvalued to more fairly valued.
However, de la Durantaye said the risk of recession remains, leaving investors to worry about how much corporate profits are going to be impacted. “The jury is still somewhat out,” he said.
Earnings expectations from analysts remain elevated, and de la Durantaye said they need to be adjusted downwards. That could result in another difficult period for equities in this quarter, but it will also set the stage for “bottoming,” which could create opportunities for stock pickers, he said.
Holding cash has also helped stabilize portfolios, and over the next six to 12 months there could be opportunities to deploy that cash, he said.
Different regions are now in different cycles, so de la Durantaye recommends global diversification. North America, for example, is continuing to fight inflation and growth is going to be decelerating. China and other parts of Asia, on the other hand, are starting to stimulate their economies. Having Asian exposure could offer diversification in a portfolio, he said.
From that perspective, de la Durantaye recommends staying defensive, but also diversifying geographically.
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