Stick with bonds for safety

By Vikram Barhat | February 1, 2012 | Last updated on February 1, 2012
2 min read

A constant stream of scary global microeconomic cues has created unprecedented risk aversion among investors who are now playing for capital preservation rather than capital gain.

That approach meets with the approval of Sylvain Ratelle, vice-president and strategist at Laurentian Bank Securities.

Read: Brace for a rough ride in 2012

“Capital preservation and purchasing power are the golden rules within the current context of uncertainty,” said Ratelle. “The return of capital is more important than the return on capital.”

Anaemic global economic growth has exposed major structural weaknesses. Governments and policymakers have demonstrated a critical inability and lack political will to bolster financial markets.

“It is due to these factors, as well as to extreme volatility, that the appetite for risk within the markets has diminished even more than economic performance levels,” said Ratelle. “We will continue to see a high aversion to risk in the first half of 2012, which should then be followed by steadying economic growth.”

Read: Be greedy when others are fearful

The performance of equity markets was generally disappointing in 2011, particularly during the second half of the year. The principal global stock market benchmark—the MSCI All Country World Index—reported a return of -7.1%.

The bond market fared considerably better, with a return of 9.6%. Thus, a portfolio made up equally of these two categories of assets would have generated a total return of 1.2%.

“Because global economic growth will be more modest in 2012 than 2011, and since there remains a preponderant risk of decline, it would be preferable to adopt a conservative investment strategy,” said Ratelle.

Ratelle said a prudent investment approach in 2012 would be to favour government bonds over stock, preferably medium-term provincials, which offer a superior return, he added.

The Canadian market, while relatively secure within a transforming world, is not sheltered from international developments as “the nation’s economy remains largely reliant on global growth, particularly in the natural resource-based sectors.”

Within the stock market, small cap companies remain the most attractive because their profits should rise more rapidly, thereby offering greater value, he added.

The loonie will eventually find its way to parity with the greenback due to more solid fundamental budgetary and financial factors, while the safe investment nature of bonds.

Vikram Barhat