Growth in developed markets has been sluggish and interest rates remain low. Should institutional investors worry?
“We don’t see a recession on the horizon in the next year,” said Chris Kresic, co-chair, investment strategy committee and head of fixed income, with Jarislowsky Fraser at the firm’s first institutional investment forum. He added: “A slow-growth environment with low inflation is actually very good for the stock market.”
The Fed will be slow to raise rates, said Kresic. “They know that QE didn’t work…so all they really have is low interest rates in order to help the economy.” High debt levels and an aging workforce are also headwinds for developed markets, he added.
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Kresic believes the growth we’re experiencing is sustainable despite future rate hikes, but the low-volatility period is over. Taking all of these factors into account, he recommends remaining overweight in equities and investing in investment-grade corporate bonds rather than government bonds.
Canadian and U.S. equities
Although the fundamentals in Canada remain strong, the S&P/TSX Composite Index is becoming more cyclical and volatile, explained Bernard Gauthier, head of Canadian equities. There’s “quite a bit of volatility in the index over time,” he said, citing Nortel and the two recent gold rushes as examples.
Gauthier suggested life insurance companies and the energy sector as areas for institutional investors to explore.
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While investors may be tempted to pull back from U.S. equities, based on the country’s recent challenges, Dan Hanson, head of U.S. equities, thinks that’s the wrong call. “The strong, healthy market returns have been supported by fundamentals,” he said, adding, “It’s a broadly rational market setup.”
Looking at the last half-century over rolling five-year periods, returns are average, Hanson explained. The key lies in finding opportunities with less-demanding valuations, such as financials, while avoiding “areas of speculative froth,” such as social media and biotechnology. “Don’t take money out of the market” in what is generally an attractive environment, he advised.
“You’re looking for topline growth,” added Kresic. “And in the U.S., we think that’s going to come.”
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