Not all asset classes are created equal

01 February 2022 by National Bank Investments
NBI Monthly Edition – February 2022

For years, lower interest rates have been conducive to investing in financial markets. But as inflation continues to dominate headlines, pressures are mounting on central bankers to keep price pressures in check.  

With both the Bank of Canada and the Federal Reserve expected to hike rates in 2022, more and more investors are coming to terms with the fact that rising rates are inevitable. How can investors offset the impact of higher interest rates on their investment portfolio?

Taking a page out of recent history

Not all asset classes embody the same characteristics. As such, investors can mitigate the impact of rising interest rates by adjusting their allocations across asset classes.

While the table below is in no way indicative of the uncertain future, it gives an idea of how various types of investments have performed in rising and falling interest rate environments.

Global Infrastructures vs Consumer Price Index

As shown, equities posted robust gains in rising rate environments while fixed income securities lagged. This is the case because fixed income tends to move in the opposing direction of interest rates.

Don’t sell your bonds just yet

Bonds are an integral component of any diversified portfolio. Not only do they offset the risk that equities bring, but they provide a steady flow of income that can be reinvested as interest rates rise.

As can be seen in the table, fixed income categories such as U.S. high yield bonds and Canadian preferred shares also boasted strong returns, suggesting that managing exposure within the fixed income category may be more viable than selling one’s securities outright. 

The relationship between stocks, bonds and interest rates

When rates rise:

  • Equity investors tend to rotate into sectors that benefit from rising rates (i.e., Financials and Consumer Discretionary).
  • Companies with large cash reserves will generally benefit as opposed to highly leveraged companies.
  • Fixed income securities with shorter duration tend to perform better than those with longer duration. 

When rates fall:

  • Dividend paying Utilities, REITs and Telecoms tend to be favored over safer income generating alternatives. 
  • Highly leveraged companies will generally benefit from lower costs of capital. 
  • Bond prices rise as newly issued securities are seen as less appealing.
  • Longer duration bonds are favoured.

Don’t get too caught up in interest rates

Predicting interest rate movements is a daunting task, but consistently doing so with absolute certainty is the real challenge. What truly matters is maintaining a well-diversified portfolio of asset classes and staying focused on the long-term, regardless of where interest rates are headed!

NBI Funds that are positioned against rising rates

NBI Floating Rate Income Fund

  • Monthly income distribution that benefits from stable to growing short term rates.
  • Lower interest rate sensitivity than typical fixed income securities.
  • Very short duration, which helps protect against rising interest rates

To learn more

NBI Preferred Equity Income Fund

  • Maintains significant exposure to fixed/floating-resets and floating-rate perpetuals, which tend to outperform bonds in a rising rate environment
  • Holds preferred shares, which offer a higher yield compared to bonds. This acts as a buffer against falling prices.

To learn more

NBI Unconstrained Fixed Income Fund

  • Benefits from a “go anywhere approach” to investing in fixed income securities worldwide
  • May use derivatives and options to mitigate interest rate risks and take advantage of market opportunities.
  • Maintains flexibility when it comes to duration positioning (not restricted to replicating a long duration benchmark).

To learn more


Legal notes

The information and opinions herein are provided for information purposes only and are subject to change. The opinions are not intended as investment advice nor are they provided to promote any particular investments and should in no way form the basis for your investment decisions. National Bank Investments Inc. has taken the necessary measures to ensure the quality and accuracy of the information contained herein at the time of publication. It does not, however, guarantee that the information is accurate or complete, and this communication creates no legal or contractual obligation on the part of National Bank Investments Inc.

NBI Funds (the “Funds”) are offered by National Bank Investments Inc., a wholly owned subsidiary of National Bank of Canada. Commissions, trailing commissions, management fees, brokerage fees and expenses all may be associated with investments in investment funds. Please read the prospectus of the Funds before investing. The Funds are not guaranteed, their values change frequently and past performance may not be repeated. The Funds’ securities are not insured by the Canada Deposit Insurance Corporation or by any other government deposit insurer. 

© 2022 National Bank Investments Inc. All rights reserved. Any reproduction, in whole or in part, is strictly prohibited without the prior written consent of National Bank Investments Inc.

® NATIONAL BANK INVESTMENTS is a registered trademark of National Bank of Canada, used under license by National Bank Investments Inc.

National Bank Investments is a member of Canada’s Responsible Investment Association and a signatory of the United Nations-supported Principles for Responsible Investment. 


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