Most markets rally higher, Canadian dollar weakness amplifies gains for Canadian investors.
February was another profitable month for investors with all major equity and fixed income markets moving higher. In Canada, the S&P / TSX Composite Index gained 1.3% on the month.
U.S. equities were higher with the S&P 500 gaining 1.4% in U.S. dollar terms. For Canadian investors, the gain was amplified, as the Canadian dollar dropped from $1.0008 on January 31 to end the month at $0.9723. In Canadian dollar terms, the S&P 500 was up 4.7%. The MSCI EAFE and MSCI World were both higher in Canadian dollar terms, gaining 2.0% and 3.2% respectively.
Canadian bonds were positive, with the DEX Bond Universe gaining 1.0%. Corporate bonds modestly outpaced governments and long bonds outpaced short term bonds. Only real return bonds that were down during the month.
Despite much headline risk bubbling, we favour equities over the perceived safe haven of fixed income, particularly for those who have a medium to long term time horizon. Our reason is quite simple: with yields continuing to hover near historic lows, fixed income investments remain fully valued. There is very limited upside and it will become increasingly difficult to generate any level of meaningful return from most fixed income investments.
We are not suggesting that one sell all of their fixed income holdings. We still believe that fixed income can play a very important role in a well diversified portfolio. Because they tend to move opposite of equities and are a favourite investment in times of extreme uncertainty, some exposure will help to lower the level of volatility in a portfolio. Within fixed income, we continue to emphasize quality, with high quality corporates being our investment of choice. Corporates tend to offer higher yields than governments, which will help to provide higher returns while interest rates remain flat, and will provide better downside protection when rates do begin to rise. Some exposure to high yield and global bonds may also be beneficial in generating returns and protecting capital.
While we favour equities, we still expect that it will be a bumpy ride. To help mitigate this, we favour high quality, higher yielding equities over the more cyclically driven, higher beta stocks. Granted, if the timing is right, returns from the cyclicals can outperform the higher quality names, but longer term, we are looking to balance return with managing volatility. Another factor we are considering is that investors have a very high demand for yield, which will help to put some level of support under the higher quality equities in the near to medium term.
Geographically we favour North America, but with a well managed global fund, there may be great opportunities to add additional return potential while at the same time cutting the overall risk profile of the portfolio. Those looking to do this are advised to go with a high quality actively managed fund, which should provide better risk reward characteristics in the current environment.
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