Canadian investment managers expect equity markets to stay the course in 2004 and expect equities to outperform bonds according to Mercer Investment Consulting’s 2004 Canadian Fearless Forecast.

The annual Fearless Forecast survey, conducted in December 2003, includes predictions and views on the Canadian and global markets from 49 leading Canadian institutional investment managers. Together, these firms manage approximately $1 trillion for pension funds and other investors.

For 2004, the investment managers forecast equity returns to be in the range of 8% to 12%, with Canadian small cap and emerging markets cited as the most favourable markets. For bond and cash markets, the managers expect more modest returns ranging from 2.8% to 4.5%.

“The past year started poorly for equity markets but finished well. Canadian investment managers are predicting the rise in markets to continue into 2004,” said Wes Peters, an investment consultant with Mercer Investment Consulting in Canada. “For the Canadian equity market, the managers predict the material, energy, and financial sectors to be the top performers,” added Peters.

Managers are generally predicting only modest appreciation for the Canadian dollar in 2004. For example, the median forecast for the U.S./Canadian dollar rate at the end of 2004 is US78¢.

Other key forecasts for 2004 include:

  • an increase in the Bank of Canada rate from the current 2.75% to 3% by the end of 2004;
  • an increase in the U.S. Fed Fund rate from the current rate of 1% to 1.75% by year end;
  • a slight decrease in the Canadian unemployment rate from 7.5% to 7.3%;
  • real GDP growth of 3% in Canada and 3.3% globally; and
  • an increase in Canadian merger and acquisition activity led by consolidation in the material, energy and financial sectors.



Manulife and BMO were most often cited as the top performing Canadian large cap stocks for 2004. While Canadian investment managers predict 2004 will be a strong year for small caps, forecasting the Nesbitt Burns small cap index to show a one year median return of 12.0%, there was no consensus on the top performing Canadian small cap stocks.

As to what could derail the forecasts, the managers identified the performance of the U.S. economy, along with the Canadian dollar and the stability of world currency markets, as the key issues expected to influence capital markets in 2004 for Canadian investors.

Looking further down the road, the managers surveyed forecast 5-year median equity returns to be in the range of 8% to 10% per year, while bond and cash markets are forecast to be in a more modest range of 3.4% to 5.5% per year.