Hello and welcome to The Download. I'm your host, Dave Richardson, and I’m very pleased— it’s always nice when we get Sarah Riopelle, who manages all of the Portfolio Solutions programs at RBC Global Asset Management to join us. Sarah, welcome.
Hey, thanks for having me again.
Good to sneak this one in before the long weekend. You've written another article. And Sarah, when you write these different notes, where can people access them? Is it on LinkedIn that you generally post your content?
It depends on the type of note that I'm writing. In this particular case, I'm not sure it will show up on LinkedIn, so it's probably more on the website.
There you go. So, you're getting an exclusive right here with Sarah Riopelle. So Sarah, let's dive into it, because there’s lots of stuff going on in markets, particularly around fixed income. We'll get to that in a second. But if we look at the past year and everything that's happened, how are you positioning your portfolio now for the remainder of this year and the years ahead?
Yes, that's a great question. The last year has had its share of ups and downs to be sure. If the events of the last year have taught us anything, it's to stay the course, stay invested, stick to long-term investment plans, because it's just so important. Think about how your investments would have fared if you had panicked and sold in the depths of the crisis last February and March, which is actually what my father wanted to do. But thankfully, I talked him out of it. But, you would have locked in losses at that time and you would have missed out on the subsequent returns. And what kind of returns are we talking about here? If you take the S&P 500 as an example, the one-year return off the March 23rd low of last year was an amazing 75%. And the market regained its losses from that four-week crisis period by mid-August of 2020. So it was a very steep but short period of time. And if you had panicked and sold during the crisis period, you would not be well positioned right now or coming out of the crisis. So, I really believe that making changes to invest in plans in the middle of a crisis is not a good idea. So then, what are we thinking about going forward? I'd say that the pandemic is entering a new phase with the roll out of vaccines and businesses starting to return to normal. We think the economy should stage a healthy recovery from here. This extremely stimulative monetary and fiscal policy is going to be supportive. As well, consumers are well positioned to boost spending here. So that's going to have a positive impact. There's always a bunch of risks to look at. Obviously, there's the impact of new Covid-19 variants that are coming out. There's elevated unemployment levels. There's the potential for higher inflation. And so, we think that the advantage of stocks over bonds has diminished a little bit with the increase in yields that we've seen over the last few months, but we think that equities continue to offer an attractive risk premium over bonds. And so, we still overweight equities in the portfolios.
Yes, and so many great points in those comments. But particularly in the midst of a crisis, it's not the time to re-evaluate your financial plan. You want to have a financial plan coming in, an investment plan coming in and stick with it. And last year was such a great lesson on that. So now with, as you say, a stronger economy, a pretty significant rise in bond yields, particularly longer-term government bond yields this year, is this changing your view on markets and is it changing the positioning of portfolios?
Yes, that's so true; the U.S. 10-year bond yield has risen over 80 basis points since the start of the year to over 1.7%, for the first time since the pandemic. And so, a lot of the valuation risk that we saw in the fixed-income market that existed throughout 2020 has been alleviated by this rapid change in yields that we've seen so far this year. Given the rising yields, for the first time in many quarters we're actually expecting slightly positive returns for sovereign bonds over the year ahead. And so, that's a big shift from where we've been over the last several quarters. While we think the bond yields are going to gradually climb over the longer term, in the near term, the speed and the magnitude of the recent selloff suggests that bonds could stay put here or rally somewhat from these levels in the near term. That said, the return prospects for bonds still remain quite modest over the medium to long term, which is why we still underweight bonds within the asset mix. But we do continue to believe that bonds are an important allocation inside balanced portfolios because they offer so many important characteristics. They provide diversification, they provide income, capital preservation in the face of equity market volatility and also liquidity. So it's really important to continue to hold bonds within the context of a balanced portfolio.
And it's really interesting with the increase in bond yields and all the forecasts of stronger economic growth. I'm getting questions from people I know for the first time in many, many years about the potential for inflation— and not just inflation, significant inflation coming up in the future. Is this anything that you're worried about or that you think investors should be worried about?
Well, I think it's the combination of some significant easing in monetary policy and central bank's willingness to accept faster inflation, which is raising concerns about inflation and investors are worried that inflation could run too hot. While the readings have trended higher over the last few quarters and prices are indeed rising, they're rising off of a low base. And so, what's caught the attention of many investors is the fact that market-based measures of inflation expectations have been rising. But we think that, if you look at historical norms, inflation expectations are still in line with levels of the past decade. So while underlying inflation trend might be higher because it's coming off of a low base, we think it's still going to remain at low levels relative to what we would have expected historically. So yes, inflation may be rising, but not to concerning levels.
Yes, and probably given where we've been and again the need for inflation expectations to shift significantly before you saw significant inflation… Probably a little bit too much talk about this, at least in the near term?
Yes, for sure. It's an interesting topic of conversation, but not one that we should be putting too much focus on. It's just another one of those things, risks that bear watching. Something we need to keep an eye on and see if there's any significant changes in trend, but not something we're worried too much about at this point.
Well, Sarah, fortunately, this is a podcast. So, with more lockdowns coming where we live, the big inflation is in my hair. I need a haircut very badly. I'm glad these are only audio.
But it's not going to happen in the next month, I'll tell you that.
Well, anyway, Sarah, great to see you again. And lots of great stuff in your comments today. We always appreciate your visits to the podcast. Thank you very much.