Avery Shenfeld, managing director and senior economist with CIBC World Markets, relayed his latest economic and financial markets forecast yesterday at the National Club in Toronto.
“I’ve called this a benign slowdown,” Shenfeld said. “There are slowdowns that turn out okay for investors; there are slowdowns that turn into recessions. This seems to be of the benign variety.”
One reason, he said, is that although North America is slowing, there is currently strong global growth. For example, uranium is in demand because of power plant construction in the Far East, and base metals are strong, particularly in China. This is good investment news for Canada. “In some parts of Canada’s capital market, it’s really global growth that matters,” Shenfeld said.
But where these commodities cast rays of sunshine, others, such as natural gas, bring clouds. Because it’s mostly targeted to a continental market, he said, natural gas is affected by slowing U.S. industrial activity and increasingly milder winters.
For commodities, then, it’s a mixed forecast. “If you’re levered in the world market—oil, uranium, base metals—the outlook still looks quite healthy. The commodities leveraged in North America—lumber, to some extent newsprint, natural gas—are not as promising in the context of a slowdown.”
For the bond market, we’ve returned to 1960s Europe, a time of low inflation and low-inflation expectation. “If you bought a 10-year bond, you didn’t get that much of a premium over the inflation rate because no one expected the inflation rate to shoot ahead,” he explained.
Today, we’re in a period of lower yields and low inflation, said Shenfeld, but inflation won’t get any lower and the premium for inflation risk in the bond market is almost non-existent. “The good years you can have in the bond market at this point are years where short-term interest rates fall and long-term rates move with them for a while. But good years will be followed by bad years.”
Stocks, however, will fare a little better. Although a slowdown is inevitable, interest-sensitive sectors, such as income trusts, will benefit. Looking ahead, Shenfeld said, trusts should do okay. They’re still high-return equities with a temporary tax advantage, but will be sensitive to lower interest rates and benefit from that, he added.
REITs and the financials and utilities sectors will also do well as a result of falling interest rates.
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