The world might be set to escape a funk characterized by decelerating growth and threats of deflation, but Canadian investors may not want to get their hopes up for the coming year. Even though the Great White North’s financial markets managed a fairly impressive showing in 2016, there’s limited room for upside moving forward, according to market analysis from BlackRock.
“I think the current rally has room to extend itself, but the upside is going to be limited, given what we’ve already seen,” said BlackRock Canada Chief Investment Strategist Kurt Reiman.
While tech and health-care stocks have good potential for a global rise in 2017, they aren’t well represented domestically. In addition, a consensus estimate of 20% earnings growth for the TSX is seen to be driven mostly from energy and possible infrastructure spending, with “much of the earnings upside [coming] from energy,” according to Reiman. “It seems like a lot to hang your hat on.”
On the fixed income side, Canada is predicted to not keep pace with the anticipated rate-hiking cycle from the Fed. “We see Canadian rates rising at a slower pace than US rates, creating a widening of rates over time,” said Aubrey Basdeo, managing director and head of fixed income, BlackRock Canada. “We don’t see [a rate cut] happening with Canada benefitting from US growth, which is picking up speed. Given the divergence in central bank policy from the US, we see the Bank of Canada on hold for 2017.”
With little upside seen for stocks and bonds, benchmark portfolios built on the traditional 60/40 split between equities and bonds are expected to yield very modest returns over the next 12 months. “We recommend a flexible fixed-income strategy – one that looks to preserve capital by actively adjusting the portfolio’s sensitivity to interest-rate risk while seeking to exploit increasing dispersion of individual security returns across market sectors globally,” Basdeo said.
The exchange rate story for the loonie is defined by two opposing forces: rising oil prices and Canadian monetary policies that diverge from the US. “The energy side of that tug of war is winning,” said Reiman. “However, the loonie remains cheap to long-term fair value and 75 cents may be the sweet spot.”
While a cheaper Canadian dollar is expected to boost exports to the US, non-energy exports have yet to benefit from the weakness in Canada’s currency.
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