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As the Bank of Canada becomes hawkish, investors retool the outlook for higher interest rates According to Reuters

© Reuters. A jogger runs past the Bank of Canada building in Ottawa

By Fergal Smith

TORONTO (Reuters) – Investors in Canada are stepping away from interest-sensitive stocks, looking for inflation protections and betting on steeper yield curves as the Bank of Canada leads banks The global center moves to a more hawkish stance.

Canada’s central bank on Wednesday signaled it could raise interest rates as soon as next year and slash bond buying, becoming one of the first major central banks to reduce stimulus.

Investors said they have adjusted their portfolio for a while to prepare for higher interest rate prospects, but BoC’s move has reinforced focus on such results.

“The fact that the Bank of Canada is currently starting to slow down … that’s the first sign of what’s going to happen and is a big story in the second half of this year,” said Greg Taylor, a portfolio manager. investment at Purpose Investments.

Taylor expects other central banks to follow the lead of the Bank of Canada, making it harder for the stock market to appreciate by the end of 2021. A higher rate reduces the value of future cash flows. which stocks produce.

AGF Investments portfolio manager Mike Archibald values ​​technology stocks and cyclical industries, such as industry and consumers, while the defensive sectors are underweight, including telecom. information, consumer equipment and utilities.

“I am underweight (self-defense) with expectations of better growth over the next 6-12 months as well as higher productivity over time,” Archibald said.

Increased bond yields reduce the attractiveness of high-dividend defensive stocks that tend to pay.

The Bank of Canada expects the Canadian economy to grow 6.5% by 2021 and inflation will move in the coming months to the highest level within the 1% to 3% target range.

According to Michael White, portfolio manager at Picton Mahoney Asset Management, with rising inflation expectations, commodity purchases could benefit portfolios.

“Things like industrial metals and energy … you get the benefits of being active when the economies in general are growing but they’re also sensitive to inflation,” he said.

A more hawkish Bank of Canada backed the Canadian dollar CAD =, and James Athey, chief investment officer at Aberdeen Standard Investments in London, were among the investors who bought the coin on Wednesday, when it hit a one-month high of 1.2455 per US dollar, or 80.29 US cents.

He also bets that Canada’s long-term yields will rise more than short-term yields, or the curve will be steeper.

That transaction is still relevant “since asset purchases are going down sooner and a lot easier than switching to tightening through higher rates,” Athey said.

Earl Davis, head of fixed income and money markets at BMO Global Asset Management, said Monday’s proposal in the federal budget to increase the rate of long-term bonds to 42% from 15 The pre-crisis% can also lead to a steeper curve.

While the punishing third coronavirus pandemic created a headwind for the Canadian economy, it may not change the big picture on the exchange rate outlook.

Philip Petursson, investment strategist at Manulife Investment Management, said: “We believe this third wave and renewed closures are events that are disruptive but not destructive.”



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