Tactically increased Fixed Income, decreased equities
Current target positioning as of Jan 14, 2016
2016 welcomed equity investors with a cold shoulder. As at January 14, the S&P/TSX closed down 5% on a year to date basis (YTD), and down 12% from its high on October 9, 2015. In the U.S., the S&P 500 closed down 6% YTD and down 9% from its November 3, 2015 high. However, an appreciation of the U.S. dollar versus the Canadian dollar buffered some of those declines for Canadians.
In fact, the Canadian dollar’s rapid decline to $0.70 put the exchange rate into territory not seen since 2003. The recent decline has been highly correlated with the price of oil, which deteriorated from about $50 U.S. per barrel to about $30 in only three months due to supply and demand factors. The negative spillover effect to the overall Canadian economy remains a risk, increasing the likelihood that the Bank of Canada will need to further decrease interest rates to support the economy. This would be supportive to the Canadian bond market.
Although equity valuations remain somewhat in overvalued territory, we do not believe they are at levels that would typically signal a protracted bear market. The S&P 500 12-month forward P/E ratio is about 16.4 vs. a 25-yr average of 15.8, slightly higher but not over-stretched. Aggressive central bank tightening (increasing interest rates) has also been a precursor to major bear markets, which is not a scenario that we expect, as the U.S. Federal Reserve has telegraphed their intent to remove monetary stimulus at a gradual pace.
We remain positive on equities mid to longer term, but view the current correction as an opportunity to invest at more attractive valuations in the year ahead. As a result, target allocations to fixed income have been tactically increased, and equity target allocations decreased. In the equity oriented Empire Life Emblem Aggressive Growth Portfolio, the target allocation to U.S. equities has been tactically increased at the expense of Canadian equities, given the U.S. market’s more defensive nature, particularly when factoring in currency effects.
This document includes forward-looking information that is based on the opinions and views of Empire Life Investments Inc. as of the date stated and is subject to change without notice. This information should not be considered a recommendation to buy or sell nor should they be relied upon as investment, tax or legal advice. Information contained in this report has been obtained from third party sources believed to be reliable, but accuracy cannot be guaranteed. Empire Life Investments Inc. and its affiliates do not warrant or make any representations regarding the use or the results of the information contained herein in terms of its correctness, accuracy, timeliness, reliability, or otherwise, and does not accept any responsibility for any loss or damage that results from its use.