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ECONOMIC OUTLOOK

A LOOK AHEAD, A LOOK BACK Donald Horne sat down with three key portfolio managers to get their takes on 2016, and a look back at 2015

LOW INTEREST rates are forcing advisors to look high and low for vehicles that offer maximum yield. In November three experts weighed in on where the opportunities can be found: portfolio managers Sergei Strigo of Amundi Asset Management, a sub advisor for the Excel High Income Fund; Martin Murenbeeld of Dundee Capital Markets; and Lieh Wang of Empire Life Investments. Strigo: Global interest rates are currently at very low levels, even though we expect the US Federal Reserve to hike interest rates in the near future. However, we do expect the absolute level rates to remain low or go even lower in the rest of the developed world. In this environment, within the fixed income space, there are very few opportunities for investors to get any kind of meaningful yield; but emerging markets do provide opportunities for high yields The dollar denominated bonds, we

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are at over 5.5% in terms of yield on the main indices (JP Morgan), and if you go to local currency bonds, that becomes much more interesting, with around 7% yield (JP Morgan). If you look at countries such as Russia, Brazil or Turkey, you can have double-digit yields of more than 10%. Murenbeeld: Advisors will take on more risk, and they’ll go into corporate debt. Government debt is paying very little, and they’ll move up the risk curve, buying Italian or Spanish debt. But that’s not what I would recommend. I myself wouldn’t be inclined to lend governments too much money. Wang: That has been the difficult question going back five years. Since the crisis, when the banks introduced emergency low interest rates, the traditional instruments for investments – like sovereign bonds – don’t give us much of a yield. The two obvious places to look would be one – in the fixedincome market, a step beyond the traditional

treasury and sovereign bonds and look at the corporate bond market, which would naturally have credit risks. And if we really want to step out even further on the risk curve, something like high-yield bonds would be something to look at. But I wouldn’t make that a core part of the asset mix. Secondly, we look towards stocks. The yield on the TSX currently is 3.1%, and that’s a significant increase from where the yield was 10 years ago. Correspondingly the five-year Government of Canada bonds dropped during that same time frame. I would say high quality blue chip stocks can look to add yield. The US 10-year rate has decreased since June to about 2.1%. What’s the reaction in the market, and who is benefiting? Murenbeeld: The Bank of Canada is not going to stand in the way of the equity market. That doesn’t mean it isn’t going to look at the market and say, ‘Oh gosh it’s weak, let’s raise rates.’ Whatever the Bank of Canada is going to do isn’t going to upset the equity market. Wang: The question really speaks to whether the US Federal Reserve will finally start to normalize interest-rate policy and begin hiking interest rates from zero to 25 basis points. If they were to do that, then the whole yield curve may shift upwards, although it may flatten as well. In Canada, we’re not close to following along, because our economy is weaker than

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