Last year was an improvement over 2020 in many ways.
The blow is that 2021 has failed to deliver on its promise that many hoped for around this time last year, when it was widely assumed that vaccines would get us out of the pandemic by the end of the year. .
For investors, however, 2021 has been a very good year.
The TSX Composite Index finished up about 22%. The Dow Jones Industrial Index rose about 19 percent; the NASDAQ rose 21% and the S&P 500 topped them all by 27%.
What’s in store this year is a guess, of course, but many experts see challenges in repeating the strong market returns of 2021.
?? We would be likely to see an economic transition from the rapid reopening of 2021 to a normalized economic environment, ?? says Philip Petursson, chief investment strategist at IG Wealth Management.
In turn, stock returns are likely to moderate and be much closer to the average.
This translates into expectations of single-digit percentage increases for all of the aforementioned stock indices.
This is certainly not bad news given the challenges the world is facing.
Omicron continues to set daily case records. In turn, public health measures are not going away anytime soon. Additionally, climate change is likely to bring even more forest fires, storms, droughts and floods that inevitably cause economic upheaval.
?? Yet one of the most important things for investors this coming year is inflation, ?? Ken O Kennedy, Director of Investments at Dixon Mitchell in Vancouver.
Inflation topped four percent by the end of 2021, the highest level in decades, and about double what the Bank of Canada and other central banks are targeting.
Inflation can be difficult for everyone, given that it shrinks households ?? purchasing power.
This is not that much of a problem for the stock markets, as stock prices often rise as well.
For borrowers and bondholders (i.e. lenders), high inflation is problematic because it often leads central banks, like the Bank of Canada, to raise their overnight interest rates. the day, which typically drives the cost of borrowing for consumers and businesses.
Higher interest rates inevitably increase the cost of borrowing, often slowing economic growth, hopefully just enough to cool the demand for goods and services in order to dampen the growth in the prices of those assets. and workers’ wages.
Unless there is a complete reversal of the direction of inflation, we can expect three interest rate hikes from the Bank of Canada and the US Federal Reserve in the spring, said Nathan Janzen, economist at RBC Economics.
âWe kind of know the direction of interest rates, but we don’t know exactly when and how quickly they might rise,â he warns.
Still many expect the Bank of Canada to hike the rate by 25 basis points (0.25 percent) in the spring, then hike rates twice as much as ?? 25 basis points each by the next. end of the year?? one percent rate.
Even with the hikes, the interest rate would be very low by historical standards, Janzen adds.
Nonetheless, these hikes will pose challenges for cautious investors who might have 50 percent or more of their portfolios invested in bonds. The reason is that bond values ââtend to fall in rising rate environments.
One solution is to look for “alternative sources for fixed income securities to improve returns”,? said Petursson.
The options here include private debt. These are mainly bonds, but they are not traded on the public markets and are therefore less affected by interest rate hikes.
One challenge, however, is that private debt investments are often only available to wealthier investors. That said, some mutual funds do offer exposure. Other options include holding cash-like investments (i.e., high interest savings accounts and short-term GICs). They may not offer returns that keep pace with inflation, but their values ââare largely unaffected by rising rates.
Another strategy is to invest more in dividend-paying stocks with returns that are more likely to exceed inflation.
?? Dividends can be a very interesting source of income, ?? Petursson adds.
Yes, dividend-paying stocks continue to lose value in a bear market, he adds.
But dividend companies can ?? improve the current income for the portfolio ?? as interest rates rise, helping to offset lower yields on bond holdings, he says.
Probably the best strategy for dealing with current challenges, including inflation, is to have a diversified portfolio, says O ?? Kennedy.
?? Make sure your equity portfolio is diversified with different types of drivers, ?? he says.
Over the past couple of years, many investors have focused heavily on technology stocks, which until recently offered excellent returns. Big tech companies are likely to remain good investments in the future.
?? Amazon, for example, is a fantastic company, and it was a big beneficiary of the pandemic, ?? he adds.
?? But do you want to make sure you have the right exposure to the companies that benefit from it? a return to normal too ?? every time this happens.
One of the benefits of a diversified portfolio is that you end up owning companies that may benefit from the price hike, like Visa Inc.
As prices increase, Visa automatically earns more on each transaction. O ?? Kennedy explains, noting that the company charges fees on transactions and other services it provides to businesses.
So there really is a built-in inflation hedge.
Despite the challenges, Canada’s economy is expected to grow four percent in 2022, “a strong economic backdrop,”? Janzen said.
While there are still a lot of uncertainties, especially when it comes to the pandemic, we’ve seen this playbook before, ??? said Petursson. âSo I really don’t think the pandemic will be an obstacle to economic growth. ”