Why the Canadian economy is resilient despite rising interest rates?

The Canadian economy has been robust as the BoC raised interest rates to control inflation, according to Luc de la Durantaye, Chief Investment Officer, CIBC Asset Management, in a recent podcast Opens in a new window..

“There’s recent research from the US Federal Reserve that explains that,” says Mr. de la Durantaye. “Excess savings for consumers were historically elevated following the pandemic with government support. That excess saving has supported consumption so far. The research points to the fact that these excess savings are almost depleted by now.” For details, read Inflation: Progress and the Path Ahead Opens in a new window..

Banks are also starting to raise their lending rates to catch up with the policy rate. This, along with potential additional interest rate increases, could lead to an economic slowdown in the second half of 2023.

Although high interest rates often increase the cost of living, they could also have an upside for investors. Higher interest rates can help lower inflation, increasing real investment returns and raising purchasing power. They also increase returns on fixed income investments. “Maintaining a low-duration bond portfolio lets you benefit from the recent rise in interest rates,” says Mr. de la Durantaye. “Don’t forget, you’re getting paid much better today than you were a year or two ago.”

While the prospect of rising rates creates some bargains in low-duration bonds, things may be trickier in equities as the economy softens. During periods of higher interest rates, equities can become more sluggish, making growth opportunities more challenging to find. “Low-duration bonds also give you some options to take advantage of an equity market that might be going sideways, providing some better entry points,” explains Mr. de la Durantaye.

Investors shouldn’t abandon the equity market during periods of rising interest rates. A more defensive approach to stocks could offer fruitful results.

“You want to be exposed to some of the defensive sectors that provide good dividends to get you that cash flow again,” he notes. “That also provides more stability in your portfolio.”

While there are some specific growth opportunities in equity markets, investors may want to play a longer game rather than jumping in and out of the market during periods of short-term volatility or uncertainty.

Portfolio flexibility is also critical during a volatile economy. Mixing short-term bonds into your portfolio may help provide the agility to dip into equity investments whenever that makes sense for you and your investment goals. based on your comfort level with risk.

For a detailed discussion with Luc de la Durantaye of CIBC Asset Management, play the podcast Opens in a new window..

If you’d like to discuss the insights in this podcast or have questions about your investment portfolio, please reach out to your advisor or CIBC representative any time.