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, supported by economic expansion and rising corporate earnings. However, above-average valuations and policy uncertainties increase the risk of a short-term pullback.

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) – Yields are rising, but from a historically low base. 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, as we favour U.S. small- and mid-cap equities, which would benefit from tax changes and the improving U.S. economy.
  • Aggressive (Target = Middle) – Emerging-market equities warrant a modest allocation, balancing improving global growth with policy challenges in China. 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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