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Roger Aliaga-Diaz, regional chief economist, Americas, and head of portfolio construction at The Vanguard Group Inc., sees investors moving to higher-yield cash accounts as a global trend, but says that might not be the best option.

He recently spoke with Globe Advisor about his market outlook for this year.

What’s the lure of high-yield, cash accounts?

With this level of interest rates, people are questioning whether they need to take as much risk and go into equities.

So, we have seen portfolios tilting more toward fixed income and cash because they can get that yield. Before, some people may have gone out of their risk curve to get the yield. So, maybe what we’re seeing is people dialling back to their true risk profile.

The problem with cash is even at these yields, it may not be able to keep up with inflation. The inflation numbers we’re seeing now, hopefully, they’re going to start coming down. We may start seeing the interest rates become positive in real terms. But for the time being, even those yields are not keeping up with inflation.

What if rising interest rates and inflation continues longer than expected?

That’s definitely a risk. Unfortunately, the science of portfolio construction is uncertain, so you have to account for all the possible scenarios. What I wouldn’t recommend is designing a portfolio for one particular scenario.

You have to invest for the middle path, which is why diversification is so important. So, don’t be concentrated in cash. Don’t be concentrated in long-term bonds, either. That’s why I encourage this broad diversification across the entire given curve.

If we see another breakout of inflation – not very likely, but it could happen due to political events or energy shocks – then at least there is some cushion with broad diversification. But central banks have been so aggressive with tightening that it looks like inflation slowly and gradually will continue to march down. So, sitting in cash may not be the best option.

What is your outlook for this year?

Inflation will come down, but it will come at a cost with a global recession.

It will be a monetary-induced recession but we haven’t seen the full impact of it yet on the economy. We’ve seen it in housing and, in some sense, with manufacturing, but there is a little more to come. We’ll see a recession toward the second half of the year.

Furthermore, we think we’re entering a period of positive real interest rates, which has not been the case for 10 years.

And that means thinking when central banks get over the tightening cycle, how much will they have to start cutting down, and how far are they going to get. Maybe they don’t need to get back to 2.5 per cent. Perhaps it’s a higher interest rate, which is good news for investors in money markets, cash and bonds.

This interview has been edited and condensed.

- Deanne Gage, Globe Advisor Reporter

Must-reads from Globe Advisor this week

What to do about housing affordability amid high interest rates

The sharp increase in mortgage interest rates layered on top of still-high housing prices has reduced affordability for prospective buyers and led many homeowners to experience economic hardship. Now, homebuyers and homeowners are keen to know what options are open to them. Homebuyers, specifically, are wondering whether they should remain out of the market for the foreseeable future. The unknown question is – when will the Bank of Canada change direction? Inflation might ease in the coming months, but it might not. Travis Forman of Harbourfront Wealth Management looks at strategies that make the most sense for clients.

Pent-up travel demand to offset headwinds for airlines as stocks take off

Airlines stocks have been battered by the COVID-19 pandemic and other turbulence, but are starting to take off again. Pent-up demand is driving the leisure market, while business travel is recovering. And that has given a lift to U.S. Global Jets ETF JETS-A, the only exchange-traded fund focused on the airline industry. This quasi-active fund, which owns airlines, airports, aircraft manufacturers and related services, has gained 21 per cent so far this year versus 5 per cent for the S&P 500 index. Shirley Won reports on opportunities in the sector.

Why the next bull market is unlikely to look like the previous one

What the next bull market might look like is probably the last question on investors’ minds with interest rates rising, inflation soaring and a recession looming. Yet, with equities skirting bear market territory, advisors can make a good argument that stocks present a buying opportunity, with prices down significantly from all-time highs, to position portfolios for growth when the next bull market begins. It’s likely the next bull market will look more like a conventional one, driven by profitability rather than revenue growth, experts say. Joel Schlesinger looks at what the differences will be key the next time around.

What top advisors look for in new clients, regardless of account size

Does a client need to have significant assets to work with one of Canada’s Top Wealth Advisors? Probably, but not necessarily. Some of the advisors on The Globe and Mail and SHOOK Research 2022 ranking replied “zero” when asked for the minimum level of clients’ investible assets. It’s not always about the money, it’s about whether clients and advisors fit well with one another, advisors say. Deanne Gage speaks with top advisors about what they look for when taking on a new client.

Also see:

Why this money manager sees ‘compelling’ valuations for Canadian banks and energy

What to watch out for when investing in spin-offs

The Phillips curve is dead – when will central banks come clean?

U.S. fund managers turn away from China and look to Europe for growth

BlackRock’s iShares regains pole position from rival Vanguard

What you and your clients need to know

Court refuses to allow class-action lawsuit to proceed against discount brokerage firms

An Ontario judge has denied a class-action lawsuit against seven Canadian discount brokerages that alleged investors had improperly been overcharged billions of dollars in fees for a service they did not receive. Ontario Superior Court Justice Edward Belobaba dismissed an application to certify a class-action lawsuit that was filed against online trading divisions of four major Canadian banks, as well as those run by HSBC Securities (Canada) Inc., Credential Qtrade Securities Inc. and Desjardins Securities Inc. Clare O’Hara reports on investors’ reaction to the ruling and what they now plan to do.

10 gold stocks that may be heading higher

Slowing inflation reduces the likelihood of sustained central bank rate hikes which reduces strength in the U.S. dollar and is supportive for gold prices. With that backdrop, Brian Donovan of StockCalc uses the company’s models to screen and select the top 10 listed gold mining companies by market capitalization on the Toronto Stock Exchange. The valuation tools were then used to calculate the fundamental (or intrinsic) valuation for each stock to see if it is undervalued or overvalued compared with its price. Here’s what he found.

Cold e-mails are the new cold calls: Here’s how to improve your response rate

Have you ever tried to e-mail a busy person who was unfamiliar with you? Maybe you were searching for a job, seeking advice or hoping to make a sale. A study of two million e-mail users revealed the long odds of obtaining a response: On average, people who receive fewer than 100 e-mails a day respond to 25 per cent of them, and people who receive at least 100 e-mails a day respond to just 5 per cent. Fortunately, you can boost your response rate by applying these proven techniques.

– Globe Advisor Staff

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