As the portfolio managers primarily responsible for allocating about $50 billion in assets under management at Fidelity Investments Canada, Geoff Stein and David Wolf have a lot to keep track of.

Aside from considering macro factors ranging from GDP outlooks around the world to inflation expectations, they also look at commodity markets, currencies, recession probabilities and central bank policies to determine whether they want to be long on risk in areas like equities and lower-rated bonds, or defensive in assets such as government bonds and cash?

The answer these days is to continue being overweight equities given that policymakers dont seem to be in a hurry to alter the amount of monetary accommodation and that lower rates can support higher multiples. But they are very underweight Canada.

Canada has been on a pretty good run for the past 10 or 15 years: the stock, bond and housing markets have done well, and the currency, economy and employment have more or less held up.

As a result, a number of imbalances were created in the economy, specifically higher levels of domestic demand, household spending/debt and housing construction. But since those types of conditions havent been sustainable in any other country in history, Wolf sees no reason to suggest they are going to keep propping up Canada.

It was pretty clear that Canadas vulnerability was fostered by the supercycle in commodities, said Wolf, who moved to Fidelity about 18 month ago after previous roles as chief economist and strategist at Merrill Lynch Canada, and then as an adviser at the Bank of Canada, mostly during Mark Carneys time as governor.

The necessary rebalancing of the Canadian economy could probably have happened at a leisurely pace with a weaker loonie, but the collapse in oil prices means it will happen much sooner.

Its going to happen because the fuel for the domestic boom is now gone, Wolf said, adding that he thinks markets are still underestimating the negative impact that lower commodity prices will have on Canada.

By contrast, the managers are optimistic about equities in the U.S. — their favourite market. Multiples down south are at or above long-term averages and look a bit high on conventional measures in some cases, but their view is that lower-for-longer rates will still fuel growth.

Stein, whos been an asset allocator for almost his entire career and with Fidelity since 1998, noted that earnings growth in the high single digits from mainstream U.S. equities, coupled with some multiple expansion in recent years and average dividend yields in the 2% to 2.5% range, have produced some pretty attractive total returns.

The outlook is still pretty favourable, he said. Earnings growth is in the maturing stage of the cycle, but if rates stay low, inflation remains quiet, we may be talking about a 10% return on U.S. stocks.

As for other developed markets, the managers continue to stay away from Japan as its quantitative-easing program and weaker yen have failed to generate any sustained economic traction.

Europe, meanwhile, faces a lot of structural programs. Austerity has hampered earnings and the very weak euro has negatively impacted returns. The managers have been underweight Europe, but they have become more inclined to shift to a neutral position.

It is arguably among the cheapest markets in the world from a valuation point of view, and with the ECB finally stepping up to play in the QE parts, it has brought a bit of a risk bid back into European equity markets, Stein said.

The managers are also playing a little in emerging markets as more of an opportunistic trade. Since some EMs have similar characteristics to that of Canada (resource oriented, currencies tied to the global cycle), they are hedging their underweight in Canada equities with some exposure to emerging markets.

They are so cheap right now that its a bargain basement way to play Canada, while maintaining some significant underweights, Stein said.

On the fixed-income side, Wolf pointed out that many investors have lately steered clear of bonds on the assumption that rates would inevitably rise. But he said it was pretty clear to him that central bankers dont and cant know when rates are going up, so markets really shouldnt be that certain either.

There are fewer making the argument that rates are going back up right now, which is actually a bit odd, he said.

Nevertheless, the managers are in no way turning bearish on bonds, but Wolf thinks the risk/reward is particularly less favourable on government bonds since there is certainly more upside to U.S. 10-year rates from 2% now versus 3% a year ago.