Many clients have stepped into the RRSP season with confidence and optimism, buoyed by a run of positive stock market behaviour and economic growth in Canada and the U.S.

Compared with last year’s start, when the Canadian stock market was declining and investors were fearful, this year is finding clients willing to invest. They have seen a year of strong stock market gains in which the Canadian market was one of the strongest in the developed world, showing a 21% gain in the S&P/TSX composite index last year. Any clients who sat out last year would be reluctant to miss out again.

“The mood of the marketplace is good,” says Brian Gooding, head of distribution at the Mackenzie Investments division of Mackenzie Financial Corp. in Toronto. “Last year, markets were down, there were a lot of jitters and the fund industry showed negative net sales in January. This year, net sales are positive and there’s more optimism.”

Gooding says gross mutual fund sales at Mackenzie are up by about 40% for the month of January, and there’s less money going into money-market funds, which are typically viewed as a parking spot in uncertain times. Balanced funds and U.S. equities are, so far, the popular categories this year, he adds, but Canadian equities and fixed-income are also doing well. The top-selling Mackenzie fund in January was Mackenzie U.S. Mid Cap Growth Class Fund.

David Richardson, vice president at Toronto-based RBC Global Asset Management Inc., says his firm is also off to a strong start for the RRSP season, with mutual fund sales more than double last year’s levels, but still below all-time record levels. Although clients continue to favour diversified products and balanced fund-of-fund portfolios, he says, they are moving up the curve from highly conservative portfolios to bolder balanced strategies with more equity exposure. At the same time, they have backed off guaranteed investment certificates, and the deposit side of Royal Bank of Canada‘s business is lagging fund sales, Richardson says.

“Although there is some apprehension about events in the U.S. with the election of a new president, the economic figures are pointing toward improving growth, and there is more willingness to take risk,” Richardson says. “Clients are willing to wade in with a balanced, diversified approach, and let the professionals handle the allocation and rebalancing decisions.”

Toronto-based Bank of Montreal recently released the results of its 2017 RRSP survey, showing that 46% of Canadians planned to contribute to their RRSP this year, down from 50% last year. Although the intention to contribute has declined, the average amount contributed for those who had already invested had risen significantly to $5,088 from last year’s $3,984. Another poll, also from Mackenzie, showed 50% of investors with advisors felt confident at the end of January, compared with 36% of overall respondents.

Robert Armstrong, vice president at BMO Global Asset Management Inc. in Toronto, says the trends are showing some regional differences, with some Ontario residents feeling pinched by rising electricity bills. Albertans, who were “shell-shocked” a year ago when oil prices were stagnating around US$30 a barrel, are feeling more optimistic with oil prices around US$50.

“Overall, our clients are slowly creeping away from the most conservative solutions and toward a balanced growth approach, which we regard as the right approach for long-term investors,” Armstrong says. “We believe it’s a good time to be overweight in U.S. and Canadian equities, with economic and earnings growth coming back, and a low probability of recession.”

Economic figures released in January show a tightening labour market in the U.S. with unemployment at a low level of 4.8%. Consumer spending and business investment have been growing, and U.S. President Donald Trump has promised to cut corporate taxes, increase infrastructure spending and renegotiate trade deals to stimulate U.S. growth.

What any new trade deals might mean to Canada is still unknown, but strong protectionist measures in the U.S. could ultimately hurt Canada’s growth by dampening exports.

What seems more certain is a rise in U.S. interest rates, although the Bank of Canada is holding rates steady. The U.S. Federal Reserve Board raised its target rate by a quarter point in December and signalled there could be more hikes this year. Since then, there has been a rise in bond yields and in commercial interest rates such as mortgages, with some spillover in Canada. Bond prices have dropped off, and bonds could lose more value if there are further rate hikes, posing challenges for investors who lean on fixed-income assets. For example, a 1 percentage-point increase in rates would lead to more than an 8% decrease in the price of a 10-year government of Canada bond, according to research by IA Clarington Investments Inc. of Toronto.

Many advisors and clients are therefore favouring fixed-income strategies that go beyond government bonds, to include exposure to a mix of income-paying securities with less vulnerability to rising rates, including dividend-oriented common stocks and preferred shares, floating-rate loans, corporate bonds, short-term bonds, global bonds and emerging markets bonds.

“With fixed-income, we are shifting the mix away from government bonds,” says Tina Tehranchian, branch manager at Assante Capital Management Ltd. in Richmond Hill, Ont. “The bull run is over for the bond market and there is some risk.”

For clients who are in the de-cumulation phase and are living off their portfolios, or who have registered retirement income funds and need to make regular withdrawals, she is suggesting a cash wedge, equivalent to at least three years of planned investment income, in order to build a cushion and ease worries about having to sell securities in market corrections.

“I’m the one who is tempering expectations a bit. My clients are actually feeling less nervous,” Tehranchian says. “The last few years have seen strong gains as we’ve risen from the ashes of the financial crisis, and there are a lot of uncertainties with the new administration in the U.S.”

ETFs experienced a strong January, with net inflows of $1.7 billion, according to National Bank Financial Inc. (NBF) in Toronto, compared with barely positive flows of $22 million in January 2016. Equity ETFs, including Canadian, U.S. and international funds, saw combined inflows this January of $777 million. Fixed-income ETFs saw slightly higher inflows of $799 million, with diversified bond portfolios and preferred-share ETFs benefitting from outflows from government bond ETFs.

“It’s been a big January, with a rising tide of interest in ETFs,” says Daniel Straus, head of ETF research and strategy at NBF. “Equity flows are supporting the Canadian trade, with the oil recovery taking hold and some uncertainties in the U.S., and there have been heavy flows into fixed-income.”

At Horizons ETFs Management (Canada) Inc. in Toronto, the biggest-selling ETF this year has been Horizons Active Preferred Share ETF, also the biggest seller in 2016. The ETF’s active strategy has allowed for increased exposure to rate-reset preferred shares, which are positively co-related to rising interest rates.

© 2017 Investment Executive. All rights reserved.