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COVER STORY: INDUSTRY TRENDS
says. “The lingering deflationary impulse from China and other emerging markets has also faded. Markets are starting to price in the end of overly accommodative monetary policy, so the bond markets will get more challenging.” That will mean investors need to recalibrate their expectations, while BlackRock and its competitors will have a much tougher job on their hands. “Lower and lower interest rates year after year – that era is over,” Reiman says. “It means [you need] much more targeted, tactical exposures to get much more limited returns than investors are used to. We are entering 2017 still overweight in emerging market debt and investment-grade corporate bonds. We have pared back our maturities so we have a more mutual duration posture, but over the course of next year, we need to be prepared to make the necessary adjustments.” Florian Ielpo, head of Macro Research and Cross Asset Solutions at Unigestion, concurs with Reiman when it comes to central banks and interest rates. “We think we are seeing a reflation trade right now in the bond markets,” he says. “We have been through a long period of deflation and QE by central banks, but central banks are starting to see less need for QE.” The price of equities right now in North America has also created reluctance among investors to buy stocks. This typically means they tend to move toward fixed income, which has proven to be the case this year.
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“Antiestablishment candidates are growing across the developed world. It will be part of the investment landscape for the foreseeable future” Florian Ielpo, Unigestion “Emerging equities are starting to get expensive, and developed equities are very expensive right now, so that’s why investors are buying bonds,” Ielpo says. People also tend to head for the relative safety of fixed income in times of uncertainty. In this respect, a Donald Trump presidency is not the only geopolitical shift to consider, Ielpo points out. “Next year we have elections in France, Germany and the Netherlands, so there is political risk for the markets,” he says. “Anti-establishment candidates are growing across the developed world. It will be part of the investment landscape for the foreseeable future.”
ALTERNATIVES One of the effects of falling bond yields has been investors moving toward alternatives in much greater numbers. That's been good news for the likes of Sprott Asset Management, a firm that excels in that space. “We have alternative income products that generate yields without owning bonds,” Sprott CEO John Wilson explains. “It’s a big growth area for us. Before the financial crisis, an investment-grade bond would get you a return of 7% to 8% with very low risk. Now both of those attributes are gone – they don’t have those rates of return and are very vulnerable if rates do rise.” Sprott’s selling point is the diversity it offers to investors when it comes to building a portfolio. Canadian equities performed strongly this year, but no one can say with any degree of certainty how 2017 will play out. Adding alternatives such as hedge funds or real estate becomes more attractive in such an environment. “We are seven years into a bull market, but bull markets don’t last forever,” Wilson says. “People want to balance equity exposure with products that are hedged in terms of forward-looking risk.” Using hedge funds requires a great deal of expertise and an ability to read financial headwinds. Bearing that in mind, what does Wilson foresee for Canada’s markets in 2017? “Earnings and the economy are still fine, so my view is that equities can run to new highs in the early part of 2017,” he says. “For
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