Active investor:
Flexible investment strategies can help ride out the economic recovery
Investors need to consider their fixed-income exposures more closely as they wait for signs of a stronger global economic recovery.
According to Aubrey Basdeo, managing director and head of Canadian fixed income for BlackRock, investors should brace themselves for the potential for more interest rate volatility. “Global central bankers have made it increas- ingly clear that the path for interest rates going forward will be data dependent.”
The preferred investment strategy is to keep durations shorter and assume more credit exposure, he advises. “Additionally, there may be value in diversifying your exposure — to global highyield vehicles, for example, where the economic cycle is still in the early stages.”
The need for diversification is underscored by the Bank of Canada’s decision on May 27 to maintain the overnight rate at 0.75%. This came as no surprise despite a growing risk that growth in the United States, Canada’s largest export market, may be tepid at best, Basdeo says. “The bulk of the economic indicators so far for Q2 show that the U.S. economy has not bounced back as much as expected from Q1’s weather-induced slowdown. The Atlanta Federal Reserve is now predicting second-quarter U.S. GDP growth of just 0.9%, well below economists’ consensus estimate of 2.65%.”
Basdeo believes the bank’s current polic y stance is anchored to the assumption that Canada’s economy will experience strong growth in the second half and beyond on the back of a stronger U.S. recovery. “To be sure, some indicators would support this view. The U.S. labour market has been relatively healthy in terms of job creation and wage growth and is picking up speed,” he says. “There are also expectations that the drop in gasoline prices will spur consumer spending, and a buoyant stock market and recovering home prices will put consumers in a more comfortable frame of mind. The terrible winter may have played a part in delaying the recovery but could also result in significant pent-up consumer demand.”
Whether that demand materializes remains to be seen. Despite the positive indicators in employment, housing and stock markets, Americans continue to be more focused on saving than spending. “Retail sales growth has been dismal,” Basdeo says. “This could be a temporary phenomenon or a sign of longerterm challenges for growth.”
In Canada, the labour market is struggling to find its footing and prices rose by less than 1% year-over-year in April, which means no significant inflationary pressures are coming into play, Basdeo says. “Meanwhile, Canadian consumers are cash-strapped and debt-burdened, so we can’t count on domestic consumption to fuel growth.”
Away from the United States, slow growth in international markets such as Europe and China is also having a detrimental effect on net export and investment prospects for Canadian business. “We have yet to see a leading indicator of manufacturing recovery in Canada, and we have not seen capital investment come through on the part of businesses despite the cheaper Canadian dollar,” Basdeo says.
What this means for investors is interest rates will continue to stay low or potentially head lower, he adds. “Even if there is a modest recovery here, the bank will likely not change anything for the time being.”
Overall, fixed-income in- vestment should be structured to handle any contingency, Basdeo concludes. “Divergence in growth and monetary policy is an investment theme we believe will be with us for the next while so the best approach is a flexible investment strategy.”