Investors should reduce bond exposure

Big Picture

Economic developments around the world lead markets higher

Further signs of improvement in US, German and Chinese economies offered further support to the current market rally, as did relief on the US debt limit front.

In Washington, the Republican-led House agreed to suspend the government’s US$16.4 trillion debt limit until May. The move – which still requires White House and Senate sign-off – allows the US to keep paying its bills and gives lawmakers breathing room for long-term budget talks. It also takes a big question mark off the table for traders who cheered the move. Markets also responded positively to lower-than-expected new applications for jobless benefits south of the border. The number fell to the lowest level in five years and now stands where it did in January 2008. Positive economic data also came out of China that showed manufacturing expanding at the fastest rate in two years. The latest read has the Purchasing Managers’ Index growing to 51.9 in January, from a predicted 51.7. Germany added to the flow of upbeat data as its business confidence survey rose for the third month in a row in January and hit a seven-month high. Meanwhile, earnings season continues to unfold in the US which provided a positive backdrop for further gains on the week. Finally, the Bank of Canada kept its policy rate unchanged at 1% this week.


North American stock indexes breaching previous highs

The TSX exceeded its 52-week high and reached levels last seen in mid-summer 2011 this week. For the four-day period covered in this report the TSX added 98 pts. to close at 12,823. The Dow and S&P 500 also advanced with both breaching territory last visited in 2007. Over the US holiday-shortened trading week, the S&P 500 added 9 pts. to reach 1,494, while the Dow moved higher by 176 pts. to close Thursday at 13,825. Meanwhile, the NASDAQ fell 4 pts. to fall to 3,130; still within 65 points of values last seen in 2000.

Scotia’s Recommendation

Investors should be reducing bond exposure and shifting toward equities on any stock market weakness

  • Equities - Himalaya Jain, Director, Portfolio Advisory Group (PAG) wrote: “Hurricane Sandy and fiscal cliff uncertainty represent potential downside risk to US Q4 earnings. While we remain bullish on equity markets for 2013, stocks have already posted solid moves so far in 2013 and any number of catalysts, including Q4 earnings and debt ceiling worries, could trigger a short-term pullback. We would treat market weakness, if any, as a buying opportunity.”
  • Fixed income - Andrew Mystic, Associate Director, PAG, suggests “given the Bank of Canada’s recent tone, investors should begin to re-evaluate the duration of their portfolios - particularly given the relatively low rate environment and its potential impact on value if rates reverse course. Term Call – we no longer see value in the mid-to-long end of the curve and recommend investors stay short at this time. Sector Call – underweight Canada, overweight Municipals, Provincials and Corporates. Currency Call – we recommend Canadian investors remain in Canadian dollars for their fixed income holdings. Alternative Strategies – marketweight high yield, marketweight Emerging Markets Debt, underweight inflation protected debt.”
  • Portfolio strategy - Scotiabank GBM Portfolio Strategist Vincent Delisle says: “Higher yields (negative bond fund performance) could trigger a sustained bond-to-equity asset rotation, lending another hand to equity markets.”


This publication is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author is an employee of ScotiaMcLeod, a division of Scotia Capital Inc. (“SCI”), but the data selection, analysis and views expressed herein are solely those of the author and not those of SCI. The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, neither the author nor SCI can make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your investment advisor, who can assess all relevant particulars of any proposed investment or transaction. SCI and the author accept no liability of whatsoever kind for any damages or losses incurred by you as a result of reliance upon or use of this publication in contravention of this notice. All performance data represents past performance and is not indicative of future performance.

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About the Author

Jeff Stathopulos, CIM, CFP, Portfolio Manager

Jeff is an advisor and partner with The Navigation Team at Scotia Wealth Management.

He lives in Kelowna with his wife Tanya, their two university bound daughters and their canine kids.

You can contact Jeff by email at [email protected]

Website:  www.yourlifeyourplan.ca

The Navigation Team

Scotia Wealth Management

This column is for information purposes only. It is recommended that individuals consult with their financial advisor before acting on any information contained in this article. The opinions stated are those of the author and not necessarily those of Scotia Capital Inc. or The Bank of Nova Scotia. ScotiaMcLeod is a division of Scotia Capital Inc., Member Canadian Investor Protection Fund.

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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