Two views of the future
Two of Canada’s leading financial experts offered their outlooks for the coming year at the opening ceremonies of the Toronto World Money Show recently.
Their views could not have been more different!
One was upbeat, forecasting a period of higher commodity prices that would fuel the resource sector, rising exports, and low double-digit stock market gains in New York and a high single-digit advance in Toronto.
The other was dark and foreboding, with warnings of deflation, a continuation of the U.S. housing crisis, a painful unwinding of the debt bubble, and a battered stock market.
It certainly gave show attendees plenty to talk about during the reception that followed. Whether they went home enlightened is another matter.
The two were Robert Gorman, chief portfolio strategist for TD Waterhouse Canada, and David Rosenberg, chief economist and strategist for Gluskin Sheff + Associates. Both are based in Toronto.
Mr. Gorman was first up. He gave a virtuoso performance, rhyming off dozen of statistics in a clear, point-by-point analysis of the positives and negatives facing the world economy without once referring to notes or using PowerPoint slides.
Yes, there are risks he acknowledged. Deflation is a concern, although he rates the odds as low with only a 20-25 per cent probability. A double-dip recession could happen but slow growth is more likely what we’ll experience in 2011. (He’s in line with the latest Bank of Canada prediction on that point.) The housing market in the States should begin to stabilize with affordability (sales prices plus interest rates) at its best level since the 1970s.
On the plus side, he sees moderate growth as a good thing. “It will be enough to boost corporate profits without triggering inflation.” The wide gap between returns on U.S. Treasury bonds and stocks means that equities are good value and investors will recognize that, bidding up share prices.
History is another positive indicator, says Mr. Gorman. The third year of a presidential term — which 2011 will be — has been positive 90 per cent of the time for U.S. markets with an average gain of 14 per cent. That’s because after the mid-term elections there is a period of political stability which investors welcome.
The net result will be a low double-digit advance on Wall Street with a rotation in leadership from small-cap companies to blue chips. He especially likes Procter & Gamble (NYSE: PG), Johnson & Johnson (NYSE: JNJ), and PepsiCo (NYSE: PEP). Mr. Gorman is also keen on some of the undervalued U.S. technology stocks such as Microsoft (NDQ: MSFT) and Cisco Systems (NDQ: CSCO).
His outlook for the Canadian market is only slightly less bullish, with a forecast of a return of 8 per cent to 9 per cent on the TSX in 2011. He likes dividend-paying stocks, particularly the banks, with Royal (TSX, NYSE: RY) and Scotiabank (TSX, NYSE: BNS) his top selections. He also expects the energy sector to do well with both Suncor (TSX, NYSE: SU) and Encana (TSX, NYSE: ECA) showing strength.
What doesn’t he like? Bonds. Returns will be “very meagre” in 2011 he predicts, finishing in the low single-digit range.
David Rosenberg takes the completely opposite view. With a “deflationary backdrop” to contend with, yields on long-term U.S. Treasuries will drop another 100 basis points (one percentage point) to “crazily low” levels. That will mean a sharp rise in long-term bond prices, making this one of only two investment sectors he’s positive about in 2011 (gold is the other one).
Mr. Rosenberg also spoke without notes although he presented a dazzling array of charts, graphs, and small-type slides that were rarely on the screen long enough for the audience to decipher. But there was no ambiguity about his core message. Although he insists he is not a “perma bear” — “I’ll be bullish on equities some day, but not yet”, he says — Mr. Rosenberg expects 2011 to be another painful year for the United States and that pain will spill into Canada. A double-dip recession is certainly a possibility next year, he warns.
Why? Start with the embattled U.S. housing market. It’s not going to get better any time soon, he believes, pointing to the extremely weak number of new mortgage applications despite the fact interest rates are at record lows. “The system is broken,” he told the Money Show audience. “There is too much supply in the U.S. housing market. We are probably only half-way through the cycle.” Meantime, the net worth of the average U.S. household had fallen by more than $100,000 from three years ago.
Add to that the huge debt load that has to be worked through, which he estimates at between $5 and $6 trillion, and we are facing a deflation risk that is “worse now than at any time in the post-war world”.
The logical response for investors in the face of all this gloom is to buy long-term bonds — Canadian issues since he believes the U.S. will continue to devalue the greenback – and gold. “Gold will be hitting new highs over the next few years,” he predicts.
So which scenario should you believe? Although Mr. Rosenberg presents some compelling arguments, my personal instincts lead towards the more positive views of Mr. Gorman. I think stock markets will enjoy modest gains next year, although most of the advances will likely come in the second half. I don’t expect a deflationary cycle to take hold. And I am certainly not a big fan of long-term bonds at this stage.
That said, I advise continuing to hold some bonds or bond funds in your portfolio with an emphasis on shorter maturities. These will provide a measure of asset protection in the event Mr. Rosenberg’s dark world comes to pass.
As well, I suggest holding some gold or gold stocks. Interestingly, almost every speaker I listened to at the Money Show was bullish on gold (my own prediction for next year is US$1,500+ an ounce). That’s not necessarily a good thing, however. As Mr. Rosenberg told the audience, quoting Wall Street guru Robert Fuller: “When everyone agrees on the same thing, something else is likely to happen.”
Photo ©iStockphoto.com/ TIM MCCAIG
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