Market outlook: Time to get real
Investors got a harsh dose of reality in 2015, and while next year doesn’t look much better, there are still opportunities to be had.
By: BRYAN BORZYKOWSKI
Date: December 28, 2015
It’s been a sobering year for Canadian investors who, after two rate cuts, plummeting oil prices and a weak dollar, have finally come to realize that the country’s struggles may last well into 2016.
“There’s been a heavy dose of realism as to where the Canadian economy and the domestic market have gotten to,” says David Wolf, a Portfolio Manager in Fidelity Investments’ Global Asset Allocation group.
At the beginning of last year there was a large gap between perception and reality, which tends to be a positive for opportunity-seeking fund managers who can capitalize on such a knowledge gap, but now people are more aware of the challenges that the country faces.
“That makes it more uncertain as to how we evolve from here,” says Mr. Wolf, who spent four years as an advisor to Mark Carney, the Bank of Canada’s former governor.
It’s a similar story globally, as well. There are genuine sources of uncertainty over U.S. Federal Reserve policy and Chinese economic policy, and economists still don’t fully understand why global growth has been underperforming for the last seven years, says Mr. Wolf.
With so much ambiguity facing investors, he’s has had to double down on risk management, he says, and make sure that the funds he oversees can be resilient in this slower-growth, commodity-price-depressed environment.
Canada: A changing country
When it comes to Canada, Mr. Wolf emphasizes that the country has undergone plenty of change over the last year.
The decline in oil prices has had an effect on our growth (the International Monetary Fund predicts that our economy will expand by just 1.7 per cent in 2016), and this could negatively impact our personal balance sheets and the housing market, too.
Relative to other countries, Canada will likely continue to experience sluggish growth next year, but its fortunes could improve slightly compared to this year, says Mr. Wolf. However, the Canada we’ve come to know over the last few years is not the Canada that will take us forward into the future.
“We’ve had a great run for the better part of 20 years, and while that’s a reflection of a lot of things we did right, it also shows that we’re a small commodity-exporting economy, and now that is gone,” he says. “The way we’re going to make it in this world will have to be pretty different.”
Currency: Staying cheap
One potential driver of Canadian growth, thanks to a lower dollar, is manufacturing, but Mr. Wolf says our loonie will have to fall even farther before that sector can make up for losses elsewhere.
Our dollar is highly tied to commodity prices, so when energy falls, so too does our currency. The loonie is cheap, he says, but it has to stay cheap if it’s going to restore at least some level of growth.
While he doesn’t want to predict where the dollar will land in 2016, it’s highly unlikely that it will fall another 15 per cent, compared to the greenback, as it did this year.
“We’ve seen the bulk of the move for the cycle,” he says.
Interest rates: Remaining low
A big story for 2015 has been the diverging paths of U.S. and Canadian interest rates, and it’s unlikely that will change. After months of signalling, the Federal Reserve finally hiked its overnight rate by 0.25 per cent on December 16, while Canada slashed its rates twice this year.
Going forward, U.S. rates could rise further, while Canadian rates may not move, says Mr. Wolf. More importantly, though, rates will likely stay low for some time.
For years, there has been an idea that low rates would only be temporary and that they’d climb back up to early-2000s levels. That scenario is becoming increasingly unlikely, says Mr. Wolf, which may be a good thing for markets.
“There’s a dawning realization that that’s not going to happen,” he says. “There may be some response in the short end in terms of higher rates across the curve, but that’s going to be quite limited. So it’s not the fear-inducing development that many people seem to take it as.”
Global economy: Emerging-market growth ahead
Beyond Canada, the emerging markets have become relatively cheap, says Mr. Wolf, due to uncertainties around Chinese growth and lower commodity demand.
However, many countries in the emerging-market sector are still expanding faster than developed nations. They have better demographics, and technological advances are helping them realize rapid productivity gains, he says. In other words, there are still long-term opportunities there, he says.
As for America, it “still looks reasonably solid to us,” says Mr. Wolf. Earnings prospects are still positive and the economy continues to grow. It is more expensive than it has been in the past, but “it’s the best house on the block,” he explains.
He is cautious on European and Japanese stocks, mostly because quantitative easing has depreciated their currencies, and that has driven up equity markets.
“That chain of events cannot continue indefinitely,” he says. “We tend to be attracted to markets where the fundamental supports are more organic than purely policy measures.”
Ultimately, investors shouldn’t expect big gains next year, but there are still a number of places where Fidelity’s managers are finding opportunities.
“There’s more realism in the markets, but expectations should be tempered,” he says. “Still, there are good buys, and we come in every day looking for them.”