2014 should be a good year, even if Canada’s expected to underperform compared to the U.S.
That’s what a panel told approximately 1,000 people at CFA Society Calgary’s 37th annual Forecast Dinner, moderated by CBC news anchor Peter Mansbridge.
“We are seeing the developed world start to escape from the deepest recession in decades. 2014 is most plausibly the year when liftoff actually occurs, when the developed world’s growth starts to normalize in a big way,” says Eric Lascelles, chief economist with RBC Global Asset Management. “We can already see this happening in the U.S., where recovery is underway and the housing market is reviving. Stocks have had a truly astonishing year.”
Lascelles suspects the stock market won’t see that kind of performance in 2014, although he thinks investors “will see stocks rise at a perfectly acceptable rate. [But] they will likely struggle into double-digit return territory, whereas last year it was a slam dunk.”
This year, portfolios should look more long-term normal, as opposed to being tilted to take advantage of tactical opportunities. “This is a time to start shifting equity holdings down, closer to a neutral weight. […] Profit margins are extremely high now.”
Lascelles, who predicts the Canadian dollar will slide to 89 cents this year, notes that “it’s quite clear that policymakers welcome the shift.”
5 things that must happen
David Darst, senior advisor to Morgan Stanley and a member of the Morgan Stanley Global Investment Committee, says five important transitions need to take place in 2014 to boost markets:
1. The Federal Reserve must transition from quantitative easing to forward guidance, “which means keeping interest rates low.”
2. Japan must successfully transition from deflation to inflation.
3. Europe must successfully transition from a fragmented financial system to a unified banking framework.
4. China must transition from leveraged-driven growth to reform-driven growth.
5. Emerging markets must transition from traditional growth models based on exports and foreign direct investment to sustainable growth models based on internal middle-class consumer demand.
Read: Canada to grow in 2014
Risks in 2014
For Andreas Hoefert, chief economist at UBS Wealth Management in New York, “the biggest risk remains geopolitics. We have seen some improvement in Europe, but the eurocrisis is not over.”
European Parliament elections take place in May, he notes, and there will be parties from the extreme left and the extreme right. “The second risk is the Middle East, but it is less risky than it was a year ago.” The third risk is in the tensions between China and Japan over the disputed Diaoyu Islands.
Darst thinks the U.S. will continue its solid growth, and inflation will remain subdued.
“For Europe, we see gradual improvement. For Japan, we see a pickup in inflation and we expect the stock market to have another good year, although with volatility,” he adds. “Emerging markets remain vulnerable to capital outflows caused by higher interest rates in the U.S. [and] we are underweight.”
Read: Trends to watch in 2014
In Canada, Darst expects 2.3% GDP growth, and says the Bank of Canada will likely adopt a further easing bias and may even lower interest rates.
“We are of the belief that the currency will be allowed to depreciate further,” he adds, possibly down to 85 cents by the end of the year.
Additionally, “the transportation bottlenecks of oil leaving Canada through pipelines to the west or south suggest that Canada may be less poised to gain from U.S. growth than historically.”
Within equities, Darst is buying European, Japanese and American. In the U.S., “we would continue with an emphasis on heath care, technology, and materials. Within bonds, we are emphasizing short-term bonds and high-yield bonds. We are de-emphasizing inflation-protected securities, and emerging market bonds and investment grade bonds. Finally, we have a very modest weighting in commodities and REITs within alternative investments.”
Where will markets be at end of year?
S&P 500: Lascelles, 2,025 “a decent year;” Hoefert, 1,960; Darst, 2,014
Dow Jones: Lascelles 17,750; Hoefert, 16,482; Darst 18,000
TSX: Lascelles, 15,500; Hoefert, 14,400; Darst 14,800
Gold: Lascelles, $1,150; Hoefert $1,100; Darst $1,300 year average
West Texas Intermediate: Lascelles $85; Hoefert $96 “sideways;” Darst $100