‘Leaner’ returns expected in 2017
Canadian investors should prepare for a “leaner, and potentially meaner” investment environment in 2017 by lowering their return expectations and looking to emerging markets, technology and health care, BlackRock’s chief investment strategist for Canada says.
Kurt Reiman says Canada will likely have an “OK” year, but don’t expect a repeat of the 20 per cent plus total return on the TSX investors saw in 2016.
“We’ve just got to anticipate that our portfolios are going to deliver less than what we’re used to,” he said in an interview Tuesday. “And so investors will have to look, maybe they will need to be more tactical. Things like getting more returns sourced from a growing dividend, looking to valuation opportunities such as Japan or emerging markets, and especially managing your risk within the bond market.”
BlackRock, the world’s largest asset manager, said in its Global Investment Outlook for 2017 it expects U.S.-led reflation to accelerate, and recommended investors focus on equities and credit over fixed income and government bonds.
Another key theme highlighted by Richard Turnill, BlackRock’s global chief investment strategist who wrote the outlook released Tuesday, are lower returns ahead amid structural factors such as weak productivity and aging societies. Also, there is a growing gap between equity winners and losers, or “dispersion,” amid a shift from monetary policy that lifted all stocks, toward fiscal policy that affects specific sectors or companies.
The bull market can continue, but, of course there are risks, from U.S. president-elect Donald Trump’s agenda, to elections in France and Germany amid a “forest fire of populism” around the world, BlackRock says.
That backdrop to 2017 should be “pretty decent” for stocks and investment grade bonds, and value stocks in places and markets that are relatively cheap such as Europe and Japan, said Reiman.
The signs of resilience of the U.S. economy combined with a cheap loonie should benefit Canadian exports, he added. This reflation, and in turn firmer demand for energy and industrial commodities, should also help Canada’s resource heavy economy.
Canadian financials are looking reasonably strong, but relative to their global peers, they are “rather expensive,” said Reiman.
Canada’s red-hot housing market is an area of concern due to rising interest rates and the high level of indebtedness, but Reiman isn’t too worried given that it’s so “widely discussed” and policy-makers are trying to rein in the hotter regions.
“It’s not like it’s going to catch anybody by surprise,” he said.
For a sharp decline in Canada’s housing market, it would require a material move higher in interest rates, an upturn in unemployment or a decline in people’s incomes, which he doesn’t see as likely.
Risks that do loom, however, include that Canada’s earnings outlook is tied almost “universally” to oil.
There is the possibility for retracement due to unforeseen factors such as the agreement between OPEC and non-OPEC states unravelling or oil companies being able to produce more efficiently, and cheaper.
“I’m not sure where its going to come from, but if oil prices move lower, that’s a big risk to the earnings outlook,” he said.
If oil prices move lower, that’s a big risk to the earnings outlook.