Mutual funds: Where to put new money now

Continue to add to your Canadian equity mutual funds portfolio. Aggressive small-cap equity mutual funds are starting to reward risk takers now.

Economic data and market sentiment have improved in recent months, as risks to the global economy have declined. Here are some points to consider in assessing the market outlook and its risk environment:

China. China’s growth has improved somewhat in recent months, but debt remains a significant risk and bears watching.

Policy uncertainty. The rise of populism, as reflected in the U.K. referendum and the U.S. election, raises uncertainty, particularly in relation to the adoption of potentially protectionist policies.

The global economy. The global economy continues to grow at a slow rate. But things have brightened a bit as the economic slack in many developed nations over recent years has improved. Economists have responded by increasing global growth forecasts for 2017. Global growth, which is expected to come in under three per cent for 2016, should slightly exceed three per cent in 2017.

Interest rates. Rising interest rates, particularly in the U.S., should act as a drag on economies and lead to higher borrowing costs.

The Trump presidency. Donald Trump’s election to the U.S. presidency has potential benefits and risks. Benefits include lower taxes and increased infrastructure spending, which should boost short-term growth. Trade protectionism, however, should hurt growth.

All told, we’re cautiously optimistic about the current economic environment and its impact on stocks and equity mutual funds.

Investment strategies to adopt

We recommend keeping about 25 per cent of your equity mutual funds portfolio in funds with significant foreign exposure. That’s just a matter of prudent diversification. After all, the Canadian dollar could experience sudden strength. Or a plunge in commodity prices could adversely affect our stock markets, given the heavy weighting of resource issues on the TSX.

Economic fundamentals, however, seem to be starting to favour Canada in this regard. So we recommend keeping your equities portfolio largely invested in Canadian securities.

While we always stress conservatism for the main portion of your portfolio, it now appears that markets are starting to reward risk-takers. Small-cap mutual funds are beginning to heat up. We suggest IA Clarington Canadian Small Cap and Sentry Small/Mid Cap Income Funds as timely buys in the aggressive Canadian equity funds category.

Those looking for a special opportunity may want to look at the U.S. healthcare stocks sector. Concerns related to U.S. drug pricing have hurt healthcare stocks as a group this past year. TD Health Sciences Series D would be our choice of higher risk international specialty funds to take advantage of the pullback in the sector. But we caution that bottom-picking can be risky. Our multi-country international equity funds like Mawer International Equity also offer appeal to contrarian investors.

 

This is an edited version of an article that was originally published for subscribers in the January 20, 2017, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.

Money Reporter, MPL Communications Inc.
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