Election or not, inflation pressures are creeping higher in Canada and investors should start preparing their portfolios, says Andrew Pyle, wealth advisor at ScotiaMcLeod.
Domestic politics, including the Conservatives’ now waylaid budget, will likely be trumped by bigger issues outside Canada’s borders — like Japan and the Middle East — but the underlying theme of growth and building price pressures remains intact.
The former head of capital markets research at Bank of Nova Scotia doubts the Bank of Canada would raise interest rates in April but said a hike on May 31 is possible if inflation concerns build and growth doesn’t lapse early in the second quarter. “Otherwise, I’d be looking for a return to tightening before the end of the third quarter,” said Mr. Pyle, who took part in a post-budget Live Chat this week held by the Financial Post.
Against that backdrop, a little inflation preparation is warranted, though Mr. Pyle doesn’t think investors should go overboard on real return bonds (government bonds that rise with inflation).
These may deliver good returns in a year-end lift to inflation but he would devote no more than 10 or 20% of a total bond portfolio to RRBs, leaving the rest in nominal bonds. RRBs have risen in price since mid-February and are approaching October’s highs. “We need to see the world skate through recent energy price increases and Japan to extend this trend near-term.”
In an interview, Mr. Pyle said bond investors should have a good weighting in short-to-medium corporate issues going out no more than six years. Corporates provide better inflation protection than government bonds. One way his clients get this exposure is through ETFs like the iShares DEX All-Corporate Bond Index Fund (XCB/TSX).
Other inflation hedges include dividend-paying stocks and materials stocks, including gold. ETFs he uses are iShares S&P/TSX Capped Materials Index Fund (XMA, TSX) and iShares S&P/TSX Capped Energy Index Fund (XEG/TSX).
Mr. Pyle prefers iShares over rival ETFs because of their liquidity. While the stocks in these sector ETFs may pay lower dividends than high-yielders like banks or utilities, they provide pure growth potential and inflation protection. Good corporate bonds are also issued by companies like TransCanada Corp. or Canadian Natural Resources Ltd.
Mr. Pyle said investors are still overweight Canada but appetite for international exposure is growing. He cautions overweight positions in Canada result in portfolios concentrated in resources and financials.
Given the relative outperformance by Canada in 2010 and this year, Mr. Pyle sees some “interesting value plays abroad. We’ve been suggesting for a while that investors not place too much emphasis on how Canada skated through the last recession and market downturn, especially with U.S. conditions still tentative.”
While “not banging the table” on emerging markets, Mr. Pyle suggested the long-term growth story in China still looks strong.
Domestic politics, including the Conservatives’ now waylaid budget, will likely be trumped by bigger issues outside Canada’s borders — like Japan and the Middle East — but the underlying theme of growth and building price pressures remains intact.
The former head of capital markets research at Bank of Nova Scotia doubts the Bank of Canada would raise interest rates in April but said a hike on May 31 is possible if inflation concerns build and growth doesn’t lapse early in the second quarter. “Otherwise, I’d be looking for a return to tightening before the end of the third quarter,” said Mr. Pyle, who took part in a post-budget Live Chat this week held by the Financial Post.
Against that backdrop, a little inflation preparation is warranted, though Mr. Pyle doesn’t think investors should go overboard on real return bonds (government bonds that rise with inflation).
These may deliver good returns in a year-end lift to inflation but he would devote no more than 10 or 20% of a total bond portfolio to RRBs, leaving the rest in nominal bonds. RRBs have risen in price since mid-February and are approaching October’s highs. “We need to see the world skate through recent energy price increases and Japan to extend this trend near-term.”
In an interview, Mr. Pyle said bond investors should have a good weighting in short-to-medium corporate issues going out no more than six years. Corporates provide better inflation protection than government bonds. One way his clients get this exposure is through ETFs like the iShares DEX All-Corporate Bond Index Fund (XCB/TSX).
Other inflation hedges include dividend-paying stocks and materials stocks, including gold. ETFs he uses are iShares S&P/TSX Capped Materials Index Fund (XMA, TSX) and iShares S&P/TSX Capped Energy Index Fund (XEG/TSX).
Mr. Pyle prefers iShares over rival ETFs because of their liquidity. While the stocks in these sector ETFs may pay lower dividends than high-yielders like banks or utilities, they provide pure growth potential and inflation protection. Good corporate bonds are also issued by companies like TransCanada Corp. or Canadian Natural Resources Ltd.
Mr. Pyle said investors are still overweight Canada but appetite for international exposure is growing. He cautions overweight positions in Canada result in portfolios concentrated in resources and financials.
Given the relative outperformance by Canada in 2010 and this year, Mr. Pyle sees some “interesting value plays abroad. We’ve been suggesting for a while that investors not place too much emphasis on how Canada skated through the last recession and market downturn, especially with U.S. conditions still tentative.”
While “not banging the table” on emerging markets, Mr. Pyle suggested the long-term growth story in China still looks strong.
