The potential for rising gold and stable oil prices may see Canadian markets outperform other countries, but investors should still expect an environment of persistently low returns on stocks, ultra-low yields on bonds, and bouts of high volatility in the months ahead, say experts at BlackRock Inc.

“This year has combined fickle global markets with lacklustre growth,” says Kurt Reiman, chief investment strategist at BlackRock Canada.

Faced with this backdrop, resilient investors may need to adjust their expectations and fine-tune their portfolios to find new sources of return while minimizing the impacts of risk. The latest BlackRock List offers eight key insights for them to consider:

1. Low market returns ahead
Global recession fears have subsided and Canada’s economy is expected to improve through 2016 as commodities recover. The U.S. economy is on the uptick and emerging markets look set to stabilize as the U.S. Federal Reserve keeps a lid on rates, and a credit boom in China boosts near-term growth. However, aging populations and the United Kingdom vote to leave the European Union (EU) may dampen global growth. Historically low oil prices will remain a headwind for Canada as it transitions to non-energy exports. Global monetary policy will keep bond yields low and push investors toward higher-yielding assets. Stock prices, in turn, have gotten ahead of fundamentals, leaving little room for appreciation. Since outsized investment returns will remain elusive, investors should pick their positions carefully as markets separate winners from losers.

2. Divergence down, not out
Diverging central bank policy and greater disparity among government bond yields have closed somewhat. The Fed is expected to increase rates slowly, the Bank of Canada will likely remain on hold, and Japan and Europe have limited room to lower negative rates. Divergence could re-emerge this year as the Fed weighs economic data versus global risks, but less divergence in the interim is keeping a lid on the U.S. dollar, supporting the case for diversifying portfolios across countries and currencies.

3. Market volatility revisited
Investors should be prepared for more volatility across countries and asset classes. From EU uncertainty to a polarizing U.S. presidential election and persistent Middle East instability, market risks can hamper long-term returns. Building downside protection into your investment portfolio in good times and bad may be a solution.

4. Better earnings on Canadian equities ahead
Canadian stock market returns have generally tracked underlying economic growth since the financial crisis, but corporate profits have disappointed. Returns have been fuelled by investor willingness to pay more for earnings and robust share buybacks. A recovery in earnings could enable further gains without pushing the market to more expensive levels, which seems likely given recent stabilization in oil prices and renewed enthusiasm for gold.

5. Find value in dividends
Low nominal yields in the bond market have boosted the appeal of stocks offering sustained dividend growth. With 10-year Government of Canada bond yields falling to 1.0 per cent, the yield advantage for owning Canadian stocks has grown. A company’s ability to increase dividend payments consistently over time points to diligent cash management and a sound business model, characteristics that tend to beget lower volatility.

6. Stick with bonds for ballast
While bonds currently produce little income, they’ve been more likely to move in the opposite direction to stocks during episodes of equity market stress, providing an important hedge. According to the BlackRock Investment Institute, more than 70 per cent of bonds in developed-market government bond indices have yields of 1.0 per cent or lower, with roughly a third below zero. In this environment, long-duration exposure is attractive for performance potential and as a hedge against ‘risk-off’ episodes.

7. Consider corporate bonds
With low government bond yields, consider investment grade (IG) and high-yield (HY) bonds in Canada and the U.S. for higher income and potential for price returns. The European Central Bank bond-buying program includes purchases of corporate bonds and should underpin bond spreads as investors look elsewhere for higher-yielding bonds.

8. Look for yield, but don’t overreach
Finding decent income without indecent risk is becoming more challenging. As traditional bond yields remain low, other income sources also face hurdles. Some of the highest-yielding stocks have been heavily bought in the investor search for income and now sport lofty prices. The takeaway: maintain flexibility and a firm focus on risk.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of July 7, 2016, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

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