How to invest as the Bank of Canada holds interest rates at 5%
The Bank of Canada’s decision to keep its overnight lending rate on hold at an elevated level is driving some investment professionals to move money into the bond market and consumer staples as a defensive strategy.
The central bank decided to hold its benchmark rate at five per cent for a second consecutive time on Wednesday. It’s the highest central bank interest rate in Canada since 2001.
The pause is indicative of a clear downward inflation trend and it suggests to money manager John Zechner that much weaker Canadian economic data should be expected the months ahead.
Zechner, chairman and founder of J. Zechner Associates, spoke with BNNBloomberg.ca about how this outlook is influencing his investment strategy.
“While we don’t expect any big moves in interest rates in the near term, the next direction that interest rates will move is lower, and heading into this environment we favour investing in long-term bonds like the 10 year U.S. treasury or the 10 or 30 year Canadian government bonds,” he said in a phone interview.
On the equities side, consumer staples are among the safest play for investors, Brian Madden, chief investment officer at First Avenue, told BNNBloomberg.ca in a phone interview.
Amid plateauing interest rates, Madden said investors should consider the realities of an economic slowdown.
“In this kind of economic environment, we look to own best-in-class companies with strong balance sheets,” he said.
Madden suggested investors look for companies that provide household needs, pointing to consumer staples such as grocery stores and telecoms.
“In an environment where rates remain higher for longer, you also have to think about the fact that while the borrower is disadvantaged, the lender is not,” he added.
Insurance companies will benefit from higher-for-longer interest rates, Madden said, because they tend to invest in short and medium-term bonds and then reinvest their capital at higher levels, he said.
Rebecca Teltscher, portfolio manager at Newhaven Asset Management, also pointed to consumer staples as investment options.
“We’ve seen recently a market sell-off for interest rate sensitive sectors like in telecoms and the utilities sector,” she said. “There’s immense opportunity for growth ahead in these stocks.”
As one example, Teltscher pointed to the large number of immigrants expected to arrive in Canada who will need phone and Wi-Fi services provided by the telecommunications sector.
'BUBBLES OF RISK'
Despite the search for safety, Teltscher also cautioned that investors should be aware of risks looming above the market that could ultimately lead to a correction.
“There are several small bubbles of risk in the market right now and it’s impossible to say which one will burst, but there will be a point where one does,” she cautioned.
Those risks include possible consumer weakness, escalating in geopolitical tensions and mortgage renewals, as just a few areas Teltscher said she is keeping her eye on.
“Something will eventually break in this market and that’s why we’re positioned in a very defensive way,” she added.