David's Weekly - April 5, 2024

Plan - don't predict

In this week's letter:

Opportunities to generate income with bonds are slowly deflating - and that matters for those approaching or in retirement. Now what? Invest like a pension fund

Clients' top concerns

Our top concerns about our clients' situations

Opportunities to generate income with bonds are slowly deflating - and that matters for those approaching or in retirement.

We've been pounding the table for several years now about the generational opportunities for investors in need of steady, secure income from their portfolios.

Whereas in the past 10 years low interest rates have been a boon to stock market growth, the other side of the coin has been the challenges of buying bonds that will provide a meaningful cash flow.

To be clear, we're not calling for the end of the opportunities altogether, what we do see are more signs that the turning of the interest rate cycle is gradually diminishing bond opportunities.

Some of this is due to the mechanics of bonds and inflation. With inflation falling, bond yields also fall, as is natural.

Real Returns = Nominal Returns - Inflation        

However, the market hasn't yet fully priced in a return to inflation targets, and so, there remains very good value in the bond market, albeit, value that is slipping.

Discount Bonds Deals and Credit Spreads - two indicators that the market believes inflation is falling.

If we could time the market, we'd buy bonds in advance of the market believing inflation has been licked. But timing the market is impossible. Regardless, here are signs why the discount bond trade which we've been using successfully with the proper overall tax position, is slowly running out of steam.

1) discount bonds - those that were issued during low interest rate periods and fell in price when interest rates increased, are maturing. This has resulted in a very favourable opportunity for the non-registered accounts of individuals of high earners in the top tax bracket. That opportunity set is falling and the next round won't de-develop until we circle around the cycle again.

2) credit spreads - the extra premium investors should receive for taking corporate risk, rather than buying government bonds - are shrinking. Here's a picture of how credit spreads have behaved since '07. This isn't to say that credit spreads won't widen out again, just that the compensation is lower right now.

Credit Spreads since '07. We're approaching levels just before the great financial crisis

Private Credit - Invest Like a Pension

As we discussed last week, public market opportunities for fixed income are less attractive than they've been over the last year. And that is why we are having conversations and offering private market solutions that put "regular" investors in the same opportunities as pensions and family offices. Those opportunities remain, so reach out to discuss if you're looking for diversification and return enhancement.

What are clients' top concerns?

Let's leave markets for a moment and broaden the conversation to wealth management. As we've pointed out, investment management is ubiquitous and commoditized. When speaking with business owners and executives, the top concerns they share where we can add value include.

1. Poor portfolio performance. What's doesn't get measured doesn't get managed. Although we do witness some sub-par portfolios, often the perception of poor performance is increased by the lack of an overall plan. This is why we match portfolios with needs and not just risk tolerance.
2. Difficulty understanding fees. There's nothing more frustrating than opacity when it comes to fees. CRM2 clarifies how much your advisor charges but doesn't explain the value received, Furthermore, MERs can be difficult to understand and measure. We believe in full disclosure.
3. Don't hear from their advisor. Abandonment by one's advisor can be an indication that their only value is investment which, as we've explained, is the most highly commoditized part of the business.
4. Don't know if they'll have enough to achieve their goals. This results from a lack of a financial plan. Our conviction is that portfolios are meant to take you where you need to go and, therefore, that all portfolios should be goals-based. All clients should expect a financial plan and that is our policy.
5. Worry they are paying too much taxes. Of course, we believe everyone should pay their taxes but should not pay one more penny than they have to. Tax planning, of which there are literally 150 or more strategies, is not the same as tax avoidance or tax evasion. The tax planning gaps we often fill with our specialists are often left open by tax advisors or previous investment advisors.
6. Don't have any succession planning in place for their business. Business owners are busy. They are entrepreneurs whose time is filled weekdays and weekends and their challenge is often finding the balance between work and family. Years often pass before the begin to flesh out plans for succession and more often than not, the succession planning strategy starts with our first conversations.

Our top concerns about our clients' situations

We won't elaborate, but here's what keeps us up at night before getting our clients' plans in order.

1. An outdated Will or no Will at all.
2. No financial plan
3. No risk management in place in case of tragedy

If you also share some of the above questions and concerns, please get in touch. At RBC Dominion Securities we have been successfully addressing these questions for years, putting plans into place to help our clients meet their needs and goals. Give us a call. Let's have a coffee together and see how we might help.

And with that, we'll wrap as always with this week's Global Insight. Enjoy.

In this week's issue ... (FR )

• 2024 earnings: The likely convergence of the “haves and have nots”: Soon all eyes will be on Q1 earnings results. We think the full-year earnings growth trajectory is more important. Growth rates for the Magnificent 7 and non-Mag 7 stocks are expected to converge—a positive sign. But there are some lingering second-half earnings risks to keep in mind.
• Regional developments: Economic impacts of fewer non-permanent Canadian residents; U.S. Treasuries face significant selling pressure; Stage seems set for ECB rate cuts to commence in June; China manufacturing PMI at 1-year high.

This information is not investment advice and should be used only in conjunction with a discussion with your RBC Dominion Securities Inc. Investment Advisor. This will ensure that your own circumstances have been considered properly and that action is taken on the latest available information. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof. The inventories of RBC Dominion Securities Inc. may from time to time include securities mentioned herein. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ? / TM Trademark(s) of Royal Bank of Canada. Used under licence. ? 2023 RBC Dominion Securities Inc. All rights reserved.