The current economy is not the best of times, and it’s not the worst of times. With global growth of about 3%, it’s the mushy time in between, said Avery Shenfeld, chief economist and managing director with CIBC, presenting his outlook for investors last week at the National Club in Toronto.
Europe
Europe is currently in a double-dip recession, and it has a big “to-do list” to ensure that it has only a recession and not a massive run of government defaults and bank failures, stressed Shenfeld. That to-do list includes, but is not limited to, quantitative easing (i.e., a larger bond-buying program from the European Central Bank), funding for the Spanish government and spending from Europe’s strongest countries (e.g., Germany).
Credit is another problem. Low interest rates in Europe are not working to stimulate spending, corporate credit is not flowing and the banks are tightening credit standards.
Asia
Japan, though stable now, within 10 years will be of concern for investors, said Shenfeld. The country’s government bonds currently yield at 1%, but as its citizens’ age, they will be drawing down on existing savings rather than putting additional funds into government bonds, he added. Japan will have to start borrowing from the rest of the world. And with bond yields so low, there may not be many takers. “Japan would face a sharp spike in borrowing costs that will prove troublesome for such a high-debt country,” he said.
U.S.
U.S. growth is currently at 2%, and the outlook for 2013 will be much the same. According to Shenfeld, the U.S. can do two things to help growth: quantitative easing and operation twist (selling short bonds to buy longer bonds). However, he says that this will really only help out the U.S. economy through a placebo effect.
Canada
Canada is going through its old, milder version of fiscal austerity, maintained Shenfeld. Government spending is falling, and that’s a drag on growth. So where does that leave investors?
Investors are asking a simple question, said Shenfeld. “How do they make big money in a world of mediocre growth?” The answer, said Shenfeld, is that they can’t, but that doesn’t mean there aren’t a few options for investors.
Shenfeld suggests the following:
- Consider stocks that pay healthy dividends that are well backed by earnings, where earnings are less dependent on global growth (such as high-quality real estate investment trusts).
- Put a lower weight on stocks heavily dependent on a strong global business cycle (such as industrial metals producers); and
- Consider corporate bonds from companies with solid fundamentals, including cautious debt-equity burdens and interest payments that are well covered by cash flows. These can be found in a broad range of industry sectors.