Increased Canadian Equities, Decreased U.S. Equities
In our last tactical update on April 18 of this year, target allocations to international and Canadian equities generally increased, while target allocations to fixed income generally decreased. Since then international equities have been the top performing asset class. Unfortunately, Canadian equities lagged behind fixed income, with a continued decline in crude oil prices being a driving factor.
So long as oil demand does not materially decline, we believe oil prices below $50 (USD per barrel) is not sustainable. Many producers are unlikely to be profitable at these levels, which would lead to a decrease in supply and a rebound in oil prices. We believe oil price equilibrium to be closer to $60, given the current economic cycle. Over the past month, oil prices have in fact shown some resilience rising from $42 to $47. As a result target allocations to Canadian equities have been tactically increased.
Part of this allocation includes a re-introduction to small cap Canadian equities in most portfolios (Diversified Income and Conservative portfolios being the two exceptions). This area of the market was particularly affected by the oil price decline, and we believe it provides an opportunity to re-initiate a strategic position. Small cap equities represent a key portion of the Canadian equity market and opens further opportunities for non-risk averse investors. It also complements the large cap Canadian equity portion of the Portfolios, which tends to be more conservatively managed.
U.S. equity target allocations have been tactically decreased. We remain constructive towards the asset class’s longer term prospects due to structural factors such as innovation and demographics, however, current valuation concerns and a softening of the trade weighted U.S. dollar leads us to incrementally seek value in other markets for the time being. Over the last two weeks, U.S. equities have continued to decline on U.S. dollar weakness against the Canadian dollar, while Canadian equities have stabilized.
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 does 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.