“We really like bonds and our approach with them is to keep it as simple as possible,” says Christine Tan.
Because she believes Canada is closer to maximum interest rates than the US, Christine Tan’s bond allocation is overweight Canadian government bonds.
And where you looked for short-term bonds two or three months ago, you are now looking at longer bonds.
“When you get closer to the end of an up cycle, you can start increasing the duration of bonds,” she explains.
Finally, a “certain dividend”
Bonds weighed on investors’ portfolios in 2022 as the Bank of Canada waged its battle against the highest inflation in decades. Bond prices have an inverse relationship with interest rates; when rates rise, the price of bonds in the secondary markets falls.
The Bank of Canada’s key interest rate was 0.25% at the start of the year, but it was raised seven times in a row starting in March and stood at 4.25% in December. The central bank did not rule out further rate hikes in 2023, but it softened its language and suggested further increases would depend on economic data.
Meanwhile, the yield on a five-year Treasury note in Canada, a key benchmark that ended 2021 at 1.25%, was close to 3.00% by the end of 2022. And while this increase has pushed up borrowing costs, a phenomenon is proven. of the higher cost of mortgages in Canada, it has also translated into better returns for investors such as retirees looking for a stable source of income.
Stan Wong, portfolio manager at Scotia Wealth Management, says he’s eyeing several sectors for stocks in the new year, including energy and health care, as the economy faces a possible recession.
“Healthcare provides a very good mix of earnings growth, but also some defensive attributes like a higher dividend profile and the simple fact that it’s obviously something people need, not something they want,” he notes.
“I have a few solid consumer names like Krogers and Costco, but I think the biggest part will come from financials because I think they’re cheap. Energy should still do well, and so will consumer discretionary really .”
But he says it’s not time to ditch bonds just because they had a tough year in 2022.
“Finally we’re getting some returns,” Stan Wong says of the bonds.
And, he continues, if central banks turn around next year and start lowering interest rates, bonds will also provide capital gains.
Christine Tan admits 2022 was a particularly difficult year for retired clients who dipped into their portfolios, even in a balanced conservative portfolio, down 10% to 12% last year.
“Bonds are not sexy, but at the same time, you don’t want to take too much risk yet because the recession is still in its infancy,” she says.
