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Stocks have climbed to record levels and sovereign bond yields have reversed their pandemic-related plunge. How are we positioning our portfolios? In this episode, Sarah Riopelle, Vice President & Senior Portfolio Manager, Investment Solutions, shares her view and outlines the some of the changes she’s made to her portfolios to position them well for the current environment. [5 minutes, 41 seconds] (Recorded April 28, 2021)


Hello and welcome to The Download. I'm your host, Dave Richardson.. Continuing along with the trend, we are having another fully vaccinated podcast. Because our guest today, Sarah Riopelle, who manages Portfolio Solutions at RBC Global Asset Management, got her shot yesterday. Sarah, how are you feeling?

Not too bad. A dull headache, but I'll make it through, I promise.

Well, I can tell you from our experience, you feel a little sluggish for a day and a bit and then you feel almost like a superhero.

Yes, a little sense of relief, I expect, right?

Absolutely, but I'm a lot older than you, though, so it was particularly important for me. But I don't want to talk too much about vaccines. I want to talk about what's going on in markets. And we've seen equity markets hitting all-time highs in recent weeks. We've seen fairly volatile first quarter in bond markets and, although with some stabilization, that continued through April. Has this in any way changed our outlook for the economy and markets from your perspective?

Well, overall, the backdrop for the economy remains strong. We believe we’re in the early stages of the economic cycle, so lots of stimulus in place and good prospects for economic growth. The virus situation seems to be improving, at least in North America, because of the vaccine rollout and additional tightening measures in some problem areas. Short rates, we think, are going to remain low for at least another year. The Bank of Canada hinted at potential hikes in late 2022 but the Fed's latest projections are pointing towards 2023. So, no pressure from central banks. Because central banks remain highly accommodative and inflation remains contained, we think that the risk of significantly higher bond yields from here is quite minimal. So, yes, as you said, the US 10-year nearly doubled from late 2020. We think that's actually removed the valuation risk that exists in the fixed-income markets. So that's largely been alleviated here. The results are, the base case is no longer calling for negative returns in the fixed income side of portfolios. And then against that backdrop, investors have been highly enthusiastic towards stocks. Stocks climbed to record highs, as you said. The S&P 500 is up over 80% since the March 2020 lows. That powerful advance is accompanied by sentiment measures reaching extreme optimism levels and then valuations getting quite stretched. That extreme optimism and those valuations can persist over time, but we think that some complacency is creeping into markets. There's a little bit of vulnerability, should some of that enthusiasm fade or the outlook deteriorate.

I think one of the most important things that you mentioned and that we've talked about in previous episodes of the podcast with other investment managers, is this whole idea that you can have expensive markets in fixed income as well as equity. Everyone talks about equity markets being expensive. It's not as often that you hear people talking about fixed-income markets overshooting yields to the downside and the value of bonds to the upside. We were in that position and we've seen that adjustment. So with that, Sarah, have you changed the positioning in the portfolios you're managing in any way?

Yes, well, last week we reduced our equity weight by a little bit, took it down about 50 basis points to 64%, and moved those proceeds to bonds. So, a lower equity weight, but still overweight relative to our strategic neutral. Time horizon is a really important consideration here. We have to balance the near-term tactical positioning of the portfolios with our longer-term bullish sentiment around stocks. We remain positive over the medium to long term on stocks. And that's why we remain overweight overall. But we've opted to dial back the degree of overweight a little bit because of near-term prospects for equity markets. We focused that reduction in stocks on the US equity market, where valuations seem the most stretched relative to some other markets around the world. We added some weight on to bonds because that large upward movement in yields made sense for us to buy some bonds in here. So the bottom line is we continue to see strong economic backdrop supported by stimulus, low rates, reopening of economies. The significant rise in yields as well as stock prices has narrowed the equity risk premium and lessened the attractiveness of stocks versus bonds somewhat in the near term. Hence the reason why we lowered that equity rate tactically just a little bit. We focused that sell on the US market as stocks there appear quite expensive, whereas markets outside of the US continue to offer good value. And so, it kind of summarizes how we're currently positioned.

Yes, and it makes sense, given the comments you made around the economy, valuation and what's been happening in the fixed income market. Particularly through the first quarter and month of April. Sarah, always a pleasure to have you on as a guest. Always an interesting synopsis. You manage probably as much money as any investment manager in Canada. So, the moves that you're making are something that investors are always interested in. Thanks again for your time.

Thanks for having me.


Recorded: April 28, 2021

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