By Olev Edur
They went up, and then they went up again…and now?
Standard investment practice is to create a long-term strategy based on your personal needs and tolerance for risk, build a balanced and diversified portfolio to meet those goals, and then stick to your plan. Nevertheless, some flexibility is always advisable. The experts seem to agree that the Bank of Canada (and the US Federal Reserve) will be lowering interest rates—what effect might those expected rate cuts have on investment markets going forward? And what changes, if any, might retirees consider when it comes to best taking advantage of lower interest rates?
Marc-André Lewis, chief investment officer at CI Global Asset Management in Toronto, offers a few insights.
According to Lewis, any delay in interest rates coming down would likely be due to continuing strength in the US economy. “We’re surprised at the resilience of the US economy, which is still very strong despite rate increases,” he says. “One of the reasons is that in Canada, the UK, and Europe, mortgages must be renewed every five years or less, whereas most mortgages in the US have 30-year terms. This can limit the effect of rate hikes. The US economy has outperformed other countries during this period of high interest rates, so we’re watching it closely.”
In any event, is there still a window for locking in longer-term fixed-income investments, or do long-term rates already have the rate reductions factored in? “Markets tend to anticipate interest-rate and other economic changes and have been anticipating rate reductions since last fall,” Lewis says. “But if you look at where rates were in December 2023, long-term bond rates are actually higher now, so you can get better returns. There has been some reflection recently of rate cuts to come, but you still can get good value in longer durations.”
What will be the impact of rate cuts on equity markets? Will we see strong upward movement overall, or will the cuts already have been priced into the stock market? And will those cuts benefit certain sectors more than others?
“The rate cuts will be supportive of stronger economic growth, rather than being restrictive,” Lewis says. “The effect will be positive for the equity markets in general, but any industries that are more dependent on borrowing will benefit most. That would include the real-estate sec- tor and the high-tech industry.”
Since the US has been less affected by the higher rates than most other countries, will other countries that have been more negatively affected—including Canada—stand to benefit more as rates come down? What are the long- er-term prospects for Canadian markets, vis-à-vis the US and other foreign markets?
“The US has definitely been less rate-sensitive, and Canada is still showing signs of problems in supply and demand in housing,” Lewis says. “All of which is to say that Canada has been largely left behind in the high- interest-rate environment. International investors shied away because of the problems here, but Canada is a good place to be right now. With rate cuts, there will be quite a compelling case for investing in Canada. We’ll see the re- wards for having suffered over the past one and a half years.”
Lewis cautions, however, that there are limits to how far rates will come down, particularly given the ongoing US economic strength, which translates into a lesser need for major reductions. “We think it’s good that we’ll be shift- ing to a lower-interest-rate environment, but don’t harbour hopes that we’ll see zero or near-zero interest rates again,” he suggests. For that to happen, there would need to be some kind of severe economic shock, and that’s not on the horizon right now.
“Everyone should expect that rates will remain higher than before the pandemic, although there’s still the possibility of rates being substantially reduced,” Lewis adds. “The bank rate may fall to perhaps 2.5 or 3 per cent—that may seem high in relation to pre-pandemic rates but not over the longer term.”
The bottom line, then, for retirees hoping to bolster their investment portfolios in anticipation of rate reduc- tions is that (a) it may be a good time now to lock in some longer-term interest rates and (b) as far as the stock mar- kets are concerned, it may be wise to look at some reallo- cation into those industries that stand to benefit most from rate decreases.
Of course, the foregoing are only generalized predictions, and you should always work closely with your investment or financial adviser if you want to take maximum advantage of the forthcoming new order.
