Alternative Investments, the Interest Rate Environment, and 2024 Mid-Year Performance

As we cross over the half-year mark, it’s a good time to review the current market landscape and think about how best to prepare for the remainder of the year. The first half brought pretty wild changes, but even despite this, the North American economy demonstrated some unexpected resilience. 

Some of the key themes that stood out between January and June include the US’s tightening labor market. While this should have pulled back consumer spending, it remained surprisingly high, and as we look forward, if it continues at its current pace, in theory, equity market sectors should perform well in the coming months. 

In Canada, after four long years, the Bank of Canada issued its first interest rate cut, and some analysts say this is just the beginning. In fact, Canadians could see another interest rate pullback as early as this month. 

We spoke to Travis Forman, Portfolio Manager at Strategic Private Wealth Counsel, to get his input on the alternative investment sector, the interest rate environment, and his thoughts on the months ahead.

Alternative Investments in 2024

What’s the state of the alternative investment landscape? 

Although public markets continue to gain ground in the first half of 2024, this has not stopped people from allocating to private investments. In fact, with the recent successes in public investments, it’s likely a perfect time to trim some public market risk and build up one’s private allocation if one hasn’t done so already.

A recent survey shows that 81% of advisors say their clients have been investing in a wider range of asset classes over the past year. Alternatives have offered clients a way out of investing in “home country” funds, offering more international exposure.

Traditionally, alternatives were a way to move beyond the traditional 60-40 portfolio, but today, we’re seeing the very definition of diversification expand all together. With that being said, there’s a proliferation of new alternative products available on the shelf, giving everyone a way to participate to some degree.

It’s no longer a secret that adding private or alternative investments can reduce a portfolio’s public market correlation and risk, ultimately increasing its probability of long-term success. The data is in, and investors with a healthy allocation to private investments such as credit, real estate, and equity fared far better than those with 100% public investments.

We cannot base performance on short-term metrics alone. Over the past 20 years leading up to 2022, private markets outperformed publicly traded equities, offering better returns and more diversification opportunities. Private equity delivered an average annual return of 14.75% over 20 years, compared to 9.25% for the S&P 500 — a significant difference that would be noticeable in any portfolio.

The Changing Interest Rate Environment

Can you give us an overview of the current interest rate environment in the US and Canada?

Absolutely. It’s no secret that countries around the world today are facing hiking interest rates, but it’s something we haven’t seen to this degree since the 1980s. 

In the US, the Federal Reserve decided to hold interest rates after its meetings in early June. To combat inflation, the rate was raised 11 times between March 2022 and July 2023. 

Inflation has cooled, yet the Fed is still waiting on more positive data before actioning any favorable change.

In Canada, on June 5, the Bank of Canada announced a 25 basis point reduction in its overnight lending rate, lowering the benchmark rate to 4.75%. This marked the first cut of the current cycle, initiated after the Covid-19 pandemic.

Interest rate movement affects Canadians because the Canadian economy is underpinned by real estate, and the climbing interest rates the country’s been experiencing have made it particularly difficult to buy property.

BMO Chief Economist Douglas Porter stated the Bank of Canada’s “overall tone [as of late is] constructive for further cuts and frankly a bit more dovish than expected, but still with a healthy dose of caution.” He emphasized that the central bank “is also obviously wary about moving too quickly” and will need to assess new economic data “on a meeting-by-meeting basis.” While the timing of future rate cuts remains uncertain, economists agree this is the first of many.

What’s Ahead

How can we prepare for the rest of the year?

While it seems as though the market is returning to a more favorable place, we should still expect a bit of volatility ahead. To get ahead of this, revisit your portfolio and ensure it is diversified.

Diversification is a core tenet of portfolio construction, and it will remain so for the long term. While investors love to see holdings go up all at once, this can also mean the same investments head south simultaneously. To smooth returns and avoid the risk of a sharp pullback, carry a healthy mix of investments in your portfolio.