Portfolio positioning amid rate cuts and market risks

As monetary policy continues to shift and market risks evolve, investors should review and, if necessary, adjust their portfolios. By doing so, they can navigate market changes effectively and seize emerging opportunities in a dynamic environment, says David Wong, chief investment officer, managing director and head, total investment solutions, with CIBC Asset Management.

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In a recent interview, Wong highlighted the supportive impact on the bond market provided by recent rate cuts by the Bank of Canada.

While Canadian bonds have historically yielded positive returns during months when Canadian equities returns were negative, this correlation has weakened since interest rates began rising in March 2022, Wong noted. However, with current bond yields at relatively high levels and the direction of monetary policy clearly moving lower, Wong sees renewed potential for bonds to offer “useful diversification benefit” for portfolios.

“I think the market is really getting excited that we’re seeing concrete signs that the major headwind of rising rates on the bond market is behind us,” he said.

Wong also said investors should consider being “open-minded about actively managed portfolios,” as market returns become more broad-based.

In recent years, active managers in U.S. equities struggled, given that returns came from a small subset of large stocks in the benchmark.

“Historically, this type of concentration does unwind, and when that happens, it has meaningful implications for how active managers perform versus the index,” Wong said.

For example, between 2000 and 2009, the S&P 500’s concentration in its top 10 names went from 26% to 19%, Wong said. In nine of those 10 years, the median U.S. equity manager in the eVestment U.S. large-cap equity universe beat the S&P 500, he said.  

Wong also stressed the importance of strategic asset allocation as rates move lower. Investors should base their decisions first on their goals, he said, and then use a diversified set of assets.

“A thoughtful, strategic asset mix that is diversified can cast a wide net to ensure participation in future earnings growth that smooths out any over- or under-enthusiasm reflected in market pricing,” Wong said.

Lastly, Wong noted the risk of geopolitics and specifically the upcoming U.S. election. However, historically, “election years tend not to produce unusual market returns in either direction, up or down,” he said.

The best way to manage any potential election outcome, he said, “is to be diversified and fully invested to capture the compounding power of financial productivity from good companies around the world.”

This article is part of the Advisor To Go program, powered by CIBC Asset Management. It was written without input from the sponsor.