Happy New Year to everyone, we hope that you had an enjoyable holiday season celebrating with friends and family.
At the beginning of each year we reflect on the previous year’s successes and challenges both personally and professionally, with a guide towards improvement and growth. Personally I think we all inherently strive to be better people. Professionally as we work towards greater success, we peer into the future and consult with various capital market strategists, from whom we have taken the following comments as our guidepost for the upcoming year.
Much of the various commentaries we have seen on expectations for the global economy for 2015 forecast global GDP growth acceleration from 3% to 3.5%. The recent drop in oil price itself equates out to a 0.5% boost to global GDP growth. Importantly, blocks that account the most to global growth, notable Asia, are also prime beneficiaries of lower oil prices. Another margin of safety is Europe where monetary conditions have turned positive due to Euro depreciation and non-conventional reflation. Falling inflation rates, most notable caused by declining oil prices, position the emerging market central banks to pursue monetary reflation which should protect as well as stimulate world economic growth throughout 2015. However, these same factors are expected to generate negative cyclical drivers within Canada, thus we are forecasting that the Canadian dollar should drift lower towards the 81 cent level.
Given the backdrop of a stronger global GDP growth expectation versus Canadian GDP growth, we expect to witness a structural shift in volatility, leading towards more rolling corrections and rallies. Cycles that we believe will be amplified by regulatory policies such as Basel III that have worked towards reduction in general global capital market liquidity. What this means to us in the management of client portfolios is that neither complacency nor concentration should be the hallmarks of any management style. Thus greater active capital risk management and enhanced global diversity will be at the forefront for us during the year.
As we re-live past mid cycles, whether it is the mid-80’s OPEC shock or the mid-90’s Emerging Market defaults, history suggests that equities should provide greater growth versus fixed income with an expected equity risk premium of 3%; US corporate growth should exceed Canadian corporate growth with an expected equity risk premium of 3.5%. When we take consensus corporate earnings expectations along with Treasury Bond yields expected to range between 2.25% and 3%, our forecast for the S&P 500 is 2,225 and for the TSX is 15,500 for 2015. Based on these forecasts, what investors could expect is approximately 3% from fixed income and 6.5% equity returns over the next year.
When we look towards the economic sectors; our valuation and business-cycle frameworks suggest that we favour “cyclicality” over “predictability”, bond proxies and lower beta. Resource companies as a group trade at valuation discounts last seen at the tech bubble peak during 2000. We remain neutral regarding resource companies currently, but what this tells us is that they are historically cheap and that there is potential for investor opportunity as these relative valuations change over the year.
With world economic growth re-accelerating we would continue to favour mid-cycles companies such as the Industrial, Technology, and Financial sectors. Thus we see rail, aerospace, software and ‘old’ technology companies continuing to provide growth for investors. Among the financial sector we have moved to favour the life insurance companies over the banks, but that a diversified ownership of both should be expected to benefit investors. We also see the Consumer Staples, Healthcare, and REIT sectors providing a defensive base within client portfolios during 2015. We see an increasingly defensive positioning throughout the year as providing the greatest benefit to investors.
The volatility we have observed this week as we start the new-year is probably a good preview of what we can expect over the remainder of 2015. Equity valuations are no longer as cheap as they were over the previous few, thus there will be battles between bulls and bears this year.
Within the context of the above, we must always consider individual goals and risk factors when making asset allocations on behalf of clients, so the above are merely guideposts for 2015, with each individual portfolio being slightly different. However one thing that will not ever change is our commitment to the privilege you bestow upon us with taking care of you and your family. We thank you for that trust.
As always, we welcome your feedback. Have a great weekend.
The Dekker Hewett Group