Canada’s inverted yield curve may be flashing recession signs, but it hasn’t prevented investors from enjoying some of the best quarterly returns in years.
Investors are lapping up Canadian assets even after the yield curve inverted. This shift, when longer-term interest rates dip below short-term yields, often signals that a recession looms and that policy makers will be forced to lower borrowing costs. “I would put the root cause of the outperformance of Canadian credit basically on the posture of the Bank of Canada — there’s a risk that it can actually cut rates now so we’ve seen the yield curve come down,” said Philip Petursson, the chief investment strategist at Toronto-based Manulife Investments.
Petursson sees the Canadian stock benchmark trading in line with the S&P 500 and international equities, estimating returns in the mid-single digits over the next 12 months as a result of more modest earnings growth. For fixed income, he expects a similar return profile of mid-single digits, assuming interest rates fall.
Sheep to the slaughter
because they are so cheap
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