With the prospects for equities dimming along with the outlook for global growth, a report from CIBC World Markets Inc. looks for some safe havens for investors.

“The focus of global markets is now shifting from liquidity and financing concerns to deteriorating macro fundamentals, which will worsen in the coming twelve months largely due to massive fiscal belt tightening in over 60% of the world economy. If history is any guide, the next few months should see global stock markets dance to the tune of a slowing global economy, and Canadian equities will see increased correlation with softening world markets,” the report notes.

In this sort of market, while equity correlations tend to increase when markets slide, the CIBC report says that sector selection is increasingly important. It points out that not all TSX sectors are equally levered to world markets. “While sectors like financials, industrials and materials are highly correlated to global returns, other areas such as telecoms, health and consumer staples actually tend to be much less sensitive,” it says.

Looking beyond equities, it finds other asset classes that tend to provide some shelter to investors when global stocks are under pressure — in particular, foreign exchange. “Among the assets that we looked at, an equally weighted basket of major currencies (U.S. dollar, yen, euro and Australian dollar) appears to provide the best hedge against declines in global equities with a negative correlation of nearly 40%,” it says.

It also finds that commodity futures appear to be less sensitive to global developments than Canadian stocks, although the correlation is still positive; and, it says, raw material prices appear to be increasingly vulnerable to any weakening in global demand.

Canadian bonds also exhibited a negative correlation with global stocks, it says, but it cautions against fixed income in when rates are likely to be rising.

“In this environment of reduced diversification opportunities, sector selection within the equity market and proper allocation across a range of asset classes will become increasingly important as investors search for cover in a world in which returns are increasingly connected,” it concludes.

IE