Central banks have made rates so low that rate-sensitive sectors are at risk, says Luc de la Durantaye, first vice-president of Global Asset Allocation and Currency Management at CIBC Asset Management, and manager of the Renaissance Optimal Inflation Opportunities Portfolio.
“The rate-sensitive sectors have underperformed because central banks have come to a crossroad, particularly the Bank of Japan and the European Central Bank, where they can’t push interest rates much lower.” He explains that banks may “have to reverse course to a certain degree.”
Since that’s bad news for defensive and rate-sensitive sectors, he recommends rebalancing away from those categories. If you’re currently overweight, de la Durantaye says, “Move closer to a market-neutral sector allocation […] and therefore reduce the underweight that you have in the other sectors—because there’s too much uncertainty as to the […] next phase in monetary policy.”
That next phase may start as soon as December, when both the ECB and the Federal Reserve are holding meetings. Says de la Durantaye, “Depending on the decision[s] they make, potentially moving to an underweight would be required.”
And, if you’re fully exposed to rate-sensitive and defensive assets, “I would start to rebalance early on and at least take a quarter to a third of your portfolio and switch it to less-rate-sensitive sectors.”
He recommends moving to more value-based sectors – technology, industrials and financials – “instead of the pure rate-sensitive sectors.”
Timing a portfolio transition away from defensive stocks is challenging, he concedes, because “we don’t exactly know the pace at which central banks will change course.” But, “one thing we do know is they have reached a limit and some transition is going to occur. Doing some transition of your portfolio now would be a good recommendation.”