Page 14 - Newcom

YOUR GUIDE TO SALES AND FINANCIAL PLANNING
BUILDING YOUR BUSINESS
PAGES 14-20 l INVESTMENT EXECUTIVE l JANUARY 2020
INSIDE THIS SECTION
PLANNING
COLLABORATION 16
Advisors are engaging in formal agreements with other professionals to offer comprehensive service to clients.
LIQUID ALTS
OUT OF THE BLOCKS 18
The new liquid alternative mutual funds had a cool Year 1, underperforming the index by a large margin.
REGULATION
REVIEWING THE RULES 18
The Canadian Securities Administrators will focus on the self-regulatory structure in 2020.
RESPONSIBILITY
HOW GREEN IS GREEN? 20
There is no official definition of a “responsible” investment, which makes it difficult for clients to know what they’re buying.
Storm clouds on the horizon?
Despite global political and trade tensions, economic fundamentals remain relatively sound
of more mature economies. In the U.S., for example, manufacturing accounts for only about 12% of GDP.
Overall, global economic growth is expected to tick upward to about 3.3% from 3.0% in 2019, but still below the 3.6% in 2014-18 and way below the 5.1% in 2003- 07. But only the U.S. is in good shape. Much of the slowing is because of China, which has been hurt by the trade war and, like most industrialized countries, has an aging population. Europe is fragile. Japan is using large amounts of fiscal stimulus to keep afloat. Other emerging economies are struggling with the strong U.S. dol- lar (US$), in which much of their debt is denominated. Canada’s consumers are overleveraged and the housing market is overheated.
The U.S. Federal Reserve Board cut its overnight rate to 1.75% from 2.5% in three steps between July 31 and Oct. 30, 2019. When combined with debt-light American consumers and a far from overheated housing market, those cuts should lead to healthy retail sales, resulting in a 2% or so increase in real GDP.
The economic forecasts don’t include stronger business spending. Companies have the cash, but have held back on investing because of the uncertainty about the U.S./China trade war. That’s dissipated somewhat and the U.S./Mexico/Canada trade agreement has been signed, so com- panies could start adding to their capacity.
With inflation expected to remain low, interest rates are likely to stay around cur- rent levels this year, then gradually rise. Caranci, for example, expects the Fed rate to stay at 1.75% until around mid-2021.
Financial markets anticipate further gains in equities this year, although noth- ing like the 27.6% increase in the S&P 500 composite index last year. That surge was mainly recovery from the deep 20% plunge in the fourth quarter of 2018. This year, U.S. equities are beginning from a high base and are dependent on earnings growth to push stock prices higher.
Market expectations are for a 9% increase in U.S. corporate earnings, but that may be optimistic, says Jurrien Timmer, director of global macro with FMR LLC (a.k.a. Fidelity Investments). He notes that some of the anticipated earn- ings gains are already priced in and there’s little scope for increased price/earnings ratios as the average ratio for the S&P 500 is already relatively high at around 18, up from 13.7 a year ago.
Charles Burbeck, an independent global equities investor in London, agrees with Lavoie. Burbeck believes U.S. com- panies’ earnings overall could rise by 4%-5%, with one percentage point of that coming from some decline in the US$. Lavoie is expecting a “low single-digit” gain for the S&P 500.
Economic growth comes from two fac- tors: increasing numbers of workers and increasing output per worker (a.k.a. pro- ductivity). But China’s one-child policy, in effect from 1979-2015, means there are now more people retiring than entering the labour force in that country. A similar trend is occurring in most of the indus- trialized world as baby boomers retire.
Labour force numbers are dropping in
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BY CATHERINE HARRIS
financial markets were upbeat
as 2019 ended, buoyed by the “Phase I” U.S./China trade deal announced on Dec. 13 and confidence that there’s little risk of recession.
But don’t be too optimistic, warns Sébastien Lavoie, chief economist with Laurentian Bank Securities Inc. in Montreal. “Investors can take some com- fort that the worst may be behind us. But don’t be super-positive,” Lavoie says. “[The economic situation] is a little sun- shine in a rather cloudy sky.”
There was a sharp reminder of the unpredictability of geopolitics on Jan. 3, when the U.S. assassinated Iranian gen- eral Qassim Suleimani. Iran swore it would retaliate and the U.S. made further threats. As Investment Executive went to press, financial markets were holding steady. But this situation is potentially explosive.
Lavoie says this could be the pattern this year. Given all the risks out there, he says, “If it isn’t a tense situation in one part of the world, it will likely be tense
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somewhere else. It’s just a question of what will be on the front burner, making [2020] a ‘muddle through’ year.”
The U.S./China trade deal was sched- uled to be signed on Jan. 15, but there’s nothing in that agreement to stop the U.S. from raising tariffs on Chinese goods again, says Beata Caranci, senior vice president and chief economist with Toronto-Dominion Bank in Toronto.
Lavoie calls the deal “a truce that could be called off at any point.” Furthermore, as both he and Caranci point out, this is only phase one and doesn’t address the key complaints of the U.S. concerning China’s technology transfers and subsidies.
On the plus side, economic funda- mentals are relatively good. Lower U.S. interest rates have pretty much elimin- ated the risk of recession in the near term, even though there is a global downturn in manufacturing. That’s less of an issue in the U.S. and other industrialized coun- tries than it is in emerging economies because services are a much bigger part
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