PAID CONTENT
Senior Vice President and Portfolio Manager, Fixed Income
Canada’s fixed income landscape is foggy. A mix of slowing growth, trade uncertainty, and pending rate cuts has left investors — and their advisors — looking for clarity.
While fixed income portfolios may not be sprinting, they’re not standing still either. Opportunities exist for those taking a methodical yet active approach, says Darcy Briggs, a Senior Vice-president and Portfolio Manager at Franklin Templeton Fixed Income.
Several macro trends are shaping investor behaviour. In past years, government spending, an influx of immigration, and a housing boom “created an illusion of growth,” says Briggs. But deeper productivity and investment gaps remain. “Looking at Canada, we expect softer growth. GDP per capita is somewhat flat.”
Meanwhile, the on-again, off-again effects of U.S. tariffs, and whether the United States–Mexico–Canada Agreement will be renegotiated, are adding fresh economic headwinds. Until that gets settled, Briggs says consumers and businesses are going to “sit on their hands.”
“We may end up being one of the lowest-tariffed countries in the world when all is said and done, but we don’t have any visibility on that.”
If Canada has a quick resolution to tariffs, Briggs feels that mediocre growth might follow. If tariffs remain substantial, he says the country will face a full-blown recession over the next year. There are several paths, but Briggs feels that none are highly bullish for growth.
He expects the Bank of Canada will cut rates to about 2 percent by year-end, citing mortgage resets and indebted households as key drivers. Inflation remains a wildcard, too.
With these conditions providing the backdrop, what are the prospects for fixed income investors? In times like these, fixed income isn’t just about yield; it’s about discipline.
Senior Vice President and Director of Canadian corporate credit research
“Markets are remarkably comfortable with the current level of risk. We have been generally very cautious about chasing spread. We’re trying to be as disciplined as we can about credit, duration, and currency. We prefer to take a lot of little bets rather than a few big bets,” says Adrienne Young, a Senior Vice-president and Director of Corporate Credit Research, Canada, with Franklin Templeton Fixed Income.
Global diversification is key
That translates into an approach grounded in global diversification (access sectors unavailable in Canada), liquidity (act when opportunities arise), and defensive positioning (hedge selectively with derivatives).
In Canada, the bond market is smaller and less liquid, Young adds. “If other people are selling and we’re one of the few buyers, we can lock in great pricing on good-quality bonds that we might not otherwise get.”
What’s worth considering now? The short list of sectors that Franklin Templeton is overweighting includes energy (pipelines and distribution). Young touts the “contracted cash flows with high-quality counterparties.”
She’s bullish, too, on some of the resources that are important to farming and utilities (they’ll be needed regardless of the economic cycle), U.S. healthcare and industrials, and defence. Young also mentions U.S. money-centred banks, which are trading at a discount compared to Canadian banks.
This sizable investment in U.S. sectors acts as “a bit of a ballast against any correction that may affect Canadian consumer-related credit,” she adds.
In contrast, areas of concern include Canadian consumer credit, the retail and auto sectors, and credit unions (whose housing-loan books are skewed to the Toronto and Vancouver markets).
In the current environment, fixed income is generating income again. “The FTSE Canada Bond Universe yields just under 3.5%. Our preference for holding more credit than the index allows us to deliver additional yield to clients in our strategies”, says Young. That means less variance compared to some equity funds without the associated risk, offering real value.
Made-in-Canada expertise
There was a time when fixed income didn’t pay. Now, it’s a viable contributor for income and diversification, and cushioning client portfolios. “If we do have a downturn in economic activity, fixed income should still provide that buffer,” says Briggs.
While global exposure is vital, there’s no substitute for being on the ground. The Franklin Templeton team is based in Calgary, and Briggs says Canadian investors benefit from managers who understand the local nuances, whether around investors’ objectives or constraints. “You have a better knowledge of the intricacies of the marketplace. It becomes a lot more difficult if you’re removed from that.”
Rather than make major directional bets, Franklin Templeton is emphasizing a nimble posture. This measured stance enables the firm to be opportunistic.
“To benefit their clients around fixed income, advisors should think active, not passive, and diversify thoughtfully”, Young says. “Volatility demands vigilance to help smooth the ride.”
“Active management allows for better control over credit risk, interest rate risk, and liquidity risk, which can be crucial during periods of market turbulence,” says Briggs, adding that this isn’t a time to underestimate fixed income’s contribution. “Uncertainty will be with us for a period of time.”
The Franklin Templeton team believes that’s not necessarily bad for fixed income investors.
“Volatility is risk, of course. But if you’re an active manager that has been collecting liquidity — and we have — it’s an opportunity,” says Young.
She explains that sometimes certain areas of the market will go completely no bid. “That’s when Franklin Templeton can go in and say, ‘You have to sell. Well, we can buy. And here’s the price.’
“That’s an opportunity to really outperform for the investor,” she continues. “Active managers can offer you more diversification than the passive benchmark, capitalize on market opportunities, and respond to changing market conditions in uncertain times.”
Important Legal Information
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell, or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice.
The views expressed are those of the investment manager, and the comments, opinions, and analyses are rendered as at publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region, or market.
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Franklin Templeton Canada is a business name used by Franklin Templeton Investments Corp.
