Attending a Manulife investment conference recently, I came away with investing information I feel is helpful in countering the barrage of misinformation that we are exposed to by the media.
Speculation on interest rate increases is a prime example. The reality is that inflation looks to be well contained in most areas of the globe for the first time in decades, which means interest rates are not likely to increase significantly for some time. In Canada we will likely see continuing market volatility, as over 60% of our market capitalization is in banks and resource stocks. A plus side of dropping oil prices is that decreasing energy costs helps manufacturing and transportation and helps offset interest rate increases.
There has been much speculation in the press about US government debt, but it needs to be put into perspective. Although $15 trillion sounds terrible, when you consider that the US balance sheet stands at $80 trillion, it represents less than 20% debt to equity. This is a significantly better debt-to-equity ratio than many Canadian households!
Low interest rates are good for equities, but hinder bonds and fixed income returns. Sadly, many investors today are still wary from the 2008 market meltdown, and are stuck sitting on the sidelines in cash, earning little. But unfortunately, very few can live in retirement on GICs earning 2.5% interest. So in addition to cash for current and emergency needs, retirees should look to invest most of their balanced equity options globally, and consider annuities for guaranteed monthly income.
The US will be the engine of growth going forward and Canada’s will generally follow it. Investment returns will be similar in both countries but with less volatility south of the border. Both US and Canadian companies are hoarding cash, with many buying back shares, resulting in mergers and acquisitions that are at an all-time high.
A major problem facing most developed western economies is too few new taxpayers to replace those who are retiring. The only long term solution is to open up immigration from developing countries with their younger populations.
Tied to this, with the US heading towards 80% of government spending going to Social Security, Medicare and Medicaid, there is little money for infrastructure. Here in Canada, the feds are more focused on balancing the budget, when we are seriously behind in maintaining what infrastructure we have, not to mention building new roads, schools and hospitals. With low interest rates, borrowing to spend on infrastructure would be an easy way to kick-start a broad economic recovery.
Most people don’t realize that some inflation is good as it reduces the cost of debt, and that deflation has the opposite effect. We only have to look at what happened in Japan as a result of deflation and what’s happening in many European countries today, which could be a big problem going forward. For example, consider the impact of inflation on people’s homes and their perception of wealth; today’s average Canadian home price is $400,000 vs. $15,000 in the 1950s.
Investors should look outside of Canada. Also consider the ancient rule suggesting a third of one’s wealth be held in land and a third in equity type investments. The other third should be in fixed income and savings accounts for cash flow and emergency needs.
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