Canadians looking to make the most of their RRSP portfolios before and after the March deadline need to take a close look at equities, according to Bank of Montreal’s RRSP panel.
“High quality equities are probably the only game in town, right now,” said Stephane Rochon, vice president, managing director, BMO Nesbitt Burns Inc., who spoke as part of the panel on Friday. As such, Rochon recommends that RRSP portfolios be overweight in equities.
BMO has placed such a strong emphasis on equities because bonds and cash are likely to have negative real returns in the coming years.
“We are uncertain as to the timing and the magnitude of higher interest rates,” said Rochon, “but as far as we’re concerned the 30-year bull market in bonds is behind us.”
Of course, to mitigate some of the downside of market volatility bonds still have a place in any portfolio, according to BMO, it’s just a matter of choice.
“Not all bonds are created equal,” said Serge Pépin, vice president, investment strategy, BMO Asset Management Inc., who was also part of the panel.
“There are certain areas, such as emerging markets bonds as well as high-yield bonds, that could still be of interest even if we do see some pressure on the yield curve in 2013.”
For the most part, investors can expect to see an increase in equity markets, according to Rochon, because of a stronger global economic outlook.
“If you take a look at the three large economic blocks in the world – the U.S., China and the eurozone,” he said, “economic momentum is actually improving in all three regions right now.”
Rochon is particularly interested in U.S. equities because the S&P 500 is more balanced and better priced compared to the Canadian market. Fifty per cent of the TSX consists of energy and basic materials, said Rochon. In comparison, those sectors account for 13% of the S&P 500. Instead, the U.S. market has a plethora of technology, consumer and industrial companies, which are all sectors that BMO analysts expect to do well.
As well, Rochon sees the U.S. housing market as another reason for Canadian investors to include American equities in their RRSP portfolios. With the housing recovery in full swing, investors can participate through stocks such as U.S. banks and the auto sector, said Rochon.
The auto sector will benefit from the improved housing sector because higher property values make people feel wealthier and therefore likelier to make large purchases, such as a car.
Despite the optimism of the panelists, some investors may still be hesitant to include more equities in their RRSPs because of the recent past.
“[Investors are] definitely still living with the mindset of 2008,” said Pépin. To make clients feel comfortable again with equities, he said, advisors can bring them gradually back into the market through by setting up a regular RRSP contribution plan. That way, investors can dip their toes back into equities instead of diving in and trying to time the market.