“For a few years now, we’ve fielded questions on whether the 60/40 portfolio is still relevant, and I enthusiastically say, yes,” says Kevin. The Capital Markets Strategy team continues to be optimistic heading into 2022 but cautions that a new approach is needed for the stabilizing portion of an investment portfolio. 10-year Treasury yields and higher rates for Canadian long-term bonds to compensate for higher inflation - above 2 per cent.
Treasury bond should be in the range of 2.26 per cent, based on the long-term average real yield, to compensate for inflation,” says Kevin.Īll this is to say, the Capital Markets Strategy team feels the trend will be higher U.S. So, when we consider inflation higher than 2 per cent, the yield on a 10-year U.S. If a bond is earning 2.5 per cent and inflation is 2 per cent, then the real yield is 0.5 per cent. “Real yield also needs to be considered, and this is simply the rate of return on a bond minus the rate of inflation. To compensate for inflation, the 10-year needs to be trending higher. 10-year Treasury bonds are delivering returns in the range of 1.5 per cent. We need to be cognizant of that,” says Kevin.Ĭurrently, U.S. The cost of goods goes up more than their return on their investments, eroding their savings. If they aren’t earning more than inflation on their investments, they’re losing money. But if we look ahead two years, we fully expect inflation to be more in the range of 2 per cent,” says Macan.Įven so, the effect of inflation on investment returns can’t be ignored. “Inflation has likely been more persistent than many investors and the central banks expected, with supply chain interruptions and the pandemic also more persistent than expected. Will inflation stay in the five per cent range? The Capital Markets Strategy team is doubtful. But rather than focusing on a word to describe inflation, the focus should be on where it will end up. There are a variety of adjectives to describe inflation: transitory, persistent, enduring.
#Balancing caution optimism full
Looking ahead, the Capital Markets Strategy team feels the current weakness in the Chinese economy is likely to be short in nature, with the government stepping in and allowing factories to resume production at full capacity, thus resuming an upward trend heading into 2022. And one of China’s major coal-producing areas has also been heavily affected by recent flooding. “As a result, factories that rely on coal were ordered into rolling shutdowns, impacting economic activity.”Īlong with emission rates, China appears to be having difficulty importing coal from Australia and Mongolia. “An example of this self-induced weakness is with emission rates, where China wasn’t on track to meet emission targets,” says Macan. It’s interesting to note that some of this economic weakness may be voluntary. Source: Capital Markets Strategy, Bloomberg. Copper prices are signaling a slowing Chinese economyĬhinese Imports vs Copper Prices YOY Change 2006-Current (with 6-month forward forecast) Copper prices are dropping, which can be seen as the result of a decrease in manufacturing demand. There are, however, notable concerns about a slowing economy in China, with weaker copper prices supporting this narrative. There is a slowdown from peak summer levels, but things are still looking good for earnings and positive market momentum.”
“Yes, inflation is increasing, but economic activity is not decreasing at a rate where we feel concerned. “I wouldn’t say we are in a stagflation environment, but rather a slowflation environment,” says Macan. “This can be defined as an environment where inflation is increasing but economic activity is decreasing.”īut is stagflation the right term? Macan Nia suggests otherwise. “We’re seeing a general economic slowdown that is happening right across the world, and a term starting to creep into the lexicon more and more is stagflation,” says Kevin. To help make sense of it all, Kevin Headland and Macan Nia, Co-Chief Investment Strategists with Manulife Investment Management, offer their views on inflation, rate hikes, portfolio re-balancing, and more, beginning with a look at the consequences of a slowing economy. But at the same time, inflation, supply chain disruptions, and labour challenges are on the minds of many, heightening the potential impact it may have for investors heading into 2022.
With files from Manulife Investment Management Co-Chief Investment Strategists, Kevin Headland and Macan Nia.Īs we round out the end of 2021, markets continue their push for new all-time highs, there are fewer pandemic restrictions affecting businesses and consumers, and cross-border travel between Canada and the U.S. Maintaining a stable investment course for the months ahead.
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