Summer 2021 Strategy Update

July 20, 2021 | Daniel Kelly


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Here is the Kelly-Gorham Private Wealth Summer 2021 Investment Strategy Update outlining our current thoughts and positioning of our portfolios.

What is a bull market? It is random market movement causing an investor to mistake himself for a financial genius.”

 

Happy summer. And good news – it looks like we are in the final stretch for COVID vaccinations. This quarter, let’s get right to it so you can get back to enjoying the warm weather.

Strategy Update Highlights

  1. We kept current equity exposure and portfolio protection the same, increased exposure to alternative investments, and kept fixed income exposure lower along with shorter maturities. 
  2. The stimulus has done its job keeping the economy afloat as we emerge from COVID. Now, however, we are experiencing what is thought to be transitory inflationary pressures. 
  3. With point #2 in mind, it is likely that bond market volatility will continue into the near future, increasing the likelihood of an equity market correction.

 

 

Fixed Income:

We suspect that central bank bond buy backs will begin to slow. That said, in the near term, we expect Canadian, US and global central banks to keep their short-term rates at their current levels. Businesses no longer need the same liquidity and loan accesses as they needed over the past 14 months.

 

While the increasing costs across many sectors, such as energy, durable goods, real estate, and building materials, are thought to be transitory inflationary costs, they still negatively impact bonds.  That was due to rising medium- and longer-term interest rates. Please remember that as interest rates rise, it can cause bond prices to drop. 

Even with the relatively poor bond markets year-to-date, our fixed income continued performing extremely well this year. We anticipate increasing the alternative fixed income strategy exposure to try to profit from rising interest rates. 

 

We still have exposure to preferred shares using Horizons Preferred Share ETF (HPR) and Dynamic Preferred Share ETF (DXP). We are currently taking profits on those positions and will likely take more profits. We have also increased our exposure to shorter-term fixed income to buffer the impact of rising rates.

Equities:

We continue to see Canadian, US, and international equity markets rallying, albeit with a slightly bumpier ride. Additionally, we kept the safety net/put protection around its previous levels.

 

We are considering the bigger question of how long the COVID economic recovery will influence both the equity markets and bond markets.

 

We continue to see areas, such as the energy, retail, consumer discretionary, industrials, materials and financial sectors as the major beneficiaries of the recovery. As well, within the technology sector, we can see some of the longer-term secular growth companies continuing to perform well. Technology, however, is likely to be more volatile over the next year as we are seeing the shift into those other sectors just mentioned.

 

The key to more stable equity market returns will be greatly influenced by how inflation progresses. If the recent inflation turns out be transitory, as expected, it is highly likely equities will be providing medium-term stable returns. If inflation turns out to be more of a long-term problem, we could see the bond buying by central banks stop sooner than expected with short-, medium- and longer-term interest rates spiking, which would not be favourable for equity markets in the medium term. In the short term, equity markets could experience what many think is a long overdue correction or consolidation. 

 

It is mainly for those reasons we continue to have a safety net/puts on a portion of our Canadian equities, along with some having US equity protection.

With the Canadian vaccination rate accelerating, we see Canadian equity markets outperforming other markets.

   

Given 2020’s extreme drop and the massive rally back, along with investors realigning their portfolios into other sectors, inflation concerns and potential interest increases, we expect more volatility and considerably lower potential equity market returns.   Nothing goes up in a straight line and periods of consolidation are to be expected. 

 

Conclusion:

Last quarter, we mentioned the path to recovery is here, but it might be a bumpy ride and this continues to hold true.

As always, we appreciate and value your trust. Stay well, stay safe, and please do not hesitate to contact us.  We are available to meet by phone or via Webex.

 

** 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 licence. ©2021 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?