09/20/2016 07:56 EDT | Updated 09/20/2016 07:56 EDT

6 Investment Views For The Final Months Of 2016

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Financial markets took investors for a wild ride during the first half of 2016. With three months remaining, we offer up six investment views for the remainder of the year to help identify opportunities in what is likely to be a challenging economic and political environment.

Low returns ahead: Canadian financial markets have had an impressive run so far in 2016: stocks are up more than 10% including dividends, and many government bonds have posted near double digit gains. But looking ahead, investors may need to lower their expectations. With economic growth stuck in low gear and many stocks and bonds looking more expensive than at the beginning of this year, investment returns are likely to be much more muted in the future than they have been in the past.

The loonie finds a level: The Canadian dollar swooned following the U.S. Federal Reserve's first rate hike in six years this past December, but the loonie has rebounded since its low in late February and has now settled into a more stable relationship with the U.S. dollar. In the near term, we expect the Canadian dollar will continue to hover more or less near its current level despite potential for the U/S Federal Reserve's next rate hike later this year. All bets are off, however, if oil prices suffer another precipitous drop.

Volatility revisited: Rock-bottom interest rates and other overly accommodative monetary stimulus helped suppress market volatility in recent years, but increasing bouts of turbulence on financial markets suggest that may no longer be the case. Lately, volatility has spiked around important geopolitical events and economic concerns such as the Brexit vote and worries about a sudden Chinese currency devaluation. In addition, the number of times the stock markets moved up or down more than two percent in a day has risen in the past two years. In our view, higher volatility is likely to be a more persistent feature of financial markets in the back half of 2016.

Better earnings ahead in Canada: Although Canadian stocks and the broader economy have advanced since the financial crisis, corporate earnings, have disappointed. We believe profits can recover in the second half, however, as firmer prices for oil and other commodities give a boost to the bottom lines of the country's natural resource sector. We're also encouraged by the Canadian economy's resilience in the face of hardships, especially the Alberta wildfires, and economic activity in the U.S. that appears to be picking up. This would tend to bode well for Canadian stocks in the second half.

Find value in dividends: Stock market dividends have been highly sought after in the years following the financial crisis, but they still offer a very solid opportunity for investors who are desperate for income amid record low interest rates. While 10-year Government of Canada bond yields having fallen to one percent this year, the dividend yield of Canadian stocks listed on the S&P/TSX Composite Index is closer to 3 percent. In addition, Canadian stocks offering consistent dividend growth have an even larger yield advantage and are slightly less expensive than the overall stock market, as measured on a price-to-book basis.

Stick with bonds for ballast: Historically, bonds have offered stability when stock markets get into trouble. For example, the FTSE/TMX Canada Universe Bond IndexTM eked out a positive gain when the S&P/TSX Composite Index fell almost 10% in the first three weeks of this year. Therefore, even though government bonds offer ultra-low yields, they can help to smooth a portfolio's performance. For investors who can tolerate higher levels of risk, we would also highlight the additional yield available in investment grade corporate bonds and emerging market debt.

This material is intended for accredited investors in Canada only. The information and opinions herein are provided for informational purposes only, are subject to change and should not be relied upon as the basis for your investment decisions. Past performance is not necessarily indicative of future performance. This document is not and should not be construed as a solicitation or offering of units of any fund or other security in any jurisdiction. No part of this material may be reproduced in any manner without the prior written permission of BlackRock Asset Management Canada Limited.

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