RBC Wealth Management’s 2024 outlook is offering tepid optimism on equities but some real excitement about fixed income.
RBC Dominion Securities investment strategist Jim Allworth described renewed interest in bonds as a “fully useable and desirable adjunct to equities” after 15 years when investors had to accept meagre yields or take on the higher risk of owning dividend stocks.
Mr. Allworth points out that there are negative consequences of higher bond yields for equities. Higher interest costs pressure profit margins, for one. More importantly, insurance companies and pension funds could decide to lock in higher yields at the expense of their equity allocation and put selling pressure on stocks.
RBC favours government bonds over corporates as the potential for a North American economic slowdown puts pressure on company balance sheets. Mr. Allworth notes that high yield bond issuers were not able to lock in low rates for the long term and 20 per cent of high yield debt is set to mature in the next three years with elevated higher borrowing costs.
The strategist believes that there is a possibility that equities could set new highs on both sides of the border in the short term. However, he notes that U.S. equities are already priced for a “rosy scenario” that may not occur.
Domestically, RBC is concerned about the combination of higher for longer rates and a highly indebted consumer. RBC Capital Markets analysts estimate 20 per cent, 26 per cent and 23 per cent of bank-derived mortgages are set to renew in 2025, 2026 and 2027, respectively.
Canadians are already paying 10 per cent more for essential items compared with a year ago and a downturn in travel and restaurant spending signal a consumer enduring more financial distress.
RBC Wealth Management Canadian equity portfolio adviser Sunny Singh likes domestic bank stocks in the current environment. Valuations represent a deep discount compared with long-term averages, close to levels during the financial crisis. “We believe income-oriented investors with a long-term view can find opportunities in Canadian bank stocks,” he writes.
-- Scott Barlow, Globe and Mail market strategist
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Compiled by Globe Investor Staff