Heading into 2015 it’s fair to say our mindset is more cautious. We remain bullish overall toward equities, but we do see greater risks. It’s not that we don’t see opportunities. It’s just a question of where to look and when to take action.

Tough slog turns tougher for eurozone
As always, the eurozone picture remains mixed. But the incoming data have recently been tilting more toward the negative. Economic “growth” was next to nothing halfway through the year but improved modestly in the final months.

Monetary policy actions by the European Central Bank (ECB) haven’t quite been up to the task of setting the ship aright. There remains the possibility of full-blown quantitative easing, but the outcome there is far from predictable given the bank’s challenges and restrictions in trying to bolster 18 different economies.

We feel investment opportunities in the eurozone carry more risk than what we observed heading into 2014, but also the potential for more gains. Bigger and bolder action from the ECB would be a potential catalyst.

Read: Global economic growth to remain fragile: Report

Bonds the best buffer
Bond yields have stayed lower for longer than most market participants would ever have anticipated. But it won’t last.

The U.S. Federal Reserve’s asset purchase program, known as QE3 (the third round of quantitative easing), is over. We expect the first increase in the Fed’s benchmark lending rate will happen mid-year at the earliest, finally kicking off the process of “normalizing” interest rates.

Bond portfolios will likely feel some pain. This is the time to remind investors of the primary role bonds play in a balanced portfolio—which is to reduce the investment risk associated with equities. In our view, equity investment risk is rising, and that makes a well-constructed bond portfolio even more important.

We’re seeing greater opportunities in bond markets closer to home than we did last year. At that time, our investment solutions reflected the view that global debt markets provided better return potential than North American ones. Now that global bond yields have come down, we’re finding the risk/reward tradeoff not as compelling.

Read: U.S. economy expected to grow faster than Canada’s

Equities: Higher but more precarious
We believe most markets, including the U.S., international, and emerging, will continue to trend upwards this year, but likely at a slower pace.

We do however sense greater anxiety in the equity markets. Market jitters translate into volatility, and we saw the effect of that in October. There’s also Russia, where the economy looks headed for deep trouble with the late-year plunge in the ruble. The extent of the potential global impact remains uncertain.

The U.S. is likely to hold the pole position with respect to economic improvement. The unemployment rate is at pre-crisis levels, GDP growth is decent, the housing market appears stable, and consumer sentiment is at multi-year highs. All this may or may not translate to equity market outperformance, but there’s no question it’s a good thing.

Read: 7 forecasts for 2015

The steep plunge in oil prices has given Canada’s equity market a serious shakeup. However, opportunities in energy and the commodity-related sectors are looking attractive long-term and we’re poised to take advantage when the time is right.

In summary, while we’re concerned over eurozone weakness, the potential for a major move in bond yields (unlikely), and increasingly skittish investors, we are cautiously constructive toward U.S. equities and Canadian bonds, as well as global infrastructure.

Sadiq S. Adatia is chief investment officer at Sun Life Global Investments (Canada) Inc. The views expressed are those of the author and not necessarily those of
Benefits Canada.

Copyright © 2020 Transcontinental Media G.P. Originally published on benefitscanada.com

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