Tyler Mordy, president/chief investment officer, Forstrong Global; Toronto
Here are two ETFs that can be used in the context of a balanced portfolio going into 2017:
Investors looking for an equity encore in a post-Rajan Indian world will not be disappointed. Fundamentally, India has a lot going for it—relatively less reliance on global growth, orthodox monetary policy, etc.
But a new catalyst may have emerged: With former head of central bank Raghuram Rajan smashing inflation, and the significant decline in the oil price surely helping his mandate, there is big potential for Indian policy rates to come down. Investors may well be treated to a triple merit scenario of falling interest rates, rising currencies and rising asset prices. Assets right across India may benefit, but the equity market is poised for a big rerating.
The world’s central bank chariot wheels have not just hit the ground, they have gone through it, and are burrowing deep into the monetary unknown. More than a quarter of the world’s population now lives in countries with negative interest rates. Yet paradoxically, optimism on bonds is at an almost record high, given the above backdrop.
We have been longer-running proponents of a “lower for longer” interest rate outlook. Yet there are limits to linear thinking. U.S. long-term 30-year rates fell from 3.2% to 2.4% in the last year. That’s a 25% decline. Couple this epic bond rally with our forecasts of fiscal expansion and the Fed mulling rate hikes, and bond caution is now in order.
Investors should now consider shortening duration and taking on floating-rate exposures like BKLN where possible. U.S. senior leveraged loans offer an attractive alternative to high-yield bonds. Within a company's capital structure, they are typically senior to the claims of other creditors. The loans pay a floating interest rate at a predetermined spread over a reference rate (usually Libor), once a “floor” in the reference rate is eclipsed. BKLN mitigates duration risk while still providing an attractive yield.
Charts courtesy of StockCharts.com
Disclosure: At the time of writing, Forstrong held positions in INDA and BKLN.
If you are a strategist or an advisor, and you would like to share your top ETF pick for 2017, please contact Cinthia Murphy at [email protected].