A Comment -- General Comments From an Expert (A Commentary)

In 2007, there were a few mortgage funds that went broke. They were canaries in the coal mine. The recent hedge fund blowups are similar. Too much leverage in the system and not enough liquidity. Must be mindful that leverage is returning to the markets.

Bond yields. They could go either way in the year ahead. Big question is do we see a test of 2%? A real chance that we could see higher rates, and then the market has to start paying attention. If the 10-year gets to 2%, it gets interesting. A game of chicken. Does the Fed do curve control, which pins down the rates in the yield curve and causes a lot of distortion? But we're not there yet. Probably 9-12 months before the Fed starts to talk about tapering or lifting rates.

Investment grade or high yield bonds? For the last year, he's focused on credit spread. There's been very little value. He's buying mostly short-term, under 3-4 years, and focusing on government yield curve. Risk that rates drop from these heights and a chance we run into a recession. He's neutral in his spot, and negative on credit. Not a great entry point for a great yield experience.

REITs. He really likes industrial and multi-apartments. Those are the best and safest rates of return. He's avoiding office and retail, even though they're trading at significant discounts.

Preferred shares. For preferreds, assuming they're resets, it's more about the state of the interest rate market. If we think rates are going up, preferreds will do better. You have to make a call that the BoC and the Fed will raise rates sooner rather than later. You know they won't raise rates for the next 9 months, but it could go as long as 2-3 years. Or rates could drop.

Are people too euphoric? No. Markets are full of optimism. Though there will be bumps along the road, we continue to make new highs as worldwide vaccine progress continues. US stimulus plans should bridge economies until we reach herd immunity. The IMF has boosted world growth GDP for the second time in 3 months, the strongest annual GDP expansion since 1980. Safe to favour equities over bonds, cyclicals over defensives, and corporate bonds over government ones. Commodity prices should continue to gain traction.

Inflation. One of the risks to consider. We might see 2% inflation, but not excessive. Bond yields have calmed down. Another bump in the road would be if the Covid variants get out of hand. Rapid vaccine rollout in US and parts of Europe will help the reopening trade and cyclical stocks. Though we're not feeling it here in Canada yet.

Canada or US now? Has been overweight US for many years. Now it's time to look at Canada and internationally, including Asia and Europe. In Europe, it's value and financial stocks. You can't beat the depth and breadth of the companies in the US, but now's the time to look beyond.

Which US bank to buy? US banks are great, one of the top performing industries in the S&P. Focus on valuation, trading below or near book value like WFC, Citi, and CFG.

Fears of real estate crash in Canada? There's been talk of this for a very long time. You never know when this will happen. Looking at price metrics, we're right up there. We might have a small correction. But he wouldn't avoid banks or lenders on this basis.

Hedged vs. non-hedged ETFs. Right now, with the CAD at 79-80 cents, he'd prefer to be non-hedged. Hedging is more expensive. CAD range is 70-80 cents. To take out the risk of long-term currency fluctuations, you can go hedged, but you may not get the upswing of the USD going back up against the CAD.

Hybrid, a world where stay at home habits have some staying power, but we'll still be going out during the reopening. Don't bother guessing what consumers will do with mass vaccinations. Instead, stick with good stocks on both sides of the trade. A hybrid economy. Like JPM's CEO said today that he expects a mix of workers staying at home some of time and returning to the office some of the time.

People feel confident, especially in the US where vaccinations are accelerating. Recent data is very positive. Q1 exceeded expectations. Whether we see a full recovery in services later this year is questionable, especially in places like Ontario. But rates remain relatively low and stimulus helps. Healthcare is a good place to be now, though pharma tends to get beaten down historically. Health technology is especially good. Elective surgeries, down during lockdowns, will grow going forward. Covid vaccines proved how quickly companies can bring them to market, how we can solve medical problems a lot faster.

Market. Market. We are seeing signs of the real economy roaring back. He thinks this cycle has room to run. Think about the re-opening trade, the back-to-work trade and away from the work-at-home trade. Don't throw out babies with the bath water. It will not likely be like the 2008 to 2019 cycle.