What investors can learn from Q1 results

Recent remarks on the economy from the Bank of Canada (BoC) potentially provide insight for investors.

Read: BoC holds key rate, cites moderate growth

In its latest monetary policy report, the BoC says growth in investment spending by businesses will likely be “particularly robust” in the service and IT sectors.

In fact, IT was the only sector of the S&P/TSX composite index to post a positive return in the first quarter, notes a Canadian outlook report from HSBC. The sector finished the quarter up more than 10%, thanks to global synchronized growth.

“Performance was in keeping with U.S. and global markets, which also saw good overall performance despite volatility associated with Facebook and Amazon,” says the HSBC report.

Read: Why Canadian investors need more technology exposure

The worst performing Canadian sectors in Q1 were energy and healthcare. “Upward pressure on interest rates hurt performance in higher-dividend-yielding sectors like utilities and telecommunications,” says HSBC.

Investment strategy

Remarking on its investment strategy, HSBC says that the “well-diversified structure” of its portfolios reflects its views on capital markets. “Overall, we think the economic environment continues to look positive, albeit with elevated volatility, as we move deeper into 2018,” says HSBC.

As a result, the firm is currently neutral Canadian and U.S. equities and slightly overweight international equities.

Within fixed income, the firm prefers corporate bonds over government bonds, supported by companies’ strong balance sheets.

Also noted by the firm is evidence of building price pressures, which the market has so far dismissed.

Says HSBC: “With our measure of expected sustainable returns remaining low for developed market government bonds, retaining an underweight positioning in this asset class continues to make sense.”

The firm is also on the lookout for opportunities.

“We have built up a small overweight in cash to allow the flexibility to take advantage of opportunities in the bond market as yields move to potentially more attractive levels.”

Inflation risk

For Q2, the firm says that the risk of recession remains effectively nil, but other risks are present.

Read: S&P and TSX positioning as the cycle winds down

“The most important risk comes from the potential for rising inflation to prompt policymakers to raise rates more aggressively than expected,” says HSBC.

Indeed, a sharp increase in tightening measures is among the key risks to the BoC’s inflation outlook.

“Heightened trade tensions, a repricing of the future path of monetary policy or a faster pickup in wage and price inflation could trigger such a tightening,” says the monetary policy report. “Tighter financial conditions could manifest as a rise in bond yields and potentially disruptive portfolio adjustments.”

Consequences could include a decline in confidence and economic activity—especially in interest-rate-sensitive sectors—as well as reduced wealth and a rise in debt-service burdens, says the central bank.

HSBC says it’s watching risks such as trade rhetoric from President Trump, Brexit talks and economic reforms in China.

For full details, read the HSBC report, which includes a fuller inflation discussion. For more on the central bank’s outlook, read the April monetary policy report.