How to outplay low yields

Global economies are struggling with slower growth rates and trade uncertainties. As a result, low interest rates continue to be a key theme as investors aim to optimize their portfolios.

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Last week, the Federal Reserve cut the federal funds rate by 25 basis points and stopped shrinking its balance sheet. In doing so, the Fed was in step with its global peers, as other central banks also lower rates or take a more dovish tone.

“In this recent development of central banks rekindling with lowering interest rates [and] quantitative easing, this is pushing real interest rates lower,” said Luc de la Durantaye, chief investment strategist and CIO, multi-asset and currency management, at CIBC Asset Management.

In such an environment, he suggested investors consider gold.

“Gold has an inverse relationship with real rates, so the lower real rates, the higher [the price of] gold, all else equal,” de la Durantaye said in a July 9 interview.

Also, as central banks continue with policies of quantitative easing, “they’re essentially supplying more fiat currency,” he said, “so, in a way, devaluing their own currency.”

With that in mind, along with uncertainty related to global trade and geopolitics, gold “certainly should be part — and is part — of our multi-asset strategy as a hedge and a protection in portfolios,” de la Durantaye said.

Official rates that are negative are another challenge for investors.

“Certainly, in the current environment of low yields and even negative yields in a broad spectrum in Europe, there are a number of countries [where] interest rates go negative up to 10-year maturities,” de la Durantaye said. “Same in Japan.”

He meets that challenge by looking to emerging markets.

“Quality emerging market currencies and bond markets could provide a degree of income, a degree of return,” he said.

However, a focus on quality is key. “As developed market bond yields continue to plumb new lows, then the spread with emerging markets is attractive for the quality emerging markets,” he said.

And, since buying emerging market bonds means buying emerging market currency, he shared his team’s currency picks in those markets. Currencies of Indonesia, India and Mexico provide high yield and are part of a well-diversified portfolio, he said.

Finally, de la Durantaye suggested investors consider cash as a low-volatility asset in today’s environment.

“You’re not being paid to go out the yield curve in many government bond markets, given the flatness and even the inversion of yield curves,” he said.

“So, retaining some flexibility in liquidity and having some cash to take advantage of dislocation or market price improvement — then cash is also part of our strategy.”

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