Amidst the Bank of Canada’s decision to maintain its benchmark interest rate at five percent on Wednesday, investors find themselves in a state of anticipation, eagerly awaiting potential rate cuts from the central bank.
In this environment, factors such as inflation, employment figures, and productivity data are under intense scrutiny. Interest rates on fixed-income instruments, including Guaranteed Investment Certificates (GICs), remain at their highest levels in years.
Kalee Boivert, a financial advisor based in Calgary, emphasizes the importance of focusing on what investors can control amidst this uncertainty. While discussions about rate movements abound, the timing and extent of any potential changes remain beyond investors’ control.
However, there’s also the possibility that the current state represents a new equilibrium, with interest rates stabilizing at their current levels. Diana Avigdor, head of trading at Barometer Capital Management, suggests that the near-zero interest rates experienced in the past were anomalous, and the current environment reflects a return to normalcy.
The allure of higher returns on money market funds and fixed-income options like GICs has led to a substantial influx of funds in these avenues since the Bank of Canada began its post-pandemic rate hike in March 2022. Data from the Investment Funds Institute of Canada (IFIC) reveal that Canadians have directed over $75 billion into money market ETFs and mutual funds as of February 2024, more than doubling the amount observed two years earlier.
Money market mutual funds have been the only fund type with consistently positive monthly net sales during this time period. Interest in those funds mirrors those for GICs — IFIC’s 2023 annual report notes that long-term mutual fund sales were negative in 2023, but Canadians’ fixed-term deposits grew by $141.8 billion.
Boisvert suggests that the volatility experienced in the stock market throughout 2022 prompted many investors to seek refuge in low- or no-risk options. “They’re thinking, ‘This is the safest haven for my funds. With minimal risk, I can avoid the turbulence of the market,'” she remarked.
However, Boisvert emphasizes the importance of considering long-term investment returns. While GICs may offer attractive returns in the short term, historical data demonstrates that equities tend to outperform GICs over extended periods, spanning decades. “Over time, investors have consistently achieved higher returns by investing in equity markets,” Boisvert added.
For investors with a longer time horizon before retirement, Boisvert suggests that a significant allocation to GICs may not be necessary, despite their allure amidst the current environment of elevated interest rates.
Avigdor assesses the risk in the equity market at approximately five out of ten, highlighting her confidence in the continued growth of earnings. She stresses the importance of closely monitoring employment figures and earnings performance, indicating her comfort with investing in stable companies that offer both growth potential and dividends
