A look at current market conditions from Christie Rose, CFA.

September and October are well known for months of volatility for various reasons. Interestingly enough the market environment has seen more of a sideways move since the September 30, 2016 statements have been printed.

Our current portfolio strategy takes into consideration that in Canada we have been recovering from a correction in Energy and Materials contributing to a higher market in comparison to last quarter. Interest rates in Canada are at an all-time low. The U.S. market is intimidating as it keeps crawling higher, while looking forward, the market has to face the likelihood of rising interest rates and the outcome of a hotly contested election in the United States. The stock valuations in international and emerging markets are more reasonable and provide opportunities in our portfolios.

We remain under-weight fixed income relative to equities. We continue to expect equities to outperform bonds.

• We are keeping the average life of bonds relatively short to minimize interest rate risk. We are maintaining exposure to high yield within fixed income to enhance yield. High yield also has less exposure to rising interest rates and low correlation to other asset classes.

• Over the past year we have decreased our exposure to the U.S. market due to higher valuations and a strong U.S. Dollar. Earlier this year we took advantage of the weakness in Canadian markets as an attractive area to move some of the U.S. exposure into.  This strategy has been successful and as now become less attractive due to some recovery in the energy and material sectors. We are considering pulling back on our Canadian equity exposure, bringing the weighting to a slight over-weight compared to neutral stance. This trade is offering opportunity to take some of these funds and start building a small position in emerging markets, where appropriate.

• The U.S. market has been flirting with all-time highs. It is expected that the Federal Reserve will start increasing interest rates either at the end of this year or the beginning of next year. This will likely result in higher volatility in equities. Of course, there is the upcoming election….. We continue to keep portfolios under-weight U.S. equities.

• We have been over-weighting the Guardian Global Dividend strategy. This is a Canadian dollar strategy that looks globally for the strongest dividend payer and growers. Currently, it is just over 55% U.S. exposure and it generates a yield of approximately 3.7%. The country mix is most attractive while having approximately 55% U.S. exposure and 45% to other countries. We felt this would offer protection in the event of an increase in volatility in U.S. markets and acts as an alternative to our pure U.S. strategy. This strategy is also based on a quantitative model which can change quickly with an adaptive management style.

• Our portfolio strategy has been to have exposure to dividend payers in order to add a cushion during weak stock performance periods. Portfolios have been balanced across countries and sectors. The portfolio yield has been in the 3.5% to 4.0% range. This range suggests there is opportunity in our portfolios to also benefit from capital appreciation – not just the dividend.

We know the market environment is changing and our strategy of being adaptive has resulted in portfolios being well positioned with a balance of growth and income characteristics.