Your Money: 5 Big Questions

The way these issues play out will have a significant impact on your financial fortunes in 2015

I think there are five major themes that investors need to consider when planning strategies for 2015. The way in which these play out will go a long way towards determining the winners and losers in the year ahead. Here they are.
Is the U.S. economic boom for real? We haven’t seen anything like this for more than a decade. In the third quarter, the U.S. economy grew at an annualized rate of 3.9 per cent according to revised numbers from the Commerce Department. That brought the growth rate for the second and third quarters combined to 4.25 per cent, the best the United States has experienced since the second half of 2003.

Now the big question is whether this growth rate is sustainable. The International Monetary Fund, for one, doesn’t think so. In its latest projection, it pegs the U.S. rate for next year at 3.1 per cent. That’s still healthy, but nowhere near as hot as the spring-summer pace we experienced. By comparison Canada’s projected rate for next year is about 2.5 per cent according to the Bank of Canada’s October Monetary Policy Report. The IMF’s global forecast for the coming year is 3.2 per cent.

One reason for the caution about 2015 is the sluggish pace of growth in U.S. consumer spending. The Commerce Department reported a gain of only 0.2 per cent in October, while September was flat year-over-year. Those numbers came as something of a surprise as conventional wisdom had expected the drop in gasoline prices would translate into more spending at the malls. That doesn’t seem to be happening; U.S. retail sales over the Thanksgiving holiday weekend were down 11 per cent from last year. So the U.S. picture is not entirely rosy.

Where will the oil price settle? The oil shock of 2014 is not over yet. Crude prices have fallen more than 40 per cent in recent months to the US$60 a barrel range and there could be more downside to come now that OPEC has opted to keep production at current levels.

Canada is caught in the middle of these global machinations. We have virtually no pricing power because of our lack of access to international markets (the Keystone and Energy East pipelines would change that). Our energy companies benefit from the fact oil is priced in U.S. dollars but the inescapable reality is that low world prices combined with the “Canada discount” will hurt bottom lines in 2015 and act as a depressant on share prices.

That means that in the short term, the energy sector looks dodgy for new money. But investors with long time horizons may see some real bargains emerge.

What will happen to interest rates? The OECD surprised almost everyone in November by saying that the Bank of Canada will probably start raising interest rates next May. That’s a lot sooner than economists have predicted but the Paris-based organization said that an improving economy and inflation running near the BoC’s target two per cent rate will force the issue.

“Given the uncertainty surrounding the amount of economic slack, the Bank of Canada should maintain its current policy stance for the time being,” the OECD report said. “But it will have to start to withdraw stimulus as remaining slack is progressively taken up.”

What will happen to Keystone XL? President Barack Obama is out of time. He has procrastinated on this issue for years but he won’t be able to dither any longer. The new Congress, with its Republican-dominated Senate, will take office this month and once that happens it won’t be long before a bill lands on the President’s desk approving the construction.

Mr. Obama can veto it, of course, and he probably will. But that’s a stalling tactic at best. The new Congress will keep the pressure on. Opinion polls show Keystone is a winner with the U.S. public and the Republicans, who already have their eyes on the 2016 presidential election, are well aware of that. They’ll milk the political optics as much as they can.

It appears from his recent comments that Mr. Obama has already said no to Keystone in his own mind – his remarks about it benefitting Canada more than the U.S. were highly revealing. But he may not be able to resist the Republican pressure, especially since his own party is divided on the issue. Moreover, The Wall Street Journal recently suggested that the President’s foot-dragging may be having a negative rub-off effect on the leading contender for the Democratic nomination in 2016, Hilary Clinton. The President has his back to the wall on this one.

If he rejects Keystone, it will send a signal to the energy industry that any major pipeline projects in the U.S. will likely be put on hold, at least until after the 2016 election. That in turn will provide even more impetus to the shift to transporting crude oil by rail – which, ironically, is more dangerous and environmentally damaging than pipelines.

Approval should give at least a temporary boost to pipeline stocks in general and to the shares of TransCanada Corp. (TSX, NYSE: TRP) in particular. It will also be good news for oil sands producers, even though the pipeline won’t be operational until about two years after a Presidential permit is issued.

Whither China? The slowdown in China’s growth has had a huge effect on Canadian resource producers by driving down global commodity prices. The country’s GDP growth rate now stands at a five-year low, coming in at 7.3 per cent in the third quarter. The IMF forecasts that 2015 will be even worse, coming in at 7.1 per cent. That is well below the government’s target of 7.5 per cent.

Of course, a 7.1 per cent growth rate in any Western country would be phenomenal – too much of a good thing, in fact. But in China, which needs strong GDP growth to provide jobs for its growing labour force, any rate below 7.5 per cent spells potential trouble. That why Beijing has taken a number of unusual steps to try to boost the economy, including cutting interest rates and easing lending rules for home buyers.