The Year Ahead
Theo Bousalis - Dec 11, 2019
2019 has been a good year. Both our Economics team and Chief Investment Strategist have published their year ahead outlooks, so it’s a good time to check-in and see what’s in store for 2020.
On the economic front
BMO expects the Canadian economy to rebound slightly off of a below-potential 2019. This year’s drop in interest rates has supported housing activity, especially noticeable in Greater Vancouver. Oil production curbs in Alberta have eased and our energy analysts expect the oil price to be marginally (but not materially) lower next year. However, business investment continues to be challenged against an uncertain global policy backdrop and more local concerns.
Of note, our economics team expects British Columbia to lead the pack in terms of growth. The 2019 Vancouver housing slow down seems to have worked its way through the system. The $40 billion LNG Canada project should ramp up and add meaningfully BC’s local economy. We’re also supported by 2019 provincial budget surpluses, where some other provinces saw deficits. These positives have produced a strong provincial jobless rate of 4.7% that is trending tighter for 2020. Current low interest rates, low unemployment and a stabilized housing sector, all help in producing a better outlook.
All-in-all, BMO is calling for steady Canadian national GDP growth and a strong British Columbia in 2020.
In the U.S.
Similar to their expectations for Canada, BMO Economics points to Q3 upward revisions in U.S. GDP and forecasts 2020 GDP roughly in line with long-term trends. Wages and salaries have trended up for the fifth straight month. Real personal spending is increasing. Housing activity is steady. Business investment measured by core capital goods orders is increasing – although at the whim of trade policy changes.
This should lead to steady U.S. national GDP growth in 2020 as well, albeit supported by monetary stimulus.
Source: BMO Economics
On the market front
After a 2019 where Canadian equities outperformed most other developed markets (thus far), our team thinks there is still undiscovered value in Canada. Despite the strong performance, 2019 is likely to be the first year of foreign outflows from Canadian equities since 2008. Our Chief Equity Strategist Brian Belski’s research suggests these flows are near trough levels, and that improvement is on the horizon. If foreign inflows materialize during 2020, the energy, financials and materials sectors have historically been the biggest beneficiaries.
Brian believes that the pessimism surrounding Canadian financials is unwarranted. Although there are headwinds in slowing loan growth and high household debt, he thinks cash flows and earnings should remain steady. He notes that the sector is amongst the highest dividend yielding but also has the lowest average payout ratios and highest five-year earnings per share growth rate. The positives outweigh the negatives.
As we touched on in our last piece, minority governments also tend to be the most stimulative and in-turn supportive for Canadian equity markets.
With these factors in mind, there is a base case 2020 year-end forecast of 18,200, roughly a 7.37% increase from time of writing.
In the U.S.
In 2010, Brian’s team predicted that U.S. equities would be entering a 20-year bull market. In his 2020 year ahead piece he welcomes investors to the 2nd half, after a strong although bumpy first half.
That’s not to say he expects calm in the markets next year, as he knows investors will be overly focused on the election. Fundamentals should drive market performance – not tweets, headlines or the talking heads on TV. He continues to see economic and corporate fundamentals as accommodative to market growth.
There are parallels to the U.S. during ’95 -’97. This was a goldilocks period defined by low rates, steady growth and healthy equity market performance. Brian believes the 2019 Federal Reserve pivot and consequent 75bps decrease in their reserve rate, was similar to the rate cuts in ’95 and could have a similar outcome.
Brian’s analysis points to a base case where stocks continue to grind higher with periods of volatility. His 2020 S&P 500 year-end target is 3,400 implying an 8.54% upside from time of writing.
We wanted to reiterate that despite the negative headlines in the financial press, expansions do not die of old age. India, Germany, South Korea, France, Sweden, China, Spain, Italy, The Netherlands, Norway, The UK and Australia have all had economic expansions that lasted greater than 15 years, since World War II. The last time Australia suffered a recession was 1991. They are the record holders for the world’s longest stretch of growth in modern history at 28 years (and counting). Interestingly, many of these lengthy expansions came after deep and painful recessions. The theory, being that these events cause structural reform and make investors less inclined to be wrapped up in irrational exuberance. We’d draw similarities to our current expansion out of the 2008 Great Recession.
Of course, nobody has a crystal ball and uncertainty is part of investing. These forecasts will undoubtedly come into question and be challenged through 2020. There will be more bumps along the road. An asset mix that is reflective of personal risk tolerance and time horizon can support investors through volatile times. As basic as it sounds, this is the determinant of investment success.
Theo has 20+ years’ experience helping clients through uncertain times, through booms and busts in economic cycles. We know clients have been happy with the outcomes. We will be here to guide and help you, no matter what 2020 brings.
That being said, the outlook is positive and we look forward to continuing to help you in 2020. We wish a peaceful and restful holiday season and a healthy and happy New Year.
If you’d like more information you can find Brian Belski's 2020 Canadian outlook strategy video here, and his U.S. outlook strategy video here.