Wealth Watch: Peering into the not too distant future

Derek, what can investors look forward to in 2018?

With 2017 firmly in the rear view mirror, investors often take this time to look ahead to see what the new calendar year may bring. While my crystal ball remains foggy, it’s a good time of year to offer some insight into what may be around the corner.

From a global perspective, the prospects for continued economic growth look healthy. This means that investors can expect a pick-up in global gross domestic product (GDP) and expect global GDP to remain at a six-year high. Economic growth may accelerate in a number of countries including Germany, Australia, India, and Brazil, among others. Canada’s economy may cool slightly from a red hot 2017 but still perform well going into 2018.

Growing economies tend to mean that stock markets are growing as well. This means that investors may expect notable gains from their equity investments, while their bond investments may continue to lag. I am not expecting any signs of global recession to materialize for another 12-18 months. This doesn’t necessarily mean it will be smooth sailing for investors as the later periods in an economic cycle can provide some very volatile markets. Said another way, expect the markets to have a good year, but beware of any major change in economic data or world events that may swing markets dramatically in either direction.

If we are indeed near the end of the economic cycle, we can also expect that cyclical stocks should outperform defensive stocks. Cyclical stocks include sectors where profits expand in a growing economy. This can include sectors such as industrials, resources, and financials. Defensive stocks are companies where they usually have stable earnings regardless of the economy. This may include sectors like healthcare and utilities. Regardless, it may be best to build a portfolio of diverse stocks with a focus on various aspects of the economy which may include defensive and cyclical companies.

If economies continue to grow at a notable pace, it is reasonable to expect central banks to increase interest rates. As such, I believe that interest rates will increase throughout the year as central banks slowly tighten their monetary policies. In Canada, we should expect two increases in 2018. This impact will be noticed by those who maintain debt with floating rates, but also those who invest in the bond market. While bond yields will increase, existing bond prices will move lower. As such, expect a soft year for bond investors and consider keeping your maturity dates shorter term.

In terms of currency, investors should expect that the US Dollar will continue to outperform other developed market currencies in the first half of the year, but slow down in the latter half of 2018. This may occur due to the Federal Reserve tightening their monetary policy earlier in the year, while the remaining central banks close the gap later in the year. I would expect the Canadian dollar to hover around the $0.80 mark for the greater part of 2018.

Last, but not least, I believe investors should expect the price of commodities to increase through 2018. Specifically relating to oil, I expect supply to remain capped as the OPEC output cut agreement will last into the end of the year, while demand is likely to improve thanks to growing economies around the globe. This doesn’t mean however, that investors should pile into energy stocks as US shale production may continue to be a headwind and the price of West Texas Intermediate (WTI) is not expected to increase notably. With WTI already well above $60 in 2018, it may remain largely range bound for the rest of year.

Along with these forecasts there are numerous possibilities for market pitfalls. These risks include political events, a crash in cryptocurrencies, unforeseen implications from rising interest rates such as housing bubbles bursting, and a material decline in oil prices, among others. While it may be impossible to avoid these risks, it’s worth considering when planning your investment strategy.

As always, investors should take a long-term approach and consult with a qualified Wealth Advisor prior to making any investment decisions.

Happy investing and all the best in 2018,

Derek Fuchs

Senior Wealth Advisor

Scotia Wealth Management

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