How to position your
portfolio today

Canadian investors face a leaner and potentially meaner investment environment shaped by U.S.-led reflation and ongoing political and policy risk globally. Here are three actionable ideas to consider as you venture through the first few months of 2017.

Flex your bond portfolio

The 35-year old bull market in bonds may be in jeopardy if bond yields continue to rise in response to an improving U.S. economic outlook and higher inflation expectations south of the border. A rising interest rate environment can be challenging for investors, particularly those with heavy exposure to government bonds that may suffer most from further rate increases.

In this environment, we believe investors should take a more flexible approach to their fixed income portfolio, one that will seek to preserve capital by actively adjusting the portfolio’s sensitivity to interest rate risk, while also looking for global opportunities to enhance yield.

Inflation rates are on the rise
Annual percent increase in price levels

Annual percent increase in price levels

Sources: Bureau of Labor Statistics, BlackRock. Inflation rates reflect full-year increase in the Consumer Price Index (CPI) from December to December. The 2016 inflation figure is based on the annualized increase in price levels from December 2015 through November 2016, excluding food and energy prices.

Go with dividend growers

Dividend stocks have been a valuable source of income for investors in recent years but some of the highest-yielding equities are now expensive and may be vulnerable to an increase in U.S. interest rates. With this in mind, we continue to like quality companies that consistently grow their dividends over time. These stocks – also known as dividend growers – remain relatively well priced and have performed well historically when inflation drives rates higher.

Rate reset preferred shares may also be a good dividend-paying option in the weeks ahead. Rate resets, which account for a big share of Canada’s overall preferred market, posted impressive returns in 2016, but continue to offer attractive yields and typically do best in an environment of stable or rising rates.

Dividend growers have outperformed dividend payers since 2008
Total return of selected Canadian Indices

Dividend growers have outperformed dividend payers since 2008

Sources: Morningstar. Data as of 12/31/16. Dividend Growers represented by S&P/TSX Canadian Dividend Aristocrats Index, Dividend Payers represented by Dow Jones Canada Select Dividend Index, and Broad Market represented by S&P/TSX Composite Index. Past performance does not guarantee future results.

Manage your currency exposure

Canadian equities have the potential to offer modest returns in 2017, but some of the best opportunities may be found abroad. For instance, we see earnings growth and further rotation into big sectors such as U.S. financials underpinning the U.S. stock market advance, while emerging market equities might get a lift from structural reforms, improving profitability and low valuations.

A strong core portfolio that has broad exposure to both domestic and international stocks makes sense given this global backdrop, but managing currency risk is crucial. Policy initiatives – especially around trade – by the new U.S. administration could weaken the Canadian dollar versus the U.S. dollar in the weeks ahead, but result in a stronger loonie in relation to other global currencies such as the Japanese yen and/or euro. We suggest leaving your U.S. currency exposure unhedged to start the year.

Unhedged vs. hedged
Managing currency swings can make a big difference in U.S. stock returns.

Unhedged vs. hedged

Sources: Morningstar. Past performance does not guarantee future results.