Tuesday, December 12, 2023

Interest Rates Beginning to Settle. What's Next for Your Portfolio?

With the Bank of Canada holding the policy rate steady this month at 5% (Financial Post), it might be time to reconsider some of the interest rate sensitive securities that have been beaten down in the marketplace. 

Since reaching a low of 0.25% in 2022, rates have been steadily rising as the Bank of Canada combats inflation (CTV News). With inflation now starting to turn lower, and consumers showing some signs of fatigue, policymakers at The Bank have let off the gas, indicating that there might be some relief (or at least no new pains) in sight for rate sensitive borrowers.

What does this mean for your portfolio? Utilities, REITs, Preferred Shares, and other rate sensitive assets might start to look a lot more attractive on a real return basis. Canadian Utilities (CU.TO), Riocan (REI-UN.TO), and George Weston Preferred Series A (WN-PRA.TO), are down 15%, 17%, and 7% respectively Year-to-Date. Fear of further rate increases have pushed these assets lower. Now that rates have paused, investors might start taking another look. 

Is the Bank set to lower rates soon? Likely not, at risk of stoking further inflation. However, Canadian households are heavily indebted, which makes further rate increases a particularly risk proposition for the Bank of Canada, which is tasked with promotion financial stability. In a report by the CMHC: ""Canada's very high levels of household debt — the highest in the G7 — makes the economy vulnerable to any global economic crisis... When many households in an economy are heavily indebted, the situation can quickly deteriorate, such as what was witnessed in the U.S. in 2007 and 2008" (CBC News). 

This also might mean the return of the 60/40 investment portfolio, which has been a bit of a pariah as of late. This portfolio allocates 60 percent to equities, and 40 percent to bonds, and was popularized by financial gurus of the past, including John Bogle at Vanguard (New York Times). With bond yields rising over the last year, bond prices were getting hammered, and this was leading to poor returns for many 60/40 investors. With yields starting to stabilize, and even turn lower, you have seen much more positive returns for the 60/40 balanced portfolio. 

Remember, don't put all your eggs in the same basket, and maintain caution. 

Happy investing everyone. 

- Matthew. 

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