As noted above, until January, strategists thought US interest rates might drop 6 times this year owing to inflation data that had been gradually decelerating towards the FED’s target 1-3% range. Recent economic data has been surprisingly strong in some regards, removing any urgency on the part of the FED to start cutting rates. Now strategists expect only 1 to 3 cuts, and the timing has been pushed back from spring to summer. Additionally, cuts near the election in November might be avoided to prevent any perception of influencing the vote.

In contrast, the effect of higher interest rates on Canadians has been more evident, with much softer employment data and more rapidly slowing inflation (at least for now).  That said, if Canada cuts rates more or faster than the US and gets too far out of sync with the FED then the Canadian dollar could weaken significantly. This could potentially stoke future inflation due to Canadian reliance on US imports. The Bank of Canada is also trying to balance these issues with a contentious housing market. This situation puts the Bank of Canada in a tough spot.

As for fixed income, our strategy from late 2021 into 2022 led to excellent results in 2023. From March 2023 to the end of March 2024 our fixed income investments significantly outperformed our benchmarks. On average our fixed income portfolios gained 6.2% over 12 months compared to about 2% for the bond index and 4% for one-year GICs from March 2023 (along with the added bonus of tax efficiency for non-registered accounts). So far this year our fixed income investments are up about 2% while the overall Canadian bond market is down 2%. This means we have outperformed the bond index by about 4.2% on average over the past year and about 4% year-to-date.

We have achieved these results by reinvesting in some of our preferred share indexes, getting RBC Capital markets to create 2 custom notes getting 6.25% and 6.60% interest payments, and making selective moves back into managed fixed income. Looking ahead we plan to continue adding to our investments with global managers over the next 4 to 8 months.  We are doing this as the higher interest rates should allow bond managers to capitalize on opportunities for capital gains in addition to earning regular interest.

 

Equities:

Over the past six months oil and gas prices have surged, boosting performance in that sector, and benefiting our portfolio.

We increased our investments in banks and financial institutions recently after previously scaling them back from 2022 into early 2023. This allowed us to sell at higher prices and buy back at lower prices. Remember, Canadian bank stocks typically fluctuate about 27% annually. When these stocks hit the top of their price range, we strategically reduce our holdings to reinvest in other areas or preserve cash for future opportunities.

Our US equity investments have delivered exceptional results. Our US dollar accounts, consisting of 60% to 70% equities, includes investments in US Treasury notes and a PIMCO bond hedge fund. This mix, with exposure to, but also healthcare, significantly enhanced our returns. Our Canadian dollar exposure to US equities, both hedged and unhedged, has also contributed positively to our overall portfolio returns.

However, we are cautious about expecting the same high returns from technology stocks as last year, which were driven by the AI boom. While technology may continue to contribute, we anticipate healthcare and other sectors to play a larger role moving forward.

 

Conclusion: The structure of our portfolios over the past 2 years has helped us deflect the downside and has allowed us to participate in most of the upside.  Again, after the large equity market rally, I anticipate taking profits and rebalancing the portfolios over next quarter. While we do have some cash on the side and being paid well to wait, I would like to have a little more flexibility given how well the portfolios performed in 2023 and year to date 2024.

As always, we appreciate and value your trust. Please do not hesitate to contact if you need anything. We are currently available to meet by phone, WebEx, or in person.

 

** Here’s the fine print and there’s a lot of it…

Currency can add return when the Canadian dollar goes down but reduce returns when the Canadian dollar goes up for non-currency hedged US and international investments. Also, please remember that your US accounts report values in US dollars.

Securities or investment strategies mentioned in this newsletter may not be suitable for all investors or portfolios. The information contained in this strategy update is not intended as a recommendation directed to a particular investor or class of investors and is not intended as a recommendation in view of the particular circumstances of a specific investor, class of investors or a specific portfolio. Options, and other strategies mentioned, may not be suitable for all investors. You should not take any action with respect to any securities or investment strategy mentioned in this newsletter without first consulting your own Portfolio Manager or in order to ascertain whether the securities or investment strategy mentioned are suitable in your particular circumstances. This information is not a substitute for obtaining professional advice from your Portfolio Manager. The commentary, opinions and conclusions, if any, included in this newsletter represent the personal and subjective view of Daniel Kelly who is not employed as an analyst and do not purport to represent the views of RBC Dominion Securities Inc. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof. The inventories of RBC Dominion Securities Inc. may from time to time include securities mentioned herein. Investment Trust Units are sold by RBC Dominion Securities Inc. There may be commissions, trailing commissions, management fees and expenses associated with Investment Trust investments. Please read the prospectus before investing. Investment Trusts are not guaranteed, their values change frequently, and past performance may not be repeated. (Keep reading, there’s only 7 more sentences to go.) This commentary is based on information that is believed to be accurate at the time of writing and is subject to change. All opinions and estimates contained in this report constitute RBC Dominion Securities Inc.’s judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Interest rates, market conditions and other investment factors are subject to change. Past performance may not be repeated. The information provided is intended only to illustrate certain historical returns and is not intended to reflect future values or returns.   RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ®Registered trademarks of Royal Bank of Canada. Used under license. ©2024 Royal Bank of Canada. All rights reserved.

 

Investment portfolios are not guaranteed, and past performance is no indication of future returns. In addition to these portfolios not being a guaranteed investment, there can also be significant fluctuations in the value of the portfolio. Did anyone read this far?