Market Overview
US and Canadian equity markets continued experiencing gains until the end of June after a minor correction in April. Bond market volatility continued from April to May and into June, and ended up for the quarter, but down slightly year to date. Our fixed income portfolio was up year to date as of the end of June.
Strategy Update Highlights
- US Interest Rates: Experts now predict only 1 or 2 interest rate cuts this year.
- Canadian Interest Rates: We expect Canadian interest rate cuts to continue this year.
- Equities: After strong performance in US equities, we took some profits last quarter and reinvested in other equities. There was a small decline in equity indexes in April, which was not unexpected, and we used that to add to some existing or buy some new positions.
Fixed Income:
Canada is really feeling the impact of interest rate hikes that started in 2022. With that in mind and the recent inflation rate decreases, our first Canadian interest rate cut should be followed by more in July and into next year.
We previously mentioned that the fixed income portfolio would start shifting to more diversified managed fixed income investments as rates peaked and started to drop. By way of example, the preferred share indexes we bought have returned over 10%. In addition to holding RPIA Alternative Global Bond, we added two new managers – East Coast Strategic Credit Trust and CANSO Corporate Value. We also increased our investment in PIMCO’s Global Government Bond.
Our 1-year bond portfolio returned 6.48% on average outperforming our peers. Please note this is not audited and we calculated this using a weighted average of accounts with 100% fixed income. Our last update covered more details on our bond performance over the past 3 years in our Spring 2024 update.
One specific managed fixed income investment we have not added to is high yield debt. At the current time, given the current fixed income holdings, I do not want to add to a high yield portfolio.
If interest rates fall in the US and continue falling in Canada, our bond portfolio could return 10-12%.
Equities:
Our Canadian and US equities have performed exceptionally well. Last quarter, we took some profits and reinvested in other equities or added to other existing holdings. For accounts with over $60,000 in US equities, we added insurance to protect the investments until November 30, 2024, after the US elections. This protection does not limit growth.
In early July, we added a small amount of insurance to Canadian equities until November 15, 2024, and we might add more. Please remember that this strategy is meant to reduce your portfolio’s volatility.
Canadian banks’ performance has diverged. As of June 30, 2024, Royal Bank was up year to date, but TD and Bank of Montreal were down. I am looking at alternatives to TD because their growth might be held back by regulatory problems resulting from the discovery of problems with their US anti-money laundering process. Additionally, many Canadian Banks are starting to see an uptick in potential defaults due to the increased borrowing costs of homeowners.
Currently, I am not impressed with the Canadian REIT market (Real Estate Investment Trusts), except for a few residential REITs, because rising interest rates have hurt REIT share prices and there are high office vacancy rates. REITs are an area that we will be reassessing in the coming year as the sector has been dropping significantly.
Technology stocks have done well and still have potential, but we are cautious about expecting continued high returns due to the AI boom. AI will be transformative, but we cannot solely count on AI and other emerging technologies for portfolio returns.
We expect healthcare and other sectors to perform better than most other sectors, especially if interest rates drop more than expected. The big question is how fast and how much will the Canadian and US economies slow down. If the slowdown is larger than expected, we could experience a sharp market correction.
Conclusion
We hope that everyone can take some time this summer to enjoy a break! We appreciate and value your trust. Please contact us if you need anything. We are 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?