Main Investment Thesis Going into the second half of 2013:
The second half 2013 should provide modest returns for equities, and further losses for fixed income assets. In the global currencies market, the reversal of the carry trade will likely boost the value of the USD against other major currencies. In the commodities space, energy and industrial metals should perform relatively better compared to precious metals.
The search for yield theme is starting to wind down after the U.S. federal reserve signaled to the market that it is ready to reduce the size of its asset purchase program (nicknamed QE3). Investors must be careful when basing investment decision solely on yield levels because high yields does not guarantee safety and high yield assets are likely to face further losses in a rising interest rate environment. In the equities space, investor should avoid bond-like equities such as utilities and telecoms. Instead, investor should prefer companies with exposure to the stronger U.S. economy or benefit from a rising USD. Sectors that benefit from a stronger U.S. economy include industrials, consumer staples/discretionary and U.S. financials. Companies that benefit from a higher USD include Canadian industrial companies or Canadian material companies that sell commodities priced in U.S. dollars.
Focus in fixed income is on quality rather than absolute yields. Corporate bonds are better choice than overpriced sovereigns. Investors should reduce duration in their portfolio to mitigate interest rate risk. A laddering approach is more appropriate in a rising interest rate environment.
For currency investors, U.S. dollar is likely to appreciate further due to the perceived tightening in monetary policy and tightening of interest rate differentials.
Major risks to the outlook include slower than expected recovery in the U.S. economy, a hard landing in China and additional negative news out of Europe.
The post is for informational purposes only and does not constitute an offer to buy or sell any securities discussed in the post. The recommendations made in this post are subject to change without notice. Investors are recommended to conduct due diligence before committing capital to any investment.