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

We recommend a neutral position to equity and fixed income. We believe the bull market in stocks will continue. However, rising policy uncertainties increase the risk of ongoing bouts of volatility, supporting the case for proactive rebalancing.

Domestic Versus International (International target = High)

We maintain our overweight international allocation. Faster growth in the U.S. and sustained signs of a synchronized global rebound offer support for continued international outperformance. We expect domestic investments to deliver positive returns, but recommend a reduced allocation given economic challenges and domestic sector imbalances.

Asset Class Diversification:

  • Income (Cash target = High, Income Target = Low) – We suggest reducing the average maturity of bond portfolios as a way to lessen interest rate risk. We recommend a higher weighting with your cash range to position for increased volatility. Our low target allocation for income investments includes our recommendation to reduce exposure to high-yield bonds (aggressive income).
  • Growth & Income (Target = Middle) – We recommend underweight positions in Canadian large-cap equities and real estate, which we believe each face headwinds from the domestic economic backdrop. We maintain our suggested overweight allocation to overseas developed-market large-cap equities.
  • Growth (Target = Middle) – Reduce allocations to domestic small- and mid-cap stocks. Small- and mid-cap equities appear more attractive in the U.S., as we believe they will be more sensitive to U.S. economic growth, are less impacted by currency fluctuations and benefit from U.S. tax reforms.
  • Aggressive (Target = Middle) – Emerging market equities have outperformed strongly, but a modest allocation is still warranted given ongoing challenges in China and headwinds from commodity and currency fluctuations. Overall, we continue to be cautious toward direct commodity investments.

Important Information:

Investing in equities involves risks. The values 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.

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