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Jonathan Chevreau
National Post
FP Money
Saturday, January 8, 2005 |
Forecast is for high single-digit returns on stocks; will beat fixed-income
Since the on-again, off-again bear market began in 2000, investors have been on tenterhooks.
As is usually the case with fear-based investing, hiding in cash has not proved an effective strategy. It might have worked in 2002 when major stock indexes were down anywhere from 14% to 31% but would have resulted in missing out on double digit gains in 2003 and slightly less but still positive returns in 2004.
Adrian Mastracci, investment counsel at Vancouver’s
‘fee-only’ KCM Wealth Management, says, "I’ve identified five key trends investors must consider this year: consumer stamina, American jobs, oil prices, the U.S. trade gap and government deficits.”
True, most of the 2004 gains came in the post-Bush re-election rally but the fact remains the financial industry's traditional belief in the power of stocks for the long run has largely been vindicated.
Not that any advisor worth his or her salt would counsel an all-equity all-the-time approach to asset allocation. The 1999-2002 wounds are too fresh to forget. In their collective prognostications for 2005, the uniform rallying cry of financial advisors remains "diversification" -- of asset classes, economic sectors and geographical exposure.
In the stock bulls' favour is the fact that since 1905, every year ending in 5 has been an up-year. Of course, any gains will not be achieved without climbing the proverbial wall of worry.
Vancouver-based advisor Adrian Mastracci identifies five key trends investors must consider this year: consumer stamina, American jobs, oil prices, the U.S. trade gap and government deficits.
Mastracci expects equity investors to endure a rollercoaster ride: He sees an upside potential for Canadian and U.S. stocks being a modest 9% over 2005, with a potential decline of as much as 16%.
Financial publisher Gordon Pape also expects positive single-digit returns but is prepared for a correction at some point -- perhaps as late as 2006 or 2007.
These forecasts are in line with a poll of investment managers released this week by Mercer Human Resource Consulting. The experts are looking to equity markets to outperform fixed income in 2005. They are projecting 8% returns from Canadian equities, 7% from U.S. and international equities, and 8% from Emerging Markets.
While still positive, they expect only modest returns from the "risk-free" asset classes: 4% from long bonds and 2.9% from cash or short-term bonds.
Of course, January predictions are notoriously diverse. The pundits were out in force this week at the Empire Club, where three featured luncheon speakers served up markedly different forecasts.
Daniel Chornous said the twin deficits and deteriorating fiscal position of the U.S. government "has finally captured the market's attention." Even so, he said the equities bull market is "still well grounded."
By contrast, Chornous said fixed-income markets are overvalued everywhere but the United Kingdom. Rising inflation will put more pressure on central banks to hike interest rates, which will cause bond prices to sag. Advisors like Mastracci say investors can hedge against this by keeping bond maturities below five years.
At the Empire Club, gold bug Nick Barisheff advised investors to put 10% of their portfolios in gold bullion and "hope it doesn't work." (Gold, Barisheff believes, is the ultimate hedge against debased paper-based currencies.)
Barisheff mentioned Dow Theory Letters publisher Richard Russell, who suggests holding a minimum of stocks, lots of cash and a combination of gold stocks and bullion as the ultimate insurance.
The third speaker, Jeff Rubin, disagreed with both his colleagues at the Empire Club podium. Rubin is bullish on Canadian equities and advised investors to stick with income trusts, dividend-paying stocks and long bonds.
University of Toronto finance professor Eric Kirzner believes an allocation to income trusts remains warranted. Despite the four-year run, the energy and business categories are still good buys. However, the outlook for the more interest rate sensitive pipeline and real estate income trusts is less promising, Kirzner says.
A year ago, Gordon Pape was bullish on income trusts. Now he has become bearish and is prepared for a 10% or 15% pullback in prices of income trusts some time this year. But he thinks regular bonds may surprise on the upside, delivering the same modest returns they delivered in 2004, despite perennial warnings the bond bull is nearly over. Pape believes bond mutual funds will also hold their ground.
Warren Baldwin warns against a practice he's noticed some investors indulge in lately: avoiding global and U.S. investing and dramatically overweighting the domestic Canadian market.
Remember, Canada is a small market which accounts for just 3% of global stock markets. It's concentrated in three narrow economic sectors: financials, energy and commodities.
Despite concerns about a rising loonie and swooning greenback, the first logical region to include is the U.S. market.
Patrick McKeough, Toronto-based publisher, continues to pound the table for North American stocks, particularly dividend growers from the five major sectors of the economy: resources, utilities, manufacturing, financials and consumer.
The biggest bogeyman U.S. stock investors fear is the trade deficit, but McKeough doesn't view this as a "sky is falling" situation.
While pessimists complain few bargains are to be found, McKeough thinks North American stocks are reasonably priced given current interest rates. Nor does he believe it's necessary to look beyond North America for equity exposure.
Dan Hallett doesn't believe many dirt-cheap bargains can be found in the stock market "but that doesn't mean you should hide your money under the mattress."
Investors should stay well diversified, which means maintaining some exposure to overseas stocks. "For years they've been relatively cheaper than North American stocks and that remains true today."
A similar view comes from investment advisor Fred Smith, who bases his predictions on mutual fund cash flows. "Whatever people are pouring money into [remember tech funds in 1999?], you should be getting out of. Whatever people are avoiding [like international funds today], you should be buying."
Indexing enthusiast Eric Kirzner advocates an allocation of 10% or 15% to alternate investments, including absolute return funds and hedge funds. This is consistent with the diversification theme: Many alternative investments have a low correlation to conventional stock and bond investments. Kirzner also believes investors should have at least some exposure to Japan, China, India, and emerging markets.
My own personal forecast for 2005? I haven't a clue. My family's low-cost diversified portfolios are largely on autopilot and we swear by the indexers' motto: "I don't know and I don't care."
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