While the dollar is low, the effects haven’t kicked in for eastern manufacturers. It takes a while for a low currency to kick in. Supply systems have to be built – so we’re in this hiatus from the shift of resources to manufacturing.
The outlook is for a 1% economy this year. The Bank of Canada is looking at something in the 2% range, perhaps lower. So we’ll probably see a 1.5% economy.
Wang: Regardless of whether the Fed decides to raise rates in December or early next year, I don’t think the long-term trend of interest rates has changed. Basically I’d expect interest rates in North America will stay lower for longer.
It doesn’t mean we shouldn’t expect some blips along the way, which we’ve seen from time to time.
We find ourselves in this lower-end environment. The 10-year US bond yield has decreased since June of this year, and is down from 12 months ago as well. I would expect North American interest rates to be where they are now, perhaps a little higher. For 2016, in the US, I can see the 10-year getting back to 2.4% to 2.5%, and in Canada, back up to 1.8%.
What sectors are attractive for investment in Canada right now?
Murenbeeld: You have the three biggies – rocks, oils and banks are selling. Our models indicate they are on the attractive side. A theme of ours for the last four or five years has been infrastructure. We need tremendous infrastructure renewal in North America.
There are some excellent reports by the Society of Civil Engineers about infrastructure and the stuff you don’t see, such as water systems and sewage systems.
These were all put in 50 years ago, and these need to be renewed – and we’ve been terrible at addressing this problem. For the simple reason that we’ve been obsessed with addressing the social system the past 40 years – we’ve been magnanimous with looking after everybody, whether they’re working or not.
The money has to come from somewhere, and where it comes from in Canada are defence and infrastructure. In the US, it’s from infrastructure.
Under NATO rules, each country is supposed to spend 2% of gross domestic product (GDP) on defence – Canada hasn’t even been close to that. I’m not hawkish, but this stuff has to be renewed.
On the US side it’s even more obvious – all you have to do is fly to La Guardia and say, ‘My God, I think I’ve landed in the Fourth World – not even the third world.’
Infrastructure needs to be done. In the Depression, Hoover Dam was built – and that’s more than simply gussying up an airport. These are important projects. One could argue the US should build five or 10 nuclear generating facilities.
Wang: Energy companies are doing what they can to cut back capital spending, reducing or in some cases eliminating dividends altogether. They’re hunkering down to navigate through this lower-oil price environment. So we look at the low cost energy companies that can weather this lower commodity environment, so when prices do reverse back up again, they will obviously benefit and do quite well.
But until that time comes, it will be very choppy and very volatile. It’s paramount to keep a longer time frame for your investment horizon in that scenario.
The other opportunities that are attractive in Canada are Real Estate Investment Trusts (REITs). We’ve talked a lot about the lowerfor- longer interest rate environment. REITs, with their high dividend yields, are in very sound shape. They are good investments to have; slow and steady, and very predictable businesses, with stable and growing dividends. The industrial segment of the real estate market is strong, and despite the exit of Target, the retail sector is in good shape.
And don’t forget the Canadian banks! They’ve underperformed this year, but valuations are attractive, and growing dividends every single year – and yields are north of 4%.
Strigo: Falling emerging currencies have obviously a negative effect on the performance of emerging market bonds, if they are denominated in the local currencies. But we have to look more at the medium-to long- term time horizon. Falling emerging market(EM) currencies will actually benefit these countries, because currencies act as an adjustment valve.