Canadian equities are poised to outperform U.S. stocks over the next several years, although fixed-income returns will be more robust south of the border, according to a pair of reports from TD Economics
The reports published on Tuesday look at the return potential for both the U.S. and Canadian markets over the next 10 years.
For the 2016-2019 period, Canadian equities “should outperform U.S. stock returns, benefiting from firming commodity prices, robust U.S. growth and a still-low Canadian dollar,” the report on Canadian long-term financial assets returns says.
The report on U.S. long-term financial assets returns predicts U.S. equities “will deliver positive returns on average but underperform international benchmarks” for the 2016-2019 period. “While the U.S. economy will remain robust, equity investors will be attracted to other markets which face greater upside potential from current depressed levels. In the near term, a continued strong U.S. dollar will remain a headwind for U.S. equities,” the U.S. report says.
Through 2019, TD projects that the MSCI EAFE index will lead the way with average annual returns of 7.5%, outpacing the S&P/TSX index at 6.5%, and the S&P 500 at just 2.0%, the Canadian report says.
Notwithstanding its rosier view for Canadian equities, the Canadian report forecasts weaker fixed-income returns for Canada through 2019, with Government of Canada bonds returning 0%, provincials generating just 0.5%, and corporates producing 2.0%. For the U.S., it projects a 1.5% return from U.S. Treasuries, 3.0% from munis, and 3.5% from corporates.
Based on these projections, a theoretical U.S. portfolio should return between 4% (income-focused) and 6% (growth-focused), with a balanced portfolio expected to return about 5% per year, between 2016 and 2019, the U.S. report says.
Over the same period, a Canadian portfolio should return between 2.5% (income-focused) and 5% (growth-focused), with a balanced portfolio expected to return about 3.5% per year, according to the Canadian report.
Longer term, from 2019 to 2025, returns on cash of 3%, fixed income returns of 3.5% to 5%, and equity returns of 7%, are “sustainable” in both Canada and the U.S., say both reports.
For the entire 10-year period, a balanced portfolio in Canada (comprised of 5% cash, 45% fixed income and 50% equities) should yield an average of about 4.5% per year, which is only slightly below the 5.1% average total return for the past decade, the Canadian report says.
A similarly-constructed U.S. portfolio should yield an average of about 5.5% per year, the U.S. report says, which is slightly above the 5.2% average total return for the previous decade.