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By Fiona Anderson
Vancouver Sun
Friday, December 29, 2006
Most investors have done well in 2006, with the TSX composite index breaking 13,000 for the first time, and commodity prices fuelling great gains for Canadian equities.
Adrian Mastracci, fee-only portfolio manager at KCM Wealth Management in Vancouver, says, "The equity markets have been on a bull run, literally since early 2003, without a significant correction. So prepare for the unthinkable. The unthinkable will happen one day. I just don't know when."
Even income trusts were a good investment for anyone who got in well before the government's Halloween bombshell that said trusts would be taxed.
But can the momentum continue into 2007? Not likely, most analysts say. But nor will there be a dramatic tumble, provided the United States stays out of recession territory.
Canadian markets have had four very strong years, but the probability of a fifth is very low, said Paul Taylor, senior vice-president and chief investment officer for BMO Harris Private Banking.
"It will probably be a decent year -- not a terrible year [and] not a great year," Taylor said.
However, a recession in the U.S. could change all that and bring "not insignificant negative returns," he warned.
But Taylor believes a recession will be averted.
"That's truly where the focus is -- what's the chance that in fact we do encounter an outright recession in 2007?" Taylor asked.
"I'd call it the $64,000 question. But that would be vastly understating the money that rests on the U.S. economy [having a] soft landing," he said.
Gavin Graham, chief investment officer at Guardian Group of Funds agrees that returns will be lower than in the past, given all the economic indicators, including the four-year bull run and an inverted yield curve in which short-term interest rates are higher than long-term rates.
The most dangerous words in the investment world are "it's different this time," Graham said.
"No it's not," he emphasized.
Graham believes company earnings will drop in 2007 and portfolio returns of five to eight per cent would be realistic. He recommends investing defensively in "boring companies" like banks, insurers, utilities and pipelines, that often provide steadily increasing dividends.
But if the U.S. economy does tank, and there are a number of reasons it might, "it's going to be an unpleasant surprise," Graham said.
Graham believes he is more cautious than other analysts but it's better to be safe, or too bearish, than too bullish.
If an investor is too bearish, he does better than he expects, but if he's too bullish, he could lose quite a lot of money, Graham said.
When asked what they'd like to see, rather than what they expect to see, both Taylor and Graham said they wished for a soft landing in the U.S.
Michael Keegan, associate director of ScotiaMcleod, would like to see consistency in the government's tax policies and no more surprises like the new tax rules on income trusts.
Barring any surprises, he too expects a slowing economy that will see central banks cut interest rates. So investors should focus on companies that are sensitive to declining interest rates, like dividend-paying companies, Keegan said.
"That's where the return is going to come from in the market," Keegan said. "The market likely won't perform quite as well as ... [or] in the same areas as it did in the past year. So things like oil stocks and some growth stocks will probably moderate and the growth factors in the TSX will probably come from more conservative neighbourhoods."
Stephen MacInnes. chief investment officer with Inhance Investment Management, describes his outlook for 2007 as "pretty boringly good."
While markets have steadily gone up, MacInnes doesn't expect a crash similar to the tech stock meltdown. "It's been a pretty good party, [but] it hasn't got out of hand," he said.
"So we look for global prosperity to continue," MacInnes said.
Canadians, however, should consider moving offshore, as Canadian equities are unlikely to do as well as they have in the past.
"Not that we don't like Canada," he said. "But Canada is resource-dependent and we don't see quite the up side in '07 that we got in '06."
On MacInnes's wish list for '07 is more people investing responsibly.
"Whether you fully subscribe to global warming theories or not, this profligate energy consumption in the developed world needs to be curbed," MacInnes said.
Every year, more and more people invest in socially responsible funds, like the ones Inhance offers, and MacInnes hopes and expects that trend to continue.
Kevin Zakus, vice-president of business banking, would like to see the Vancouver Canucks win the Stanley Cup. But sticking to what he knows best, he'll place his bets on a strong economy in British Columbia rather than a strong hockey team.
The province is fairly insulated from downturns in Eastern Canada and the U.S., especially in Vancouver which attracts creative energetic people who add to the economy and make the city more diversified, Zakus said. So regardless of what happens in the U.S., he thinks Vancouver will continue to thrive. The city, that is, not the hockey team.
Adrian Mastracci, portfolio manager with KCM Wealth Management Inc., says wise investors are ready for any scenario, including a recession in the U.S.
"The equity markets have been on a bull run, literally since early 2003, without a significant correction," Mastracci wrote in an e-mail. "So prepare for the unthinkable. The unthinkable will happen one day. I just don't know when." |
