With the increased market volatility right now it’s easy to lose focus of the bigger picture. But with a new year, it’s a good time to take stock of your entire portfolio and put new investment goals in place. To help with this MaryAnn looks at what Canadian investors can expect in the longer term with Derek Burleton, Deputy Chief Economist, TD Bank Group.
But with a new year, it's a good time to take stock of your entire portfolio and your investment goals.
To help do that let's take a step back and get an idea of what Canadian investors can expect from asset class returns in the longer term.
Here with his forecast is Derek Burleton, Deputy Chief Economist, TD Bank Group.
So what do you see out there?
What would you say is he largest impact if you're looking at medium to longer term horizon?
Yeah, by long-term we're talking about ten years so it's certainly a fairly lengthy period.
When you talk about a period that long, you're talking about some of the basic fundamentals of growth in income.
Things like demographics; you're talking about inflation, overall GDP growth.
Those are key drivers over the long run.
But no doubt over the next four or five years what will influence those returns are higher short-term interest rates.
We're at a period in the cycle now the Fed is signalling that it's going to take rates back to more normal levels, and taking away that proverbial punchbowl is certainly going to impact returns for at least half of the ten-year horizon.
So we tackle both of those in our recent forecast.
Now what about if we take a step and look at Canadian equities; where do you see that going?
Well, actually we're fairly upbeat on Canadian equities.
I mean you look at the ten year-- the past ten years has not been great for Canadian equities.
S&P/TSX has gained about 4.5% on average per year, quite a bit less than its American counterpart.
A lot of that in recent years has been the story of falling commodity prices just badly beating up returns, so we do see upside.
I mean premised within this would be the view that commodity prices will begin to grind higher; it's not really a near-term story, I think, but as we get out into sort of the next three to four years we'll see better commodities.
I think that will help Canadian equities at least outperform.
You know, we've got the view the Canadian dollar is going to remain quite low on average and that provides a bit of a fill up to income growth for many Canadian companies that have U.S. holdings, or holdings around the world.
So that's another key feature there.
So on average we're looking at Canadian equities deliver about 6.5% per year over the next four years, which is--which is quite good.
And how does that compare to the U.S.?
U.S., not so upbeat.
You know, we'd see about a 2% annual average return over the next four years.
In near-term, we'll see.
I mean there's just a lot of volatility, as you mentioned, but clearly some indications that the market's fairly richly valued, hasn't been beaten up as much, and has less upside potential.
It doesn't mean the U.S. economy isn't going to do well; that's going to provide underlying support.
But I think just the fact that you do have less upside, a strong U.S. dollar is going to clip the wings of the profits of a lot of American-based companies and that's going to lead to a period of relative underperformance after the very positive run we've had in the last decade.
All right; interesting.
Now what about bonds?
Bonds, you know, no doubt will be driven in part by the trends and the short-term rates.
The Fed is likely to raise rates, but very slowly; I think that's key here.
It's going to take that punchbowl away very slowly, given some of the vulnerabilities in the economy, the low inflation.
So we see about three-quarters of a point in short-term rate hikes per year over the next few years, taking the short rate back up to around 3, 3.5%.
So, you know, that's going to put a bit of a damper on bond yields.
They've had quite a run in the last decade but with that kind of short-term rate profile, it's going to lower prices of bonds.
You'll get a coupon, but it will more or less offset each other so that's going to be a challenge facing bonds.
I will say one thing in support of bonds: it's that with--the world's still awash in liquidity and at least over the next few years you're still going to see the fairly healthy demand for longer term bonds in particular, as the ECB continues to, you know, print money; Bank of Japan as well.
So that's going to support bond prices and--which would mitigate the risk of a deeper fall in returns.
What about government's versus corporate's?
Yeah, we do see corporate's spread products doing a bit better than government's overall.
Again, key within that is the fact that the--the Federal Reserve, Bank of Canada and that will eventually begin to tighten rates; that's a very slow process.
We see spreads quite wide to start the period so it's--we don't build into the next four to six, ten years a major change in spreads relative to risk-free governments so I think that helps mitigate some of the downside.
So they'll eek out a small gain, but not very much; certainly the rate of inflation, I think you'd be lucky, over the next four years.
And then beyond that you get back to a more normal period of returns, about 3.5, 4% a year in fixed income.
And last but not least, cash.
Cash is going to be the losing area.
You know rates will come up, but very slowly.
You know, it's sort of a story where you might eek out 1% returns, and Canada--particularly the Bank of Canada-- not raising rates until the tail end of 2017 and may, in fact, even cut.
Very negligible returns for cash so that's going to be probably the worst performing, along with governments over the next four--four years or so.
Just wanted to take a step back.
How do you come up with your forecasts?
What are sort of some of the components that go into it?
Oh, there's a lot of rocket science.
There's a lot--yes.
But it comes down--we look at it very much from an economic lens.
And I think when you go out longer term you can do that.
I mean the past has shown that, that things gravitate towards some of these underlying fundamentals.
We have baseline views on things like what's Canadian corporate profit growth tied with the growth in the economy, the growth of trading partners Canada deals with; our view on short-term rates.
And we bring it all together and have a view on dividend yields and that kind of thing.
So we pull it all together in this long-term forecast.
Well, thank you very much, Derek.
And all the information on long-term returns is available in the TD Economics Report at td.com/economics.
I've been speaking with Derek Burleton, Deputy Chief Economist at TD Bank.
I'm MaryAnn Devenney.
Thanks for watching.