Where to hunt for future returns
With the resource boom seemingly played out and the loonie below US80¢, what does the future hold for Canadian investors? Where should they look for continued profits?
A subhead on Signature Global Asset Management’s recent global outlook statement for 2015 sums up the forecast neatly: “Sunny with a chance of meatballs.”
For Canada, the consensus menu seems to be mainly meatballs, with a few squirts of gravy. “I’m a bit in the meatball camp,” admits Signature’s Toronto-based CIO, Eric Bushell.
“I think commodity demand will remain weak for some time. Demand is down and there’s still new supply coming on stream, so the market will be depressed for a number of years....
“Normally that would be offset by a weaker Canadian dollar, which would help export industries, but because of the [15-year] duration of that strength, we’ve lost a lot of our manufacturing base,” Mr. Bushell says.
“That’s what has the Bank of Canada worried — do we
There is a slight advantage to the U.S. [market]
have that other engine of growth? We’ ll have to take the currency lower still, even from here, in order to restore our competitiveness so that foreign companies will want to come here.”
“Canada will underperform, and it actually has over the last several months,” says Eric Lascelles, chief economist at RBC Global Asset Management in Toronto.
“Where oil goes, so goes the currency, although oil has overshot. The current price of US$50 is not sustainable, so the Canadian market may get a breath of fresh air over the next year.”
Tony Elavia, executive vice-president and CIO at Mackenzie Financial Corp. in Toronto, is less sunny. Weak demand for natural resources will keep the loonie and Canadian markets “under pressure,” he says.
“Markets always overreact, so over the short to medium term, natural resource stocks should still be at good valuations. But will that continue over the next 10 to 15 years? Highly unlikely,” Mr. Elavia says.
“Canadians should still be in the Canadian market, but ... there are better opportunities elsewhere, but not significantly better because valuations are stretched everywhere. There is a slight advantage to the U.S.”
Mark Raes, head of product at BMO Global Asset Management in Toronto, agrees, adding that he sees increased demand for U.S. stocks.
“The fundamentals seem to be stronger there, so we see a trend towards finding opportunities in the U.S. and even beyond. It’s part of the continuing evolution of the marketplace,” he says.
Mr. Lascelles also points south. “We’re seeing growing unanimity that the U.S. economy has achieved lift-off. It performed well over the last year, and should continue to perform well, but the question is, how much of that is priced into the market already? It might do well, but that doesn’t necessarily equate to market returns.”
The U.S. recovery offers some spinoff respite for Canada, though, Mr. Elavia says.
“There are two effects in Canada,” he says. “There’s a negative impact on the Canadian dollar versus the American dollar, but the U.S. is Canada’s biggest trading partner so we’ll participate in the recovery, and that’s not bad.”
For the rest, all fingers continue to point to Asia’s growth prospects, despite the drop-off in commodity demand.
“China and Japan will be providing a lot of financial help to the region for infrastructure,” Mr. Bushell says. “They want to help those countries capture that growth, so they’ll come marching in to lend them the money. And they’ll be pushing to supply the infrastructure, so that will be the single biggest positive for commodities over the next five years. It will be at a lower pace than what happened in China, but it’s still good.”
China has its own challenges. “Wages have been rising at the rate of 20% a year, so they no longer have the same competitive advantage,” Mr. Lascelles says. “And they’re shift- ing from infrastructure to consumer and service industries so growth will be slower, because those industries don’t grow at 7% to 10%. If there’s a modest slowdown, that’s good, but a sharp drop would be bad.”
As for Europe, Mr. Bushell is concerned that, despite extremely low rates, nobody is borrowing. “Big stable businesses that can generate cash flow and dividends should continue to perform well,” he says. “But the extraordinary interest rate environment is unprecedented and worrying.... Businesses can’t find things to do with borrowings, even though they’re free, because there’s not a lot of demand or confidence.”
Mr. Lascelles, for one, sees good news on the horizon. “[Quantitative easing] has now been delivered and a lot of the hard work has been done,” he says. “I’m optimistic about Europe, albeit only by current low standards. European equities have been oversold, so they are cheap, and that could be a fruitful area.
“There are still large risks, including deflation and growing anti-EU sentiment,” Mr. Lascelles says. “Greece is now exchanging grenades with the Troika [bailout creditors: the ECB, the EC and the IMF], but they will come to a deal, because Greece doesn’t want to leave the union.”
Overall, Mr. Lascelles predicts that while growth everywhere is going to be less than in the past 15 years, there will be offsets. “China may fall from 10% growth to 6%, and the U.S. may be 2% instead of 3%, but developing countries will make up the slack, so we predict that global growth will remain on an even keel.”