What would a rate hike mean for institutional investors?

However, Canada’s economy is currently well-placed for a rate hike, according to Benjamin Reitzes, Canadian rates and macro strategist at BMO Capital Markets, in a recent commentary note. “Unfortunately, we can’t ignore the trade uncertainty even if much of it is Twitter-driven,” he said. “The U.S. tariffs and Canadian retaliation will dent growth, even if modestly, but more importantly reinforce that there’s some risk of further U.S. action.”

Read: Global investors turn to infrastructure, real estate as interest rates normalize: report

Yet, as Reitzes noted, Bank of Canada governor Stephen Poloz has stated policy won’t be shaped by trade rhetoric. However, the tensions are likely to continue to be a driver of the bank’s decision-making going forward, according to Reitzess, who noted that other risks, such as the Canadian housing market and consumer debt levels, have eased recently.

If a rate hike proceeds, institutional investors will want to watch closely for any signals indicating whether this is a solitary move upwards or the beginning of many, says Randall Malcolm, managing director and portfolio manager, Canadian public fixed income at Sun Life Investment Management.

“One of the things that we’ve noted in Canada is that the curve has moved very differently in the short end and relative to the long end. We have one of the flattest curves in the G8,” he says, noting most pension plans take their natural home in the long end of the curve. Longer-term investors have stuck to their guns in that sense and have been rewarded for it, he says.

Read: Rising interest rates, inflation to cause more volatility in 2018

Canadian plans can view a rate hike as another vote of confidence in the Canadian economy, adding to the Bank of Canada’s broadly positive view, he says. ”We have a strong sales outlook and employment is relatively strong as well, so hiring intentions are up. Firms are noting that labour shortages could prevent them from meeting demand.”

Such confidence in the labour market could boost Canada’s attraction as a location for investment, says Malcolm, even considering the headwinds of trade tensions. One area of doubt, he notes, is the federal government’s purchase of the Trans Mountain pipeline, which he says “showed a lack of clarity on energy policy,” a key indicator for Canadian business.

Overall, Canada’s pension plans have been undertaking significant action to mitigate return levels in a historically low interest rate environment, says Joe Cerullo, a senior consultant at Segal Rogerscasey Canada.

Read: Investment outlook neutral entering later stage of business cycle, finds new report

He notes that on the fixed-income side, Canada’s money managers have ensured a much greater diversity in the past and aren’t likely to feel a heavy impact from a Canadian rate change. Indeed, many fixed-income managers have been focusing on short-term securities, with more of what makes up these portfolios set to mature relatively soon. Managers will then be able to take advantage by redeploying capital at a higher interest rate, should the hike take place, says Cerullo.

Should the Bank of Canada pull the trigger on another rate hike? Have your say in our latest online poll.

Last week’s poll asked whether it was a good move for the new Ontario government to change its youth pharmacare program to become second payer and emphasize coverage for those without private insurance. The majority (72 per cent) of respondents said yes, the move was appropriate as OHIP+ merely added unnecessary costs onto the government with little upside in terms of system efficiencies, given employer-sponsored coverage is already in place. The remainder (28 per cent) said no, OHIP+ was a good step towards a full pharmacare program and provided welcome cost relief to employers.