Saving for retirement used to hinge on a conservative strategy that transitioned from capital growth to capital preservation as one passed middle age. But people are living longer now, and retirees have more active lifestyles. This means, we need to find investment solutions that provide growth well past traditional retirement age.
This doesn’t mean we’ve abandoned our basic strategic strategy that focuses on long-term goals and protecting investment capital, which are the foundation of a well-funded retirement. But we also have to pursue tactical strategies that will nourish our nest eggs to ensure an ongoing comfortable lifestyle. To do this, we continually evaluate global economic growth and capital markets. We call this smart investing–maintaining a strategic view but with the flexibility to deviate according to ever-changing market conditions.
To this end, we continue to favour equities over bonds. We think interest rates will continue to remain low in the near future, despite U.S. Federal Reserve chairman Ben Bernanke’s recent announcement that early in 2014 the Fed will at last begin the tapering of the stimulus program that has been in place, in renewed forms, since the credit crisis. We believe equities will continue to benefit from the continuing worldwide economic recovery—except here in Canada, where growth may be held back by slowing home sales and high consumer debt.
Canada’s woes, particularly when compared to the bright outlooks for U.S. and overseas markets, suggest Canadian equities will lose ground again in 2014, while those in the United States, eurozone and emerging markets are poised to gain.
We believe Canadian real estate prices have been over-inflated for some time, and it’s possible the housing-market could decline 10% or more in the coming years. At the same time, Canadians’ credit-market debt is at a historic high–at more than 164% of disposable income in the third quarter of 2013—and we suspect this will hold back consumer discretionary spending.
Put simply, it seems slower economic growth has taken the bloom off Canada’s reputation as a safe haven for foreign investors, who embraced our resource and financial sectors, and our strong currency, during the U.S. recession. However, the perpetual heavy concentration in those two sectors creates a diversification problem, which eventually turns off investors. This seems to have been the case in 2012, with the money leaving Bay Street in favour of more attractive and balanced values elsewhere. Canadian stocks underperformed in 2013, gaining 13% including dividends. Compare that to the U.S., Germany and Japan, with local currency returns of 32%, 26%, and 59%, respectively.
Things have been much brighter in the United States, where the housing market has bounced back from the debacle of 2009. U.S. housing debt has fallen dramatically: 14% of Americans were underwater with respect to their homes this year (home value less than mortgage value), down from 26% in 2012. This means five million more Americans are enjoying new prosperity as we enter 2014 and will put more money into the economy. That’s good news for the home-building, financial, technology and healthcare industries. On top of this, overall corporate earnings and balance sheets remain strong. We think U.S. stocks will achieve strong gains, closer to high single digits but possibly even in the double digits.
European and emerging markets, meanwhile, have turned the corner. In the Eurozone, we no longer are looking at a worst-case scenario, now that countries like Greece and Ireland seem to have overcome their sovereign debt problems. We still have some concerns, though, such as Italy’s debt burden–although its 10-year bond yields have come down. Europe is roughly where the United States was several years ago in terms of recovery, with improvements in GDP, unemployment and export data. We probably see the best investment opportunities in emerging markets. Multinational companies continue to invest in these countries and they remain the strongest growth regions. Consumer wealth is growing in these countries as well, and we expect this to boost the consumer discretionary, financials and telecommunications sectors.
Fixed income investments are unlikely to provide attractive gains in 2014, although the picture may be brighter for some foreign bonds. Generally speaking, we believe a balanced portfolio still needs some bonds, as they can offset potential equity losses in the event of economic turmoil or political unrest. It pays to be diversified in this area, in case interest rates begin to rise. However, as mentioned earlier, a slightly higher tilt towards equities does make sense given the current economic environment.
In summary, we see excellent opportunities in equity markets, particularly in the United States and emerging markets and to a lesser extent Europe. Stay away from Canada, though, and be on the outlook for rising interest rates. This is our tactical position going into 2014–against the strategic backdrop of long-term equity growth.
Sadiq Adatia is Chief Investment Officer of Sun Life Global Investments and can be reached at Sadiq.Adatia@sunlife.com. The views expressed are those of the author and not necessarily those of Benefits Canada.