The economics and strategy team at National Bank Financial Markets published one of the most bearish outlooks I’ve seen from either Bay Street or Wall Street. The upshot of the research report was a recommendation that investors reduce equity exposure to underweight in favour of a large overweight in fixed income.
Stéfane Marion, National Bank’s chief economist and strategist, sees equities as expensive, global economies surprising to the downside and inflation still strong. The problems are particularly acute in the U.S., where the earnings yield on stocks – the inverse of the price to earnings ratio – is lower than the T-bill yield for the first time since 1997.
Mr. Marion is concerned about the U.S. economy as measured by the ISM Manufacturing survey of purchasing managers. The latest reading was 46. Any reading below 50 represents a month-over-month contraction in activity. The strategist notes the consensus view that U.S. earnings will grow at a 7 per cent pace in the next 12 months. But the problem is that has never occurred with such a weak manufacturing backdrop.
Globally, National Bank expects central banks to continue to raise interest rates in what Mr. Marion describes as “the most extensive global tightening cycle in over 50 years.”
The weakening global economy will keep crude prices contained, leaving domestic energy as underperformers, according to Mr. Marion. For this reason, he reduced his recommended Canadian equity portfolio weighting from equal weight, at 20 per cent, to underweight, at 18 per cent.
The U.S. equity exposure guidance remains 4 per cent underweight, at 16 per cent of assets, and non-North American equities 4 per cent underweight, at 6 per cent. The recommendation for cash has been reduced from 11 per cent to 9 per cent with the proceeds moved to longer-dated fixed income to benefit from expected capital gains.
The advised 51 per cent allocation to fixed income is 6 per cent above benchmark and very defensive. Overall, Mr. Marion’s portfolio weighting recommendations are suitable for investors more concerned about protecting capital (although it is not bulletproof in that regard) than maximizing potential equity market upside.
-- Scott Barlow, Globe and Mail market strategist
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Ask Globe Investor
Question: I have read the pages in Gordon Pape’s TFSA book about how to invest based on percentages and types of investments at certain ages. There is a whole section called Variable Investments which my Manulife Investment Manager has not included in the “Buy and Hold” portfolio he has us in. Is that something we should be concerned about?
My husband just turned 65 and has been diagnosed with an aggressive type of cancer. Should we just get out of the market altogether right now?
Are those types of investments just not relevant in this unstable market especially going into the next couple of months? Thank you so much. – Valerie Q., Barrie ON
Answer: First, let me extend my best wishes to your husband. As a cancer survivor, I have some idea of what he is going through. I hope the treatments work.
As to your question, let’s start with variable income securities. In my TFSA book, I define them as assets that do not pay a predictable yield. These might include exchange-traded funds (ETFs), mutual funds, floating rate preferred shares, etc. Stocks that have a history of dividend volatility (some oil producers for example) also qualify.
This is only an important consideration if you need steady, predictable cash flow from your securities. If not, don’t be concerned that there is no separate category in your portfolio.
Your other question is more basic: Should you get out of the market in the light of your husband’s condition?
There are several factors to consider. First, what is the long-term approach? Presumably, if he passes, you will still want the money invested somewhere. You need to decide where that will be. GICs offer more safety and a reasonable rate of return at this time but tie up your money until maturity. The stock market offers more long-term growth potential but short-term risk. The extent of that risk depends on what you own.
Then there are taxes to consider. If you sell your current portfolio, how much will you end up owing the CRA? Is that a cost you want to be saddled with at this time? And while we’re discussing taxes, who owns the accounts? Are they registered, non-registered, or a mix? All this will make a significant difference if your husband dies.
I suggest you discuss these issues with your Manulife advisor. He is in the best position to guide you. – Gordon Pape
What’s up in the days ahead
What does the surprise announcement that Laurentian Bank may sell itself mean for the Canadian banking sector overall? David Berman will share his thoughts.
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Compiled by Globe Investor Staff