Canadian institutional investors have a large home bias, but with U.S. stock markets recently outperforming Canadian ones, they might want to rethink their strategy—and remember their closest neighbour to the south.
Relatively, U.S. stocks look attractive, compared to high-yield or corporate grade bonds, says Jim Morrow, portfolio manager of the Fidelity U.S. Dividend Fund.
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“Last year, we were worried about Washington [the fiscal cliff], unemployment and housing,” he says. This year, unemployment and housing are on the upswing, and the mending of the fiscal cliff is under way.
The U.S. economy is in a position now to “pull itself out of the malaise,” Morrow continues, noting that it has “favourable demographics,” compared with Japan’s shrinking populous, for example.
“The U.S. is one of the few developed countries with a positive birth (replacement) rate,” says Morrow.
That positive birth rate—i.e., a larger working-age population—and productivity are two big drivers of economic growth. That means increased GDP and positive returns for the U.S. economy—and both bode well for investors.
Back to equities
And, if U.S. equity markets continue their favourable performance, Morrow believes investors will begin to look seriously at this asset class again. He explains that he’s starting to hear U.S. investors talk about the “great rotation”—the move from a bond focus to an equities focus.
“The bond rally [of the last decade] is in late innings,” adds John Roth, portfolio manager of the Fidelity U.S. All Cap Fund.
However, this shift will not be immediate. “Until investors associate bonds with risk, it will be a slow turnaround to equities,” says Morrow.
In the meantime, Canadian investors may want to start thinking about equity investment south of the 49th.