Where to put new money now? We recommend continuing to add to your core portfolio holdings in portions that suit your plan and risk tolerance. Beyond that standard advice, our market outlook sees Europe and emerging markets offering attractive upside at this time.

Markets to watch

Economists have moderated their expectations for global economic growth lately as the two largest economies in the world—the U.S. and China—have stumbled. The potential for a “Grexit,” or a Greek exit from the euro zone, has occupied media headlines recently, and contributed to the decline in stock markets.

However, given the Greek economy’s small size and the fact that Europe is in better financial shape than it was in years past, a Grexit (should it occur at some point) is now considered to be a manageable event. As such, Canadian investors should worry less about this event, and more about growth in the United States and China.

The recent meltdown in China’s stock markets has raised concerns about the market outlook for the Middle Kingdom’s economy. China’s slowing growth has been a key factor in declining commodity prices in recent months, and that’s a particular concern for the Canadian stock market, with its heavy weighting of resource companies. Recently, the Canadian market has been underperforming the American market on a year-to-date basis after outperforming it earlier in the year. This may continue to be the pattern for as long as commodity prices remain depressed.

The U.S. economy, meanwhile, opened the year in an up-and-down pattern in the first half of the year. But growth is widely expected to pick up in the second half. This should help the market outlook for the Canadian economy, which appears to be vulnerable at the moment, by creating demand for manufactured goods in this country. Industrials and some materials stocks, therefore, may benefit from this demand.

Stock market outlook

However, even though the United States is in relatively strong shape, it doesn’t follow that its stock markets will be strong, especially since valuations there are on the high side.

In view of the downside risks to markets, which include slowing growth in China, rich stock valuations in the U.S., and high bond prices, we have become slightly more cautious. We recommend
balanced investors now hold about two per cent of their total investment portfolio in cash, which is up from the one per cent we previously advised you to hold.

We still, however, recommend you hold about 60 per cent in equities, with the balance in fixed-income. We always recommend keeping about 20 to 50 per cent of your equities portfolio in funds with significant foreign exposure. That’s just a matter of prudent diversification. After all, for example, the Canadian dollar continues to weaken against its U.S. counterpart, thus boosting the strong returns that U.S. equities have already experienced in recent years.

For foreign exposure, we recommend Capital Group Global Equity Fund as a core portfolio holding. It has significant exposure to the United States. But if you’re willing to take on some extra risk, you might want to focus on markets with more upside potential than the U.S. offers now. We think Trimark Europlus and Brandes Emerging Markets Value Funds offer such upside.

The MoneyLetter

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