5 Strategies for Investing Safely in 2016
Our struggling economy has many Canadians worrying more than ever about their financial well-being. Here, five strategies for safe investing and staying the course during unsettling times.
These are difficult times for investors. Interest rates are near rock bottom, economic growth is tepid, the loonie is floundering, the depression in the oil and gas sector continues, and stock markets are unusually volatile. Faced with these conditions, many people are just keeping their heads down and trying to preserve what they have.
I wish I could say that the situation is only temporary and that normalcy (whatever that is) will return soon. Unfortunately, I cannot offer any such assurance. We are going to have to contend with the current situation through 2016 and beyond. What we need are strategies that will minimize any financial damage and put us in a position to make a reasonable return on our investments.
To that end, I’ve compiled a list of some of the key areas to watch in the year ahead, along with my suggestions for appropriate action.
Here they are.
1 The U.S. economy
2 Slowdown in China
The rate of Chinese economic growth has slowed significantly and the ripple effect has been far-reaching.
In the first quarter of 2013, Chinese GDP was expanding at an annualized rate of 8 per cent. By the fourth quarter of 2015 it was estimated to have fallen to 6.9 per cent.
Any Western nation that achieved that level would be ecstatic but for China’s burgeoning population such a precipitous decline in growth, and the jobs that come with it, is a major cause for concern. The People’s Bank of China (China’s central bank) projects the country’s growth rate at 6.8 per cent in 2016, which means the situation is not expected to improve this year.
3 Europe in turmoil
Europe is facing a series of challenges unprecedented since the Second World War.
First came the near collapse of the Eurozone over the Greek crisis; next the sanctions against Russia, which hurt European exports; then the tidal wave of refugees from Syria and other countries; and finally the terrorist attacks in France that led to the imposition of border controls.
The united Europe envisaged by post-war planners appears to be splintering before our eyes. Surprisingly, European stock markets held up reasonably well in the face of all this bad news.
4 Panic in the Oil Patch
It may cost a lot less to fill the gas tank, but we as a nation are paying a high price for cheap oil.
Capital spending in the energy sector has been slashed by billions of dollars, thousands of people have been laid off, Alberta is in recession and facing a deficit, the Canadian economy is stalled and no one knows what impact the Paris climate deal’s carbon tax and cap on emissions will have on the big producers.
On top of that, the collapse in the oil price has knocked down the loonie to its lowest level in more than a decade. That may be a boon for exporters but it has driven up the cost of imported goods, including food.
On balance, low oil prices are bad news for this country. There’s no relief in sight. We are caught in the middle of a global struggle for market share with Middle Eastern producers, led by Saudi Arabia, attempting to drive upstart American shale oil companies out of business.
5 Interest rates
In mid-December, the U.S. Federal Reserve Board finally pulled the trigger and started raising interest rates for the first time since 2006.
Although the move was not a surprise, it pushed the loonie down even further and set us on a divergent track with the U.S. after our central bank cut its key rate twice last year.
Don’t expect the Bank of Canada to raise rates in 2016 – if anything, we might see another cut. Our economy is very fragile, which the new Liberal government recognized with its promise to provide infrastructure spending. The central bank is not likely to negate the effect of that initiative by raising rates.
There is no reason to expect better returns on your bonds and GICs this year. If anything, we could see rates sag even lower. Some European sovereign bonds are now quoted at negative returns, meaning people are willing to pay governments to keep their money safe for them.