With the year drawing to a close, BMO economists converged today to look back on 2012.
The bank says the year was defined by problems in Europe, continued low interest rates in Canada, and a mounting fiscal cliff crisis in the U.S. that threatened a tenuous recovery.
But there’s a light at the end of the tunnel. Though Doug Porter, deputy chief economist of BMO Capital Markets, only expects Canadian growth of 1.8% in 2013, he says great strides were made these past twelve months.
The Eurozone crisis was averted due to the fact that policymakers buckled down on austerity measures, and he notes the commitment of officials like Mario Draghi to protecting the Euro.
The long-awaited housing rebound also occurred in the U.S., and bonds rates remain steady.
Most importantly, there were also no negative surprises, he says, since 2012 forecasts were right on the money. Not only did interest rates remain low, but also the Canadian dollar was stable and the country posted growth of around 2% as expected.
Paul Taylor, chief investment officer of Fundamental Equities for BMO Asset Management, also chimed in about top events of 2012. He highlighted:
- President Barack Obama’s presidential victory in the U.S., which “signaled the swing of power to the Democrats.” (Obama was also named Time’s person of year as it says he’s the “symbol and…the architect of this new America.”)
- The avalanche of funds that flowed into bonds. Brian Belski, chief investment strategist of BMO Capital Markets, added this could result in a bond fund bubble.
- The “holy trifecta of U.S. data; the housing recovery, the pent-up demand of the auto sector and the emergence of the U.S. as an energy-efficient nation.”
- The slow-down but soft landing of the Chinese economy.
Read: Don’t give up on China
Though Porter concedes it’s tough to ignore the likelihood of weak economic growth in 2013, the bank is confident. It says the U.S. will reach a fiscal agreement and come out on top as one of the strongest G7 countries of 2013, which will help push markets.
The main roadblocks for Canada will continue to be: penny-pinching consumers; wary business owners held back by commodities and spending; sluggish income growth across the country; destitute job markets; and little improvement of government debt.
Belski adds both Canada and the U.S. will have to watch out for the possible financial over-regulation that’ll impact markets, as well as for a potential corporate tax overhaul in the U.S.
Globally, BMO expects the landscape to improve over the long-term. Taylor says the Eurozone will muddle through its problems by “continuing to develop a common bank supervisor [and] a framework for pan-Europe fiscal coordination.”
He also says your clients’ portfolios will be most affected by “how sustainable the U.S. fiscal agreement will be.”
He says it will depend on whether they provide “an appropriate cocktail of increases and constraint that ensures the recovery has durability and magnitude.”
Read: Showdown on Capitol Hill
Belski agrees the U.S. will set the tone for stocks and markets. Though company balance sheets are the strongest they’ve been since the 1950s, he warns investors to be mindful of buying into exposed and volatile emerging markets.
BMO is overweight in industrials, energy, technology and financials—particularly in Canada. It’s underweight in telcoms, utilities, healthcare, and consumer-discretionary sectors, as people are freezing spending.
Your clients should look to value and growth companies that offer dividends, and advisors can expect stronger growth in the latter half of 2013 to cheer investors.
Porter adds the dollar will remain at parity and that interest rates “will hold for the third year in a row, which is the longest standstill since the 1950s.”