Stormy market conditions

With interest rates and China’s faltering recovery posing a challenge to markets, investors should adopt a defensive approach for the remainder of the year, says Wincy Wong, executive director of wealth solutions at CIBC Private Wealth.

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“In a word, I would say defensive for the last four months of this year,” she said.

Citing historical trends, Wong noted that September is a traditionally poor-performing month for equity markets, and emphasized the need to address both technical and fundamental concerns in the market.

While China has until recently been a catalyst for global growth, Wong said recent developments raise red flags.

“What we’ve seen recently suggests signs that China is in fact struggling,” Wong said, pointing to indicators of economic distress including property developer defaults, shadow banking struggles, policy rate cuts and weak economic data. And those strains “could have some ripple effects globally.”

That’s why she remains focused on the downside risks. “From a positioning standpoint for portfolios, we are going to be defensive in nature,” she said.

From an allocation perspective, Wong said she has increased holdings in short-term sovereign fixed income assets for better yields while modestly increasing duration in fixed income portfolios.

On the equity side, Wong said sectors sensitive to interest rates, such as communication services, real estate and utilities, have faced weakness over the past year, so she’s reduced holdings.

When looking at downside risks, she outlined specific concerns about wage pressure in North America and its implications for companies’ profitability and margins. “We have been seeing continued pressure on wage growth, which is a pressure that will be sticky,” she said.

However, Wong also suggested this pressure could drive companies to seek productivity growth, potentially benefiting the technology sector. This dynamic, according to Wong, “is a positive catalyst for growth that we’re looking at in the markets today.”

Canadian consumers are more sensitive to interest rates than Americans, she said, largely because of mortgage debt, which is one reason she prefers U.S. markets. With more exposure to commodities, Canada is also more vulnerable to reduced demand from China.

But Wong emphasized the need for a balanced approach and a broadly diversified portfolio. “It’s often easy to see the negative risks in the near term, but upside surprises do occur,” she said.