Stock market performance this year will once again be driven largely by debt markets and developments in Europe, and asset managers must be tactical and flexible to navigate this environment, forecasters said on Tuesday.
At the Canadian Pension & Benefits Institute’s 2012 pension investment forecast in Toronto, speakers said the Canadian economy and stock markets are subject to a slew of global risks.
“This will be the year of living dangerously,” said Paul Summerville, senior fellow at the Centre for Global Studies at the University of Victoria. “The outlook for the global economy in 2012 is as ugly as it is dangerous: a recession in Europe…below potential growth in the United States, a sharp slowdown in China and in most emerging economies.”
Added Summerville: “None of this is good for Canada.”
He expects the Canadian dollar to fall to 85 cents US by the end of 2012, and that the S&P/TSX composite index will fall by 10% as global economic weakness weighs on the heavyweight resource sector.
The Canadian bond market will also come under pressure, Summerville said, since government finances are so dependent on resources and real estate. He expects 10-year bond yields to rise by close to 3% this year.
Eric Bushell, senior vice president of portfolio management and chief investment officer at CI Investments Inc.’s Signature Global Advisors, said stock market performance will be driven by developments in debt markets.
“The debt markets are still in charge,” Bushell said. And global debt markets, he pointed out, face substantial risks this year.
Bushell explained that a noticeable home bias has emerged in debt markets. This will pose particular challenges during the first half of 2012, with many countries facing maturing debt that must be refinanced.
“There is this ‘re-nationalization’ that is happening, and it’s cutting off certain funding channels,” Bushell said. “It’s a sharp departure from the path of ever-growing cross-border capital flows, and it poses a risk to the world. It creates substantial funding gaps.”
Against this backdrop, markets are hoping the private sector will step up to provide sovereigns and the banking system in Europe with the necessary funding, Bushell said.
“In this circumstance, I think that we’ll have stock markets considerably higher,” he said. In fact, Bushell said markets could rise by as much as 25% if funding comes through and confidence returns.
In the meantime, however, he said asset managers need to be flexible and tactical as they wait and see how the debt crisis plays out.
Jesper Alsing, managing director and CEO of Luxembourg-based ValueInvest Asset Management S.A., said that even though it’s a low-growth economic environment, stock pickers will be able to find investment opportunities. He noted that valuations are attractive.
“From our perspective, volatility is good,” he said. “It creates opportunities for stock pickers.”
Alsing encourages asset managers to seek out companies with clean balance sheets, earnings stability and strong dividend yields.