What do Interest Rate Changes Mean for Your Portfolio? – September 2024
The seasons are changing, and so is the prime lending rate.
Autumn is a time of great change in the markets, and a perfect time for you to make changes too!
Do changes in interest rates really matter to me?
That’s an easy question to ask. After all, unless you are contemplating taking out a mortgage to buy a house, you might think that interest rates are someone else’s concern. But in truth, interest rates, and their seemingly constant changes, impact a lot more than just the residential housing market. That’s why JCIC pays a lot of attention to the trends and forecasts.
“Interest rate expectations have been on a roller coaster ride this year,” according to Kai Lam, JCIC’s Chief Investment Officer.
Sometimes the forecasts themselves affect the market more than the actual rate changes.
“At the start of the year, the market was pricing in six rate cuts of 25 bps (basis points) in the US and Canada,” says Lam. That would lower the prime lending rate by 1.5%.
“But the economic data that came in was better than expected and not consistent with a recession. So, the forecasts were revised to only 1 or 2 rate cuts for 2024.”
The general rule of thumb is that governments will raise rates to curb inflation, or lower them to spur growth. It all depends on what direction they want to nudge the economy.
“Recent soft economic data and weakening inflation has allowed rate cuts in Canada and Europe,” says Lam. “The US is expected to start rate cuts in September with multiple cuts coming for the rest of the year.”
But getting back to the first question of how this impacts investing: the reality is that some companies thrive in a high interest rate environment, while others do better when rates are low.
Kai Lam explains: “For the first half of the year, interest rate sensitive companies such as utilities, pipelines, and real estate did poorly as the narrative turned to "higher for longer" interest rates. This opened up opportunities to buy high quality companies with strong underlying businesses at below average valuation. For example, we switched out of Teck Resources and initiated a position in FirstService in June. At the time, Teck Resources' share price had climbed 40% with copper prices rising and enthusiasm over BHP's bid for Anglo American. When shares approached our fundamental target price and we saw limited short-term upside, we got out. FirstService on the other hand had a depressed share price from macro concerns over higher interest rates. FirstService falls under the real estate sector, but the underlying business is not actually that sensitive to higher rates and this opened up an opportunity to initiate a position in a high-quality company trading at depressed levels. Since June, those shares have performed very well.”
Our expectation now is that inflation will continue to fall and eventually achieve the 2% target rate. A slowing economy with rising unemployment sets the stage for rate cuts in the US, Canada, and Europe in late 2024 and 2025. With that in mind, JCIC is already planning our next move.
Labour Day is the new New Year’s Day!
New Year's resolutions are hard to follow through on. After all, it's the middle of winter, you are exhausted from the holiday party season, and all you want to do is crawl under a cozy blanket and fall asleep until the snow melts.
But Labour Day resolutions... those can be fun! You are rested and energized from the summer, and the weather is still nice enough to make you want to get out of bed in the morning.
So, what new project are you going to start this September? Buying or selling a property? Taking an extended vacation? or Planning your retirement? Whatever it is, give one of our relationship managers a call and make sure your investment strategy lines up with your next big move.
Important dates to remember
Sept 30th - National Day for Truth and Reconciliation
Oct 14th - Canadian Thanksgiving
Oct 31st - Halloween
Nov 3rd - Daylight savings end (clocks go back one hour)
Nov 5th - US Election
Nov 11th - Remembrance Day
Nov 28th - American Thanksgiving
Disclosure:
Although we obtain information contained in our newsletter from sources we believe to be reliable, we cannot guarantee its accuracy. The opinions expressed in the newsletter are those of JCIC Asset Management, its editors and contributors, and may change without notice. Any views or opinions expressed in the newsletter may not reflect those of the firm as a whole. The information in our newsletter may become outdated and we have no obligation to update it. The information in our newsletter is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. It is provided for information purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor or a group of investors. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. We strongly advise you to discuss your investment options with your Relationship Manager prior to making any investments, including whether any investment is suitable for your specific needs.
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