Asset Class Outlook

We believe well-diversified portfolios should be built by first identifying a targeted mix of equity and fixed-income investments based on your goals and comfort with risk, and then gaining exposure to a broad mix of the asset classes highlighted below.
Asset Class Returns chart

Source:1Alternative Investments and Stocks trading less than $4 align with the aggressive investment category, but they are not recommended.

2Large-cap stocks that do not pay a dividend are in the Growth investment category.

Asset classes we don’t recommend separately include alternative investments, micro-cap equities and international high-yield bonds.

Equity Versus Fixed Income (Target = Middle)

Tailwinds from modest but positive economic growth and a rebound in corporate earnings support the case for further upside for equities, in our view. At the same time, policy risks in the U.S. and abroad warrant appropriate allocations to fixed income, to help provide portfolio protection against higher volatility. We recommend a neutral equity-fixed income position (the middle of your long-term range) , reflecting our view of the extended bull market alongside an increased risk of short-term pullbacks.

Domestic Versus International (Target = High International)

Canadian equities should benefit from rebounding earnings, driven largely by the energy sector. But with ongoing economic imbalances, commodity price headwinds and above-average valuations, we continue to recommend international allocations at the high end of our recommended range. The international landscape carries risks, but offers attractive opportunities to benefit from faster U.S. growth and more attractive overseas valuations. Overseas, we favour large-cap equities in developed economies over emerging market stocks.

Asset Class Diversification:

  • Income (Target = Low): Persistently low rates reduce the attractiveness of bond income, but investment-grade bonds offer stability for portfolios, which is compelling given our expectation for higher equity market volatility. North American bonds appear more attractive than global bonds, where longer-term returns will suffer from incredibly low or even negative yields, in our view. We recommend reducing high-yield bonds to the low end of our aggressive income range, as recent outperformance has left valuations at a level that we feel no longer fully compensates investors for the increased risk.
  • Growth & Income (Target = Middle): Within 'Growth & Income' we recommend reducing oversized positions in domestic large-cap equities and reallocating to international equity positions. U.S. large caps should benefit from faster economic and earnings growth, while overseas developed-market large-cap equities appear attractive given lower valuations (reflecting pessimistic expectations) and signs of global economic improvement.
  • Growth (Target = Middle): We suggest an allocation in the middle of our recommended "Growth" category range. We recommend a balanced allocation between Canadian mid-caps and U.S. mid- and small-caps, which should each benefit from further traction in the North American economy.
  • Aggressive (Target = Middle): Emerging market equities have rebounded nicely following underperformance in recent years. Deceleration in developing economies has subsided (most notably in China, where GDP growth is stabilizing) and valuations are cheaper than most other equity asset classes, but we think ongoing headwinds continue to warrant relatively modest positions in emerging market equities at this time.

Important Information:

Investing in equities involves risks. The value of your shares will fluctuate and you may lose principal. Special risks are inherent to international and emerging markets investing, including those related to currency fluctuations and foreign political and economic events. Before investing in bonds, you should understand the risks involved, including credit risk and market risk. Bond investments are also subject to interest rate risk such that when interest rates rise, the prices of bonds can decrease, and the investor can lose principal value if the investment is sold prior to maturity.

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