Returns elude Canadian investors despite strong GDP

Canada’s strong GDP performance this year hasn’t translated to better returns for investors.

“This year is ringing proof that a strong economy does not necessarily equate to strong investor returns,” says BMO chief economist Douglas Porter in an economics report.

“Between a lacklustre domestic equity market (the TSX trails the global pack at down 1% this year), a recent sag in the broader bond market (the total return is now up less than 2%) [and] sub-1% yields on cash (even with a BoC rate hike), a typical balanced investor has barely been in the green in 2017,” he says.

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Further, for unhedged investors, gains in U.S. equities have been muted by a 7% increase this year in the Canadian dollar, he notes.

Porter estimates a balanced investor has likely seen returns below 3% so far this year. That assumes an allocation of 5% cash, 40% bonds and 55% equities — 20% in Canada, 20% in U.S. and 15% in Europe, Australasia and Far East (EAFE) markets.

EAFE markets are the one bright spot, where currencies have kept pace or topped the loonie and equities have largely had gains.

“The fact that EAFE has saved the day reinforces the importance of balanced investing — you just never know where the good gains are going to come from in any given year,” says Porter.

Commenting on equities, Avery Shenfeld, chief economist at CIBC World Markets, suggests investors might be too focused on China and other large emerging markets when it comes to industrial activity.

“Industrial production is actually seeing an impressive acceleration in the developed world, with growth excluding construction running at nearly a 4% clip in real terms,” he says in an economics report.

Though China is slowing under the weight of credit tightening, “global industrial activity, and the equities tied to it, may have a bit longer in the sun before developed economy policy tightening takes hold,” he says.

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Canadian outlook

Shenfeld says a positive for corporate Canada is profit growth that’s driven by accelerating revenues, rather than further gains in margins.

“Still, margins are at lofty levels,” he says, “and we could see some dent on that front if, as we expect, wages in what is now a tight labour market start to garner a greater share of the economic pie.”

He says sectors with a large share of minimum wage earners could be particularly vulnerable, given upcoming legislated hikes.

“But in a strong economy, some of that will also be passed on in prices.”

Canada’s GDP for June and Q2, to be released Thursday, are expected to be strong. TD forecasts a 3.7% quarterly annualized rate — with household consumption again leading the way. But the pace probably isn’t sustainable.

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“Higher interest rates and weaker house prices are likely to provide a headwind to household consumption growth in upcoming quarters,” says TD senior economist Fotios Raptis in an economics report. TD expects a soft print for June GDP because of declines in real estate and manufacturing. That means a weak handoff to Q3, with growth expected to moderate to below 2%.

Read the full reports from BMO, CIBC and TD.