The Bank of Canada’s 25-basis-point rate cut last week to 0.5 percent certainly made a few investors grumble.
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After last week’s rate cut and more weak data today, there\’s a new debate brewing in Canadian economic circles whether the Bank will walk into the realm of unconventional measures
For one thing, the cut isn’t great news for investors who rely on income from safer investments such as bank-issued guaranteed investment certificates.
It also worries those wondering what\’s going to happen to already overheated housing markets in Vancouver and Toronto since the banks quickly responded in kind by reduction of their prime lending rates.
That said, it\’s possible to choose to view the glass to become 50 basis points empty or 50 basis points full.
To help to keep things in perspective, Canada\’s overnight rate is still double the U.S. Federal Reserve\’s policy rate despite two cuts this year.
By taking a realist approach, there is scope in this low rate environment, instead of simply complaining about it.
For example, I had been recently in Kelowna, B.C., on holidays and really noticed how it was booming, that was surprising given this is a hot spot for Alberta vacationers still reeling from low energy prices.
After talking to a number of well-informed locals, I soon discovered the reason for the strong local economy: property.
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Retiring baby boomers from Vancouver have been prudently selling their properties at record-setting prices, and buying equivalent houses in Kelowna for half the cost.
However, the investing markets can be a little nerve-racking for anyone with a large cash position, for example those lucky enough to get lock in tidy gains from selling their homes, but here are a few places to look into.
Some of the Canadian banks are attractively valued given their selloff this year. In particular, wealth management divisions are doing very well, capital financial markets are for the most part still robust, and retail banking should benefit from the drop in interest rates. Essentially, they\’re still a great deal richer than you believe.
Many of the Canadian REITs have also sold off and are offering some high but sustainable yields in this ultra-low rate environment.
The longer-term contrarian in the crowd might want to have a closer look at the preferred share market, that has been crushed this year on the rate cuts, particularly the rate resets. However, we advise some extra diligence here given the complexity and lack of liquidity in certain of the issues.
Energy stocks, meanwhile, are also subjected to a well known four letter word – sell – leaving many trading at 2008 economic crisis levels because of oil prices getting halved in the past 12 months.
Interestingly, this wasn\’t something reflected while filling up my SUV in the Kelowna pumps, with regular gasoline prices averaging $1.30 a litre.
Finally, and most importantly, don\’t allow low interest to sway you into dealing with excess risk.
For example, conservative investors having a moderate risk tolerance shouldn\’t have more than 70 percent of their portfolio in equities or more than five per cent of their total portfolio in exempt market securities. Around the fixed-income side, preferred shares or junk bonds shouldn\’t dominate one’s holdings.
Martin Pelletier, CFA, is a portfolio manager at Calgary-based TriVest Wealth Counsel Ltd.