Heading into the new year we remain bullish overall toward equities, but our investment approach has grown more cautious. Primary concerns include eurozone weakness, uncertainty around bond yields, and heightened anxiety in equity markets. We see opportunities in U.S. equities, Canadian bonds and the global infrastructure sector. These opinions are as of December 22, 2014.
The arrival of the new year means it’s time to introduce or kickstart any number of personal improvement projects. Get fit. Eat better. Work less.
Those with an eye toward their retirement — because let’s face it, retirement just got a little closer for everyone — have their lists too: Open that tax free savings account. Contribute more to that registered retirement savings plan. Spend less. Earn more. Maybe arrange a meeting with a trusted financial advisor?
I respect the motivating power that pushes us all to do better when the clock strikes midnight. For five straight years I’ve resolved to eat healthier. (Maybe six is the charm …)
The truth is, at Sun Life Global Investments we would never make an investment decision on the flip of a calendar. Our long-term strategies remain well-anchored, and our commitment to helping Canadians reach their financial goals is felt every day. We believe fulfilling that commitment requires active oversight and a tactical mindset.
Heading into 2015 it’s fair to say our mindset is more cautious. We remain bullish overall toward equities, but we do see greater risks. It’s not that we don’t see opportunities. It’s just a question of where to look and when to take action.
Tough slog turns tougher for eurozone
As always, the eurozone picture remains mixed. But the incoming data has recently been tilting more toward the negative. Economic “growth” was next to nothing halfway through the year, but improved modestly in the final months.
Monetary policy actions by the European Central Bank haven’t quite been up to the task of setting the ship aright. There remains the possibility of full-blown quantitative easing, but the outcome there is far from predictable given the central bank’s challenges and restrictions trying to bolster 18 different economies.
We feel investment opportunities in the eurozone carry more risk than what we observed heading into 2014, but also the potential for more gains. Bigger and bolder action from the European Central Bank would be a potential catalyst.
Bonds the best buffer
Bond yields have stayed lower for longer than most market participants would ever have anticipated. But it won’t last.
The U.S. Federal Reserve’s asset purchase program, known as quantitative easing (part three), is over. We expect the first increase in the Fed’s benchmark lending rate will happen mid-year at the earliest, finally kicking off the process of “normalizing” interest rates.
Bond portfolios will likely feel some pain. This is the time to remind investors of the primary role bonds play in a balanced portfolio — which is to reduce the investment risk associated with equities. In our view, equity investment risk is rising, and that makes a well-constructed bond portfolio even more important.
We’re seeing greater opportunities in bond markets closer to home than we did last year. At that time, our investment solutions reflected the view that global debt markets provided better return potential than North American ones. Now that global bond yields have come down, we’re finding the risk/reward tradeoff not as compelling.
Equities: higher, but more precarious
We believe most markets, including the U.S., international, and emerging, will continue to trend upwards this year, but likely at a slower pace.
We do however sense greater anxiety in the equity markets. Market jitters translate into volatility, and we saw the effect of that in October. There’s also Russia, where the economy looks headed for deep trouble with the late-year plunge in the ruble. The extent of the potential global impact remains uncertain.
The U.S. is likely to hold the pole position with respect to economic improvement. The unemployment rate is at pre-crisis levels, GDP growth is decent, the housing market appears stable, and consumer sentiment is at multi-year highs. All this may or may not translate to equity market outperformance, but there’s no question it’s a good thing.
The steep plunge in oil prices has given Canada’s equity market a serious shakeup. However, opportunities in energy and the commodity-related sectors are looking attractive long-term and we’re poised to take advantage when the time is right.
The bottom line
While we’re concerned over eurozone weakness, the potential for a major move in bond yields (unlikely), and increasingly skittish investors, we are cautiously constructive toward U.S. equities and Canadian bonds, as well as global infrastructure.
The year may be new, but our investment goals are not. We pursue them each day with the full force of a January resolution — investing for the long term under constant vigilance.
Happy New Year everyone.
Now if you’ll excuse me, I have a salad to eat.
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Sadiq S. Adatia is Chief Investment Officer at Sun Life Global Investments (Canada) Inc.
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This article contains information in summary form. Although information has been obtained from sources believed to be reliable, Sun Life Global Investments (Canada) Inc. cannot guarantee its accuracy or completeness. Information is subject to change. The article should not be construed as providing specific individual financial, investment, tax, or legal advice. Investors should speak with their professional advisors before acting on any information contained in this article. Please note, any future or forward looking statements contained in this article are speculative in nature and cannot be relied upon. There is no guarantee that these events will occur or in the manner speculated.
© Sun Life Global Investments (Canada) Inc., 2015.
Sun Life Global Investments (Canada) Inc. is a member of the Sun Life Financial group of companies.