Dynamic, diverse and increasingly less distant, global markets present both risks and opportunities but investing for growth often means looking beyond our borders.
Part of the reason international markets appear so promising is that Canada’s economic prospects are cloudier. The Bank of Canada noted in its annual report that the domestic economy hasn’t been performing as expected. A weak global economy and elevated levels of uncertainty continued to dampen activity in 2013, the central bank said.
“As economists, we are in uncharted territory,” acknowledged Bank of Canada governor, Stephen Poloz, in the report. “The world has clearly changed since the global financial crisis.”
Poloz noted that economic activity was disappointing last year, as the anticipated rebalancing of demand toward exports and investment spending failed to materialize. He said part of the softness in exports can be explained by weaker-than-expected growth in foreign demand and ongoing competitive challenges. He also cited unfavourable developments in the energy sector. And even though household debt-to-income ratios continued to reach new highs, Poloz identified the smaller increases as a positive economic factor.
We would agree with all of this. That said, we’ve long held the belief that Canada’s economy is on shaky ground, and that the central bank has been overly optimistic in its projections. It looks as if bank officials are realizing more and more the picture’s not quite as bright as they’d first thought. Poloz went so far as to say his team was in “firefighting” mode for much of the year, scrambling to adjust its forecasting models.
Compared to our central bank, the U.S. Federal Reserve is sounding more optimistic. The Fed expects economic activity to expand at a moderate pace and labour conditions to continue to improve gradually. It’s on track to unwind its bond-buying program this year. Fed officials have said the first increase to the federal funds rate will probably come in early 2015.
Political developments on the international front looked threatening for a time. The Russia-Ukraine crisis sent Russia’s main stock index into a tailspin with a loss of 15% in the first quarter. The International Monetary Fund downgraded Russia’s economic prospects on the back of recent tensions and already weak activity.
Major global markets, however, appear to be taking things in stride, despite the risk of intensified economic sanctions against Russia. The MSCI EAFE Index, representing global developed markets, rose 0.8% in Q1 in U.S. dollar terms, including dividends. The MSCI Emerging Markets Index, of which Russia is a part, fell 0.5%.
Still, despite uneven global growth, the IMF’s overall outlook remains positive compared to a year ago. The IMF forecasts average global growth of 3.6 per cent in 2014, up from 3.0 per cent in 2013, and to rise to 3.9 per cent in 2015.
Add it all up, and we continue to favour international equity markets over Canada’s. A side benefit to investing beyond our borders recently has been the falling dollar. A decline in our dollar typically boosts returns in U.S. stocks or equity funds, which could help Canadian investors that count these assets as part of their portfolio. The loonie may fluctuate around current levels, but we do see ongoing pressure.
While not an immediate threat, bonds still have the cloud of rising interest rates looming ahead when looking to 2015 and beyond. Reflecting on our overall view – more positive on equities than bonds – we’ve recently taken the step in some of our institutional target date funds of increasing the equity allocation at maturity.
In part, this move helps address the challenge facing investors saving for retirement. Persistently low interest rates have made it tough to get the total return many investors have been accustomed to throughout the accumulation stage of their lives. We feel one solution is to raise equity exposure, while never forgetting a key reason to hold bonds in the first place: to provide a more balanced portfolio that offers a better chance of outperforming during equity market downturns.
The bottom line? Part of the reason global equities remain attractive is the uncertain outlook for Canada. Growth prospects are more promising for U.S. and international markets, despite some recent geopolitical risk. Increasing exposure to global equities may help investors saving for a longer retirement overcome the challenges of low interest rates.
Sadiq S. Adatia is Chief Investment Officer at Sun Life Global Investments (Canada) Inc.
Join Sadiq S. Adatia at the Sun Life Global Investments National Road Show for an engaging discussion on the markets, global equities and opportunities in 2014 and beyond. The National Road Show will be touching down in 17 Canadian cities from May 21 to June 25. Hear leading investment minds share their perspective on the cultures, economies, risks and opportunities that shape our world. Space is limited! Register now by visiting slgievents.com.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
This commentary contains information in summary form, for your convenience, published by Sun Life Global Investments (Canada) Inc. Although this commentary has been prepared from sources believed to be reliable, Sun Life Global Investments (Canada) Inc. cannot guarantee its accuracy or completeness and is intended to provide you with general information and should not be construed as providing specific individual financial, investment, tax, or legal advice. The views expressed are those of the author and not necessarily the opinions of Sun Life Global Investments (Canada) Inc. Please note, any future or forward looking statements contained in this commentary are speculative in nature and cannot be relied upon. There is no guarantee that these events will occur or in the manner speculated. Please speak with your professional advisors before acting on any information contained in this commentary.
© Sun Life Global Investments (Canada) Inc., 2014.
Sun Life Global Investments (Canada) Inc. is a member of the Sun Life Financial group of companies.