Investors seeking income should look to high yield bonds and dividend-paying stocks, and should invest in these assets now while valuations are attractive, according to Norman Raschkowan, North American strategist at Mackenzie Investments and co-manager of Sentinel Strategic Income Fund.
Speaking at a conference hosted by Mackenzie in Toronto, Raschkowan warned that market volatility is likely here to stay. He pointed out that the average weekly movement in the Toronto Stock Exchange has been 256.3 since 2007, more than double the average of 120.1 between 2001 and 2006.
“The macro environment remains uncertain,” he said. “The volatility is going to remain with us. But that’s not necessarily a bad thing.”
Advisors can help clients navigate the choppy market environment, Raschkowan said, and find investment opportunities amid the turmoil. With valuations on the S&P 500 and the TSX having fallen to attractive levels, he believes it’s a good time to invest in equities.
“We are in an environment where the economy is growing, earnings are rising, corporate balance sheets are in the best shape they’ve been for years…and valuations are at a discount to their long-term averages,” Raschkowan said. “So equities are definitely attractive.”
Given their strong dividend yields, equities are particularly appealing for clients who are looking for income. “We think companies are well positioned to continue to grow their earnings and their dividends,” Raschkowan said.
High yield bonds present another attractive option for income-seeking clients. The default rate on high yield bonds has dipped to a relatively low level of about 1.5% in the U.S., and yet the yield premium on these investments are well above average, at roughly 600 basis points.
“Usually you get these premium spreads when default rates are rising, and people are concerned about the economic environment,” he said. “[But] from a historical perspective, [the default rate] is actually quite low.”
Within the rest of the fixed income space, Raschkowan urged advisors to avoid government bonds, but to look for opportunities in the corporate bond sphere.
Sector-wise, Raschkowan currently favours non-cyclical stocks with stable earnings and solid downside protection. He’s recently increased his holdings of consumer discretionary stocks and healthcare stocks, while he’s decreased holdings of industrials and utilities.
He particularly likes global pharmaceutical companies, which he says are currently undervalued and boast dividend yields that are growing.
Raschkowan said he expects modest global economic growth this year. Economies in Europe continue to face major challenges, he pointed out, with data showing that countries such as Spain and Britain have already slipped back into recession.
He’s encouraged by signs of improvement elsewhere, however. In the U.S., for instance, he said leading economic indicators are positive as credit conditions have improved dramatically and the housing market appears to be picking up.
“The U.S. is in very good shape,” he said.