How to explain sub-normal growth

Secular stagnation.

It’s a phrase often heard in news reports – but what is it? If you need to explain the term to clients, David Picton, president and portfolio manager for Canadian equities at Picton Mahoney Asset Management, provides a succinct definition.

“Secular stagnation is a view that the world economy will grow at less-than-normal rates for a long period.” (An easy way to explain the term “secular” to clients is to explain that it’s the opposite of “seasonal” or “cyclical.”)

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Picton, whose firm is one of three managers of the Renaissance Canadian Growth Fund, attributes the slowdown to issues that have occurred over the last few decades. These include “a large buildup in debt, more consumption than normal that has used up all pent-up demand, [and] some structural imbalances that have occurred, especially in areas like China where they built too much manufacturing capacity.”

As well, the global market is dealing overall with an aging population, “a demographic shift into less consumption, [and] more potential savings.”

All this means global GDP growth might be closer to 1.5% to 2% going forward, instead of the typical 3% to 4%.

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This has resulted in massive flows into interest rate-sensitive assets, Picton says. “Central banks have created money out of thin air, [and] that money has found its way into interest-bearing assets.” Plus, market disruptions, such as Brexit this year and China’s stock market turbulence last year, “have caused risk-off behaviour.”

As a result, Picton says there are $10 trillion in bonds trading with negative interest rates, “and you have interest rates that are the lowest they’ve ever been in recorded history.”

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So, when clients ask why their fixed-income returns are low, you can explain that all these factors have led to “a dramatic impact in the chase for yield across all asset classes — especially anything that pays a dividend within the normal equity asset class.”

That means they may have to look toward equities or riskier bonds to provide them with enough yield to reach their goals.

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