As the longest bull market in history ages, and the economy shows signs of being in the late-cycle stage of its life, many investors are wondering if it’s time to take a more defensive stance in their portfolios.
Since the post-Financial Crisis bottom in March of 2009, the benchmark S&P 500 Index has soared, delivering a more than 350% return for investors*. And, during most of the past decade, Canadians have enjoyed a recession-free economic expansion. In short, it’s been a decade of wealth creation the likes of which most of us have never seen.
When volatility struck markets last fall, many investors began to wonder if the “bull of all bulls” was finally ready to head out to pasture. Indeed, many of the commonly accepted indicators of an aging economic cycle, from soaring equity market prices and rising volatility, to strong employment, GDP growth and disappearing economic slack, are evident. More market volatility and a potential economic slowdown could be in the offing as we progress to, and through, the end-of-cycle economic stage.
Ready for a siege: building up your portfolio’s parapets
No economic outlook is a certainty, and making wholesale changes to your portfolio in anticipation of potential economic or market conditions is rarely advisable. Usually, the only reason to make significant changes to your portfolio is if your life circumstances change. However, there are strategies to shore up your defences if your portfolio looks to be under siege:
Duration
Shorten the duration (i.e., a measure of the sensitivity of the price of a bond to a change in interest rates) of your economically sensitive, corporate fixed-income holdings; maintain the duration of your sovereign debt holdings to take advantage of their hedging effects in volatile times.
Quality
Ensure your portfolio contains quality, blue-chip equities (i.e., reasonable price-earnings ratios, strong balance sheets, high earnings quality, etc.), while remaining mindful of valuations. Look internationally to economies earlier in the cycle than Canada and the U.S. to find better performing markets when domestic markets are challenged. On the fixed-income side, focus on higher-rated corporate and government bonds.
Dividend payers
Long-term, consistent dividend-payers with a track record of increasing those payouts make for an excellent “defensive wall” when markets become challenged to generate capital returns, with the added bonus of allowing you to reinvest the cash flow into under-priced assets.
Defensive sectors
Consider shifting equity holdings to more defensive sectors that tend to fare better during times of economic stress and have a low correlation to the economic growth cycle, including Consumer Staples and Utilities, which benefit from consistent and largely unchanging demand regardless of economic conditions.
Strong walls to stand on guard for thee
We continually monitor market and economic conditions, and will make appropriate recommendations or changes to your portfolio to reflect evolving opportunities and challenges. Using strategic walls, a well-fortified portfolio that reflects your investment objectives and your established risk tolerance will help you ride out all market and economic circumstances.
For more information, or to determine if any of the strategies discussed here are appropriate for you, please, contact us.
*From March, 2009 to May, 2019. Includes reinvested dividends. Return in local currency.
Source: RBC Global Asset Management.