After BlackRock released its 2017 investment outlook, we sat down with the asset manager’s chief investment strategist for Canada, Kurt Reiman
, to find out what’s in store for investors next year.
Despite the geopolitical unrest and stunted domestic economy, Canada’s financial markets have performed quite well in 2016. The outlook for 2017, however, isn’t so positive and a repeat of the 20% plus total return enjoyed by TSX investors this year should not be expected next year. In fact, Reiman advises investors to prepare for a “leaner, and potentially meaner, investment environment in 2017.”
“I think the return environment is going to be much more meagre next year,” Reiman says. “The bull market could continue, but there is room for periodic setbacks and more volatility. The principle reason for that is valuations in North America are a bit elevated, so there’s more modest room for multiple expansion. For equity markets to move higher, you’ve got to have a firmer economy and better earnings; that’s critical.”
Although investors’ return expectations for 2017 may have to be recalibrated, Reiman does believe that the economic set-up – the foundation – is strong. Since the beginning of the economic recovery, many outlooks have been too positive and set false expectations for investors, who ultimately ended up disappointed. But for next year, Reiman sees current economic predictions as being too low.
“Compared to 2016, we think 2017 will be a year of better growth in the developed and emerging world,” Reiman says. “That’s a step change from the years since the recovery began, when we’ve been sequentially downgrading growth forecasts.”
Despite the positivity around economic growth, returns are going to be harder to find next year. So, what tactical moves can investors make to boost their returns? “The parts of the stock market that are going to be under pressure next year are bond proxies; the ones that are more rate sensitive – sectors like consumer staples, utilities and telecoms stand out as being more defensive,” Reiman says. “This market run up has been built on the shoulders of more defensive sectors and it’s been the cyclical sectors that have lagged: the technology, energy and materials space, and some of the more cyclical components of healthcare and biotech.”
When reflationary trends started to take hold in the middle of 2016, value investments began to outperform. Going into 2017, Reiman identifies some specific value opportunities that could provide strong returns. “Japan, global financials, and emerging market equities are all areas that have some compelling value characteristics,” he says, “I would also source more return from companies that are growing their dividend. This tends to be in sectors like healthcare and technology and is distinct from dividend yield, which would tend to be more interest rate sensitive.”
Reiman sees room for some commodities cyclicality and envisages opportunities in markets with sensitive prices. “That’s highly sensitive to energy and industrial metals,” he says. “While I think this reflation trend is taking hold, and there will be better demand from emerging markets, we’ve had a pretty strong run up in 2016, so that kind of performance is going to be hard to repeat next year.”
Reiman also sees returns in the fixed income space becoming increasingly modest next year. “I would think about paring back exposure to sovereigns or government bonds and reallocating that to investment grade credit or real return or inflation protected bonds,” he says. “Then, I would also shorten my maturity profile, that’s where you can do a lot of work to mitigate a continued move in higher interest rates.”
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