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 CIBC Private Wealth Management, CIBC Wood Gundy
 Allan Bush Investment Team, Better Together.
 CIBC Private Wealth Management, CIBC Wood Gundy
 Allan Bush Investment Team, Better Together.
  • Home
  • Team
    • Our team
    • Our partners
  • About
    • Our philosophy
    • Our process & services
    • What clients say
  • Community
  • Blog
  • Contact us

Blog

Allan Bush

February 23, 2023

Money Education Financial literacy Economy Monthly commentary
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Rising Rates - Lowering Portfolio Risk Exposure

Predicting what the Bank of Canada (BoC) folks will do at any moment can be tough to get right. It seems a bit more straightforward than being a meteorologist, but when you think you know what’s going to happen, they often surprise you.

The January Monetary Policy Report from the Bank of Canada states, “Inflation in Canada is still too high but has declined from its peak. As the effects of higher interest rates continue to spread through the economy, and with declines in energy prices and improved supply chains, inflation is projected to fall to around 3% in the middle of 2023 and reach the 2% target in 2024.”[i]

We often have a hard time reconciling the posted inflation rate versus our own experience when trying to live our lives. Take a trip any day to the grocery store and think back to what you paid for that item prior to COVID. It doesn’t take a Ph.D. in mathematics to recognize that chicken breasts selling for $28/kg at Sobeys in Toronto, as reported by CTV News last month[ii], are not 6% higher than they were not that long ago. According to Money Sense magazine, in November 2022, you could expect to pay an average of $7.11 for a 907-gram tub of margarine in Canada, up 37% from the $5.16 you would have paid in the same month in 2021.[iii]

This article isn’t meant to shine a light on the Consumer Price Index calculation of inflation. However, if the BoC is basing its rate decisions on inflation, perhaps we are still in for some additional increases. If that is the case, our investment decisions should keep this in mind.

Managing fixed income in a rising environment is well documented. We are always happy to discuss how different investments may or may not fit within your risk tolerance and overall portfolio. For fixed income investments, playing a balancing act between coupon rate and term to maturity is essential when rates are rising. The yield curve in Canada is currently inverted,[iv] meaning the rates with shorter terms are actually higher than those with longer terms. As of mid-Feb 2023, the yields between 1-month and 1-year paper range from approximately 4.5% to 4.7%, while the 5- and 10-year paper is yielding a little under 3.5% and 3.3%, respectively. In other words, we are not getting paid more yield to invest for more extended periods of time. In this environment, the prudent choice is to stay at the shorter end of the curve.

Fortunately, a mainstay of our investment philosophy has been to invest in strong companies that pay out a consistent dividend. 2022 wasn’t a great year for this part of the market, and collecting the dividend was one of the only bright lights for that strategy last year. YTD in 2023 however, we’ve experienced a rebound in capital appreciation while still receiving this dividend.

What does all of this mean for your financial future? We’ve seen this all before, and we are confident in our strategies for getting you to your financial goals without exposing you to additional risks you aren’t comfortable with. If you are feeling apprehensive about the markets or the rates of income your portfolio provides, please let us know so we can take the time to review things with you.

 

I

https://www.bankofcanada.ca/2023/01/mpr-2023-01-25/

II

https://toronto.ctvnews.ca/why-are-toronto-grocery-stores-selling-some-chicken-breasts-for-nearly-27-kg-1.6218119

III

https://www.moneysense.ca/columns/moneyflex/the-cost-of-the-average-grocery-bill-in-canada/

IV

http://www.worldgovernmentbonds.com/country/canada/#:~:text=The%20Canada%2010Y%20Government%20Bond,last%20modification%20in%20January%202023)

 

 

 

 

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