Canada will continue to lag the United States when it comes to equities and growth in 2015, but there is nevertheless great optimism for investment opportunities in Canada and elsewhere for financial advisors and their clients, an Empire Club luncheon was told in early January.
“In assessing our economic future, the investment industry is the canary in the coal mine,” said Ian Russell, president and CEO of the Investment Industry Association of Canada (IIAC). “Looking…to 2015, the canary is chirping merrily.”
Russell pointed to a recent IIAC survey of investment industry CEOs showing that 87 per cent of the respondents forecast status quo or improved conditions for global capital markets in 2015. Some 81 per cent believed the same favourable outlook was in store for Canada’s markets.
The survey, taken before oil prices went into a tailspin, also indicated that 69 per cent of the CEOs predicted their firm’s profitability will rise this year (versus 48 per cent last year) and 72 per cent said they were hiring more financial advisors (versus 52 per cent last year).
Russell said that if the surveys prove correct (and they have in the previous two years), it will mean industry operating profits will rise for the third year in a row and that both large and small firms will see higher earnings.
Avery Shenfeld, managing director and chief economist at CIBC, said Canada sits between two poles: the United States, which is moving forward in its positive economic cycle and the rest of the world – the Eurozone and the BRIC countries – which slide in and out of recession.
“Canada is caught in the middle road,” said Shenfeld. “The U.S., for the most extent, will be an island unto itself in 2015.”
The U.S. Federal Reserve has been standing pat on its ultra-low interest rates and is in no hurry to bring back “normal” rates, said Shenfeld. However, rates will begin to creep up to as much as 1 per cent and markets will take a pause for longer than expected when that happens, he forecasted.
He does not expect higher rates in Europe or Asia and the Bank of Canada seems content to lag behind U.S. interest rates. If oil manages to recover significantly before the end of the year, he believes there will be a rise in rates in Canada, but nothing significant. In fact, he said, the central bank has an agenda to let the loonie weaken further in order to transition the economy into one more dependent on exports. Shenfeld suggested the Canadian dollar could go to US80-81 cents this year.
Slow growth around the world means fewer needs for commodities, affecting not only the price of oil but other goods such as copper, he said. However, he noted that by the end of the year there will be more economic stimulus in Europe, increased fiscal stimulus in China and another year of lower interest rates from central banks around the world, heralding a return for commodities in 2016.
Thomas Caldwell, founder and chairman of Caldwell Securities, agreed that rates will go up around the world. “But when they go up is irrelevant because when they go up they will be underpinned by a strong economy. And any increase in interest rates will be gradual,” said Caldwell. “No central bank is going to risk cutting off a nascent economic recovery. They will want to be sure rates go up gradually.”
(In a surprise move in mid-January, the Bank of Canada lowered its key rate to 0.75 per cent from one per cent, citing the rapid oil-price collapse as an unknown that could harm economic growth in Canada.)
Stronger growth in the U.S. means the S&P is expected to post better results than the Toronto market, with equities faring better towards the latter part of the year as investors count on international markets to move higher in 2016.
In North America, earnings returns are expected to be in single digits, said Shenfeld, but equities will still look good compared with extremely low 10-year bond yields.
Caldwell said China will surprise on the upside – but not right away. “China has no qualms about understating its economic performance in order to drive down the price of metals and other raw materials.”
One of the major barriers to growth, said IIAC’s Russell, is the increase in the number of regulations his members are facing.
Sweeping regulatory reform
Investment dealers are engulfed in “sweeping regulatory reform,” Russell said – everything from client order protection rules in multiple equity markets to disclosure of fees and advisor compensation – all which he said require clear direction from regulators before appropriate technology can be put into place.
Caldwell, as well, said that the number of regulations, especially against U.S. banks, is “exploding.” The dangerous part of this is when a company goes astray of the rules and regulators react by “plundering…the private sector in terms of insane fines and settlements against corporations – but it’s shareholders who [are the ones who really] have to pay these fines.”
He said more than 30 investment firms have closed shop in the past few years – and he laid the blame squarely on regulators.
“Regulations continue to explode in volume and implode in relevance. Investment advice and advisors are being hammered by regulators, their lobby groups, the media – ignoring all client satisfaction surveys. Quantity is no substitute for quality. Too much information is no information.”
Demographics too are forcing changes on financial advisors, said Russell. Baby boomers are increasingly shifting their portfolio emphasis from accumulation to conservative allocation portfolios emphasizing income and asset distribution. Tech-savvy millennials, meanwhile, aren’t that interested in financial advice and having lived through the tech crash in 2000-01, have become risk averse.
Product complexity is a macro-trend that has some dangerous implications down the road, said Caldwell. He suggested the derivative sector might be one possible investment that could help cause the next financial crisis. “Remember: today’s flavour du jour usually becomes tomorrow’s crisis.”
In addition, technology changes and systems are adding to both fixed and variable costs, said Russell, noting that more than 35 per cent of the CEOs in the IIAC survey cited technology changes as a barrier to growth.
Despite the problems, both Caldwell and Russell said they are hopeful for the current year.
“On balance, I’m an incurable optimist,” said Caldwell. “On balance, I think 2015 will be a good year for equities.”