Recent weakness in the Canadian market leads us to recommend Canadian equity funds for new purchases right now. Higher stock valuations in the US have made international equity funds the more attractive choice globally.
Stock markets have gotten off to a good start this year as economic data from around the world continues to be favourable. Given this backdrop, you may be tempted to conclude that 2018 may turn out to be yet another year of superb returns for global stock markets, if not Canadian stocks. Stocks, after all, seem determined to reach new highs. So why not bet on equities?
We would like to inject a note of caution into these considerations. In many respects, the markets are priced for perfection, so it would not take much to reverse their direction. In light of this, you should not just be mindful of how much you might gain in the coming months if everything goes right. But you should also give thought to how much of a loss you can tolerate if markets were to fall on bad news.
Don’t get us wrong. There’s a strong chance that markets could advance strongly these next couple of years. This would not be unusual as the business cycle reaches maturity. But the stronger the upturn, the more deeper the subsequent downturn may be.
To sum up, this is a time to be cautious with your investments. Conservative investors shouldn’t concern themselves with trying to reap big gains by buying into high-flying, high-multiple stocks just because they’re going up. Leave that action to more aggressive investors who don’t mind taking on risk that might lead to substantial portfolio losses later on.
Instead, make sure you’re comfortable with your asset allocation and stick to it. Buy gradually, with an eye on value, leaving some money in reserve for a potential setback.
Investment strategies to adopt
One way to ensure that you are conservatively invested in these uncertain markets, is to settle on an asset-allocation plan that you’re comfortable with, and stick to it. Another is to stress value in your investing.
Much of this value can be found outside of North America right now. Emerging markets stocks tend to trade at lower multiples than those in the US. And developing economies have stronger growth prospects.
So if you don’t mind taking on some risk, we think a fund like RBC Emerging Markets Equity Fund might be a fit for your portfolio. This fund pursues a ‘Graham & Dodd’ value investment style. The fund sets a limit on exposure to individual securities, as well as industry sectors and countries, thus reducing risk through diversification.
The US has been the first major developed economy to shake off the economic malaise of recent years. And its stock market reflects this fact. The European economies and Japan, on the other hand, have arrived at the party later and their stock markets remain more attractively valued.
Take advantage of this value by investing in funds like Mawer International Equity or Trimark Europlus.
Mawer International Equity focuses on selecting good companies that exhibit attractive valuation and investment characteristics. The fund gives you the opportunity to invest in high-quality companies that often trade at a discount to their North American peers.
Trimark Europlus uses a bottom-up fundamental investment approach to analyze the quality and value of individual European companies. The portfolio is tilted towards defensive industries.
In North America, stock valuations have generally been more attractive on this side of the border. So do add to Canadian stocks either directly or through one of our more conservative Canadian equity funds.
This is an edited version of an article that was originally published for subscribers in the January 19, 2018, 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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