Excerpts from a recent Q&A with our Portfolio Management Team.

What do you make of the recent volatility in the market and how has it, or hasn’t it, impacted your outlook and investment decisions for the portfolios?

The recent volatility has not significantly impacted our outlook as our model has been indicating that the fundamentals of the U.S. economy are still relatively sound. As a result, the market volatility has served as an opportunity to tactically add some U.S. equity exposure at lower prices. We see this volatility as a reaction to uncertainty. However, the uncertainty has not materialized into impactful changes to fundamentals.

How has the Fed’s moves and/or intentions on interest rates shaped your holdings in Tactical Income?

We believe that the odds remain high that there will be two additional rate hikes in the first half of 2019. We expect these hikes to increase the volatility of equity and real estate prices as well as an uptick in corporate bond spreads and mortgage spreads. Our proprietary Duration Timing model has provided us with tools to actively manage interest rate risk. This model has indicated to increase duration in the tactical income portfolio by trimming iShares Interest Rate Hedged Long-Term Corporate Bond ETF (IGBH) and adding longer duration exposure with ETFs such as iShares 20+ Year Treasury Bond ETF (TLT).

What is your outlook for the U.S. equity market (IVV) for 2019?

Our global tactical asset allocation (GTAA) model still signals a relatively bullish outlook for the U.S. equities. Strong readings in sentiment and valuation indicators outweigh weaker technicals and recent price pullbacks. In 2018, the U.S. economy enjoyed a banner year with real GDP annual growth rate on track to increase by close to 3%, which is the strongest gain of the nearly decade-long expansion. We believe the deficit-financed tax cuts and government spending increases will continue to help the economy grow much of next year. We also expect the labor market to continue to grow and unemployment to stay low by historical standards. Despite these positive signals, we do recognize some possibilities of weakness moving forward. The stimulus effect might fade and put downward pressure on the market in the longer term and diminishing labor supply might result in gradually decreasing prices. The ceasefire between the U.S. and China may indicate that the worst of the escalations are behind us. However, the trade tension remains and might contribute to equity volatility. We do expect some market volatility to continue through 2019 despite our model indicating that the odds of a near-term recession remain relatively low.

Are there any developments that have changed your outlook on the Eurozone?

Our outlook for the Eurozone (EZU) is relatively less optimistic compared to our view of the U.S. and some other international equity markets. Technical, sentiment and valuation signals remain in negative territory for the Eurozone. The region has been on an economic downtrend in 2018 and lost further momentum in the third quarter. Final GDP numbers confirmed that the region’s quarter-over-quarter GDP growth slowed to 0.2% from 0.4% in the second quarter. Underlying economic momentum in the U.K. also remains fragile with the Brexit deadline looming. The uncertainty surrounding its outcome has been weighing on business investment. The European Central Bank is scheduled to halt asset purchases associated with quantitative easing soon. However, this does not appear to be overly hawkish, or favoring inflationary policies, and has been expected. The economic union is moving to a more neutral fiscal policy stance after a very drawn-out period of quantitative easing.

Are there any developments that have changed your outlook on Canada?

Our GTAA model indicated a higher score for Canada (EWC) partially due to an increase in sentiment signals. The Canadian Purchasing Managers’ Index recovered in October rising from 50.4 to 61.8, where 50 is the threshold between expansion and contraction. Purchasing mangers’ hiring intentions also rose moderately and inventories posted a significant jump. The uncertainty surrounding trade relations with the U.S. caused some businesses to pull back on investment. However, we believe that the tentative agreement on a new North American free-trade pact will help to restore some confidence and possibly release some pent-up spending.

What was been the role of real estate in the portfolios and what is the outlook for this asset class?

Our exposure to real estate in the portfolios in 2018 has been iShares U.S. Real Estate ETF (IYR). With interest rates and bond yields still being relatively low, IYR (a securitized portfolio of properties) offers the income potential of real estate combined with the liquidity of stock. The yield of 3.8% has produced a relatively solid source of income for the portfolios. Moving into 2019, we are closely monitoring the trend of rising interest rates because it can put pressure on the rate-sensitive prices of REITs.