Return expectations modest but not bleak

Markets face plenty of challenges this year, including slow economic growth that could grind to a halt in the face of the coronavirus. While it’s a pretty safe bet that this year’s returns won’t look like last year’s, investors aren’t sounding alarm bells.

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In 2020, “We expect the market to do OK,” said Jean Gauthier, managing director and chief investment officer, global fixed income at CIBC Asset Management. He expects equity returns of about 8%.

Year-to-date, the S&P 500 and S&P/TSX Composite are up nearly 5%. “If we look at the stock market, we had a great start to the year,” Gauthier said.

If returns edge up higher than his forecast, he’ll reconsider his positioning. “If we see the stock market continue to perform well and get close to a 10% increase for the balance of this year, then we would play a little more defence on the stock market,” he said.

With government bonds, he avoids the pricier middle part of the yield curve. “The five-year and 10-year part of the curve starts to be slightly expensive,” he said.

For the 10-year, currently yielding 1.36%, investors have priced in more than one interest rate cut from the Bank of Canada — “probably two or three cuts already,” said Gauthier. He expects only one 25-basis-point cut, in March or April, in response to slower growth.

As such, “For us right now, the positioning that remains the best would be overweight the short part of the curve in Canada,” he said. “If you see any [economic] deterioration, the short part of the curve should outperform the five-year and 10-year, which already priced a lot of bad problems in,” he said.

He also said that, in accordance with an average-returning stock market, corporate bonds should exhibit decent performance. With bonds overall, “we’d rather be long corporate bonds and be long the short part of the curve,” Gauthier said.

How low can growth go?

Gauthier also described economic growth projections in underwhelming but not alarming terms.

The U.S. economy grew 2.3% last year, the weakest performance in three years, and economists project growth of only about 1.8% this year. Those figures compare to 2.9% growth in 2018, when the U.S. economy was boosted by fiscal policy.

Despite the lower projections, “We still maintain the U.S. should do OK,” Gauthier said. For example, “the consumer is in good shape [and] the recent cut by the Federal Reserve last year is going to help the market,” he said.

While Gauthier said he expected China’s economy to grow by about 5.5% this year, effects of the coronavirus could change that outlook. If China’s growth were to slow to about 5%, U.S. and global GDP would also be affected, he said.

Economists are forecasting that China’s growth this quarter could fall into the low single digits. During the SARS epidemic of 2003, China’s growth declined by about 2 percentage points in a single quarter, Reuters reported.

Still, “If this event can be resolved in the next month-and-a-half to two months, we should be OK in terms of growth for this year,” Gauthier said.

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