I want to pass on some thoughts expressed by Phil Peturrson at a recent financial seminar hosted by Manulife. As the managing director of the Manulife Investments Portfolio Advisory Group, Phil spoke about looking forward 12 months and highlighted five points for investors to consider:
2) North American equities are not expensive, but bonds are
3)The great rotation from fixed income back to equities is beginning
4) Compare what CPP is investing in vs. the average Canadian investor
5) What about risks?
The old rule of thumb that the percentage of your portfolio invested in fixed income should equal your age with the balance invested in equities doesn’t apply anymore, if it ever did. If interest rates and bond yields remain low, we have little choice but to have a higher percentage in equities and accept more risk. Look to the U.S. and global opportunities for the places to invest with less Canadian flavour. U.S. consumers now have the highest level of wealth ever, the lowest household debt in 10 years, and will have less than 6% unemployment by 2015. The U.S. Federal reserve is expected to end quantative easing by December.
Canada is a source of concern with growing household debt-to-income levels and residential overbuilding in Ontario and BC, especially in condos.
His expectation is for 8% to10% returns in the U.S. and globally in 2014. The S&P has exceeded its market high prior to the 2008 subprime meltdown, but the TSX hasn’t and is expected to grow only 3.5% this year. Government bonds are expensive, so look to high yield floating rate corporate bonds and dividend paying stocks.
During the subprime meltdown, $3.9 trillion in the U.S. moved to money market funds and bond funds. Investors will have to reallocate most or all of that to equities to have any expectation of decent income in the future.
Something to think about is, the current CPP investment mix is 63% foreign and 37% Canadian. The average Canadian investor’s mix is 78% Canadian and 22% foreign.
Some risks considerations for different regions of the world.
Canada – Is consumer debt too high? What about the real estate bubble? Where are commodity prices headed?
US – Interest rates, politics? There is little risk in sight going forward.
Europe – Unemployment, The shadow of Russia and Ukraine. Are stocks overvalued?
China – Will credit dry up? Could the economic bubble have a hard landing? Is there a real estate bubble? China has the biggest opportunity along with the biggest risk. 22% of its long-term debt is rolling in 2014. Will there be orderly bank defaults?
He suggested to re-balance portfolios from Canadian equity to U.S. and global equity, bonds to equity, and government bonds to other fixed income options. Look at balanced funds, with 50% of their equities in U.S. and global, but not Europe or South America. Asian options should limit China to 5%. In Canada, look at small caps and commodity producers.
This is food for thought when contemplating what to do going forward. My intent is to get people thinking, and to recognize that GICs paying under 3% make little sense, and to look outside of Canada for investment opportunities. There are investment options available today that offer guarantees to temper market risk.
Take the time to consult a qualified investment professional to help you determine options that suit your risk tolerance and investment time line.
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