Active investor:
U.S. equities a solid performer in investment portfolios
sponsored by ishares by blackrock
Canadian investors have always shown a strong interest in American equities when devising a portfolio strategy. In today’s markets, however, it pays investors to be more tactical in their choices.
“U.S. equity exposure has been fundamental from a portfolio allocation standpoint,” says Pat Chiefalo, managing director and head of product for BlackRock Canada. “In fact, in most of the portfolios and model portfolios I’ve seen, U.S. equities have always typically played an important role in diversification.”
Investors are thinking about a more tactical approach today because of the extended bull market in the U.S., he notes. “This is the sixth year of a bull market run in the U.S., making it one of the longest in history. Since March 2009, U.S. equity markets gained approximate- ly 200%. Our view is that the U.S. equity market still has more room for growth.”
There are two principal reasons for that optimism, Chiefalo says. From a valuation perspective, it’s important to underscore U.S. equities are trading above historical averages. “It is the most expensive developed market globally compared to others that are trading at or below their historical averages. However, valuations haven’t reached typical peak levels where the market could be more susceptible to a correction.”
While some have been concerned about a softening U.S. gross domestic product in the first quarter of 2015, it is not significant enough to affect growth in the months ahead, Chiefalo argues. “The general expectation is that there won’t be any substantial slowdown in the U.S. economy going forward despite the slow start. The numbers will likely get better. In addition, job creation in the U.S. is also moving along at the fastest pace since the 1990s.”
This resurgence does bring the prospect of a movement to higher interest rates. However, he says those increases will likely follow a predictable, gradual path.
One additional matter investors should consider is whether to opt for hedged or unhedged investments. The Canadian dollar has shown recent signs of a rebound, moving from a low of close to 78 cents in March to just under 84 cents in mid-May. However, Chiefalo believes the trend to a lower Canadian dollar will likely continue, which could drive more investors looking for U.S. equity exposure to consider an unhedged position.
“There are some exchangetraded fund offerings that allow investors to take the currency view they choose, whether the fund is focused on the total U.S. market or the largest 500 U.S. companies,” Chiefalo says. “If you expect the Canadian dollar to weaken, an unhedged product might work better, such as the funds found in the iShares Core.”
These offerings cover a diverse number of sectors, including U.S. tech, financials, health care and consumer discretionary. “Technology, health care and consumer are the biggest sectors that are underweighted in Canadian portfolios,” Chiefalo says.
Whatever the choices, U.S. equities will remain an integral part of a portfolio strategy. “For more tactical overweight or underweight exposure to the U.S., investors need to pay close attention to valuations, growth expectations and rate trajectory among other key aspects, as well as their preferred currency exposure.” iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. Used with permission. All other marks are the property of their respective owners. Please read the relevant prospectus before investing. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. iSC1749-0515.