Low or negative returns on bonds and positive signs of economic growth in major economies such as the U.S., China and Europe all point to good returns for equities over the next few years, Bank of Montreal investment executives say.
“In terms of assets, we continue to think that’s the right place to be despite the strong up move that we’ve seen recently in equity markets,” said Stephane Rochon, vice-president and managing director of BMO Nesbitt Burns.
“It doesn’t mean that portfolios should not have bonds or cash, but if you look at the potential returns over the next few years it is probable that after-inflation returns on cash and government bonds will be negative.
“High-quality equities are probably the only game in town right now.”
The ISM new orders manufacturing index, which monitors employment, production inventories, new orders and supplier deliveries in the U.S., is trending upward.
And the labour market south of the border is improving.
China is in the process of re-engineering its economy, and while the economy in Europe still is not great, it too is improving.
“So you’ve got the three largest economic regions with good economic momentum,” Rochon said. “Typically that’s a good environment for equities.”
Rochon is recommending investors put a greater allocation of their investments in the U.S. market, due primarily to better prospects for dividend growth in the future, a more balanced market there and positive signs of recovery in the U.S. housing market and in commercial construction.
“Both the Canadian (TSX) and U.S. (S&P) are trading up roughly 14 times forward earnings, but the U.S. market is a fundamentally more balanced market in terms of sector weights,” Rochon said. “Another way of looking at it is the U.S. has a host of very, very high quality technology and consumer and industrial companies, which are three sectors we very much like right now because we see a better risk reward in those sectors. We simply don’t have access to those companies in Canada right now.”
Large U.S firms like Google and Time Warner can take advantage of their good cash flows and strong balance sheets and start returning capital to investors through dividend growth.
“Over the next few years the dividend growth prospects in the U.S. market are far superior,” Rochon added. “Academic studies have proven that it is dividend growth that matters for stock performance over a long period of time. So the bottom line is that by investing more money in the U.S. you’re buying a higher quality, more defensive market at the same price in Canada.”
Investors need to be aware of current economic and financial market environments and need to set realistic financial goals and aspirations.
“We all want to retire wealthy but it’s how to get to that stage that’s most important,” said Serge Pepin, vice-president, investment strategy with BMO Asset Management. “Investors will go through difference stages in life, from wealth accumulation to growth to de-accumulation and these different stages will require a tweaking of a portfolio from time to time. There are numerous investment products being offered to the Canadian investing public with a fair number of them coming in different flavours, so taking the time to sit down with an investment adviser is perhaps the best thing an investor can do.”
One product that is getting a lot of attention these days are lifecycle investment portfolios. They have been around in Canada for the last 10 or 15 years but have been available in the United States for much longer.
They are structured to become more conservative over time as the investor ages toward retirement over time. The usual progression is an initial split of 85 per cent equities and 15 per cent fixed income to a final split of about 35 per cent equities and 65 per cent fixed income.
“A lot of people would classify them as a ‘set it and forget it’ type of investment, which can be misleading,” Pepin said. “While they do help to follow an investor through life, you want to make sure you are still aware of what your allocations look like over a certain period of time.”
Pepin suggests investors stay calm during periods of market volatility, make regular, automatic contributions to their RRSPs over the year, diversifying their holding among more than one financial institution, so long as they don’t lose track of their accounts, and work with a financial professional.
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.