Financial markets in Canada and the U.S. are facing a path littered with economic, political and biological pitfalls, and investors should adjust their portfolios to protect against the risks, according to RBC Dominion Securities Inc.
"It seems to us that investors have adopted a rather complacent view towards rising macro, political, and biological risks," said Myles Zyblock, RBC's chief institutional strategist.
Central banks around the world are eyeing higher interest rates, meaning stocks might soon be operating against a background of co-ordinated global monetary tightening. Meanwhile, the U.S. current account ballooned to $225-billion (U.S.) in the fourth quarter from $185-billion in the third.
At the same time the U.S. is faced with an unprecedented need for external financing, it is also placing increasingly restrictive conditions on those required inflows, RBC said. Stocks are also facing a biological risk in the form of a possible avian flu pandemic.
RBC recommends paring equity exposure, either through the use of options or by lowering their volatility quotient. Economically sensitive equity sectors should be trimmed, it says.
In Canada, RBC recommends bank, insurance, telecom and industrial companies and suggests against energy, consumer discretionary, materials and technology sectors. In the U.S., RBC is "overweight" on telecom, consumer staples and pharmaceuticals and "underweight" on materials, financials and consumer discretionary stocks.
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