It’s hard to believe, but the first half of the year has come to a close. While it’s been eventful, one could argue it’s been relatively dull compared to the year ago period. Interest rates are still rising, but less aggressively than last year. The rate of inflation is decelerating, rather than accelerating. And, economies have proved resilient, still largely growing despite what many had predicted at this time last year. Below, we share some takeaways on the year’s performance thus far and our thoughts going forward.
Global stocks and bonds are higher year-to-date, despite the near universal concerns around the interest rate backdrop. In some cases, the returns have been modest with global bonds and Canadian equities up a few percentage points for example. In other cases, like international equities, the gains are larger. The U.S. equity market has looked strong. Yet, beneath the surface, its gains have been less compelling as the technology sector has had an outsized impact, and in particular a handful of the largest household names. In some ways it hasn’t been surprising as some of these stocks were responsible for driving much of the U.S. stock market decline last year. Regardless, it’s undoubtedly been a more pleasant investing experience for investors thus far in 2023.
Our firm’s global investments team regularly produces thoughtful content to help us think about the future and assess the positioning of our clients’ portfolios. It recently produced its mid-year outlook, in which it discussed the rally in asset prices since last year’s lows. It acknowledged these trends may continue in the short-term, but also highlighted the increasing number of economic indicators that are pointing to more challenging times ahead. It remains of the view that investors should be prudent and ensure they are positioned to navigate through a more difficult backdrop in the future.
We largely share this view as we believe the substantial amount of rate hikes of the past year will eventually wear on consumers and businesses. We have taken action in portfolios for our clients over the past year that leave us feeling comfortable with their ability to handle whatever the future has in store. There have been refinements we have made: re-evaluating the quality of our portfolio holdings, the dividend yields and growth, and sector exposure for example. The biggest adjustments have been in fixed income where bonds have re-emerged as a more useful tool in helping our clients and their portfolios. The level of income that can be generated from bonds today is substantially more attractive than it’s been in years, with yields that are hundreds of basis points, or a few percent, higher. Moreover, while inflation remains a risk, we believe bonds can offer renewed diversification and protection for our portfolios in the event the economic backdrop worsens.
Interest Rates
We would like to highlight that the rapid increase in interest rates by the Bank of Canada over the past year has driven the prime rate to 7.20%. This affects the rate of interest you pay on variable rate products such as a line of credit or variable rate mortgage. If you have any outstanding balances on a line of credit, we would encourage you to review the interest rate you are paying and reach out to us if you would like to review options.
First Home Savings Account (FHSA) Update
As mentioned in our October 2022 update, the First Home Savings Account (FHSA) is now available at RBC Dominion Securities. A FHSA is a registered plan allowing you, as a prospective first-time home buyer, to save for your first home tax-free (up to certain limits). This is an excellent tool for anyone who is considering the purchase of their first home.
Why should you open a FHSA?
- Receive tax deductions for your contribution
- Room accumulates at $8,000 per year once the account is opened.
- Lifetime maximum contribution of $40,000 is possible.
- Carry forward up to $8,000 unused contribution room to future years.
- Earn tax-free investment income on your contributions.
- Make tax-free withdrawals to purchase a first home in Canada.
- Alternatively, transfer FHSA funds tax free to your RRSP (or RRIF) without reducing your available RRSP contribution room (effectively gaining more RRSP contribution room)
Quick tip: Carry forward contribution room only starts accumulating after you open a FHSA – so considering opening one this year, even if you don’t make a contribution right away.
Who can open a FHSA?
- First-time home buyers (defined as not owning a home lived in as a principal residence at any time during the part of the calendar year before opening the account or the preceding four calendar years)
- Current spouse (including common-law partner) must also be a first-time home buyer
- Canadian residents over the age of majority, who will not be older than age 71 on December 31 of the year the account is opened
Quick tip: Have family members who don’t have a first home yet? You can give funds to your family members, like your children and grandchildren, to open their own FHSAs.
We wish you an enjoyable summer and please don’t hesitate to reach out to us if you have any questions or concerns.
Kothlow Unser Wealth Management Group
2950 Glen Drive - 7th Floor
Coquitlam, BC V3B 0J1
604-665-0740