Canadian Dollars close up for background
Mutual fund investors can expect a lot of movement in their portfolios in 2012, just not all in the desired direction. In speaking with experts at four Canadian banks, two words came up again and again: volatility and dividends. While all four were fairly cautious about the investing environment for the next year, there are definitely opportunities to be had. Here are their viewpoints:
Eric Lascelles, chief economist, RBC Global Asset Management
The coming years are likely to be defined by elevated uncertainty, high volatility and slow economic growth. Slow growth means that interest rates stay fairly low, so you can't get rich in the bond market. Slow growth usually means that corporate earnings will also progress fairly sluggishly, so the stock market doesn't tend to perform wonderfully well.
So you start to look at other asset classes as being relatively interesting if not outright promising.
One of them is dividend-offering portfolios: Companies with particularly high dividends are attractive when interest rates are so low, when the prospect of earnings growth is uncertain.
The same sort of comment applies to credit, which is to say, corporate bonds, often times offering that reasonably attractive yield given the diminished expectations elsewhere.
And you can make the same sort of comment about high-yield bonds. That's a category that perhaps hasn't been on the radar screen of investors in Canada for all that long but offers quite alluring returns.
Vincent Delisle, CFA, director, investment strategist, Portfolio Strategy Group, Bank of Nova Scotia
The environment for 2012 is likely to remain highly volatile and with interest rates staying quite low. In that environment, the core areas of a portfolio should still be exposed to dividend-paying sectors. And in a period of low interest rates, cyclical areas are more sensitive to economic growth. We're still seeing some pretty good numbers and outlooks from the tech sector, industrials and transport, especially in the United States.
Areas we would be most comfortable with in 2012 would be banks and the telecom sectors. These two areas provide lower volatility and higher dividends. Two other areas would be technology and industrials.
For the resource sector, which is 50 per cent or more of the Canadian market, there may be a better opportunity to overweight this group once the extent of China's slowdown is more visible. It's more of a cue to second-quarter timing.
Marco Lettieri, economist, National Bank Financial
We expect a lot of volatility this year. As a result, for people who are trying to invest in mutual funds, we suggest that individuals have portfolios that are geared toward more defensive sectors – telecommunications, utilities and consumer staples.
To reduce the volatility for individual investors, we would suggest they try to invest in high-dividend-paying stocks or mutual funds and in sectors that are less influenced by international activity, like telecommunications, which have most of their revenues generated within North America.
You can also include integrated energy – refineries – because their business is generally pretty stable. However, they will be a bit more volatile in price.
Colum McKinley, CFA and vice-president of Canadian equities at CIBC Global Asset Management
We think the banks are likely to continue to deliver high single-digit earnings growth. So, even in an environment where we have a sluggish economic recovery, banks can deliver. They offer very, very attractive dividend yields, and history has shown that investors do quite well in the overall market, but also in individual sectors, buying the highest dividend stories and the highest dividend growth stories.
We're also overweighted in the lifecos [life insurance companies] We think the market is ignoring some of the positives that are taking place at the lifecos. And, again, you're also getting very, very attractive dividend yields here today.
The other area where I am overweight is in energy stocks in Canada. I prefer the integrateds over some of the higher-yielding energy names.
These interviews have been edited and condensed