Recession, bear market unlikely in 2008, predicts TD Waterhouse
Dec 17, 2007 8:00:00 AM
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TORONTO, Dec. 17 /CNW/ - TD Waterhouse today released its 2008 Investment Outlook, offering insight into future market trends and their impact on investment portfolios. The Outlook predicts that, despite continuing fall-out from the sub-prime lending crisis in 2008, several positive factors in the U.S. economy will more than offset the negatives and will cause the U.S. stock market to rise for its sixth consecutive year.
The annual report also examined its 2007 predictions and found that five out of six were accurate.
"The biggest question facing investors at the moment is whether the five year-old global bull market will see a sixth year, or whether the sub-prime lending crisis will tip the U.S. into recession and cause a bear market," says Bob Gorman, Chief Portfolio Strategist, TD Waterhouse. "But there has been so much coverage of the sub-prime crisis that we believe it's already embedded in current market prices. Therefore, other strong fundamentals, when combined with the stimulative effect on markets of the presidential cycle, will outweigh the sub-prime impact and keep the economy out of recession territory."
Gorman predicts that the following six themes should dominate the markets in 2007:
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On the negative side, there will be continuing fall-out from the sub-prime mortgage sector, primarily from increased mortgage loan defaults as sub-prime mortgages come due over the next six months and their rates are adjusted upwards. As well, the massive oversupply of new housing stock, which has already caused the median price of a U.S. home to fall by 5.1% in the past year, will keep the U.S. housing market in recession.
There will be continuing rotation into large caps in the U.S. market, a theme that was pronounced in 2007. Large cap growth stocks, generally out of favour since the bursting of the tech bubble in 2000, will be particular beneficiaries of this trend. Good examples are high-calibre tech companies like Cisco, Oracle and Microsoft, which are benefiting from pent-up demand for their products, strong balance sheets among their corporate clients and surging U.S. exports.
The Canadian equity market, like its American counterpart, should rise for a sixth consecutive year and generate single-digit returns. The impetus in 2008 will not come from commodity prices, as was the case through much of the current bull market. Rather it will come from the continued rotation into less cyclical sectors, exemplified by major insurers like Manulife, Sun Life and Power Financial.
Fixed income investors will earn between 4 to 4.5% in 2008 - more than the sub-coupon returns generated in 2007. Slower economic growth should translate into a lack of upward pressure on bond yields. After the widening of corporate bond spreads in 2007, we expect corporates to outperform government bonds in 2008.
Europe should once again be the best-performing major international market, generating positive, single-digit returns. This reflects solid earnings and dividend growth along with good valuations. Japan, after a poor year in 2007, will likely post better returns, close to those in Europe.
Caution is warranted in the emerging markets in 2008. First, they are no longer cheap and are, as a group, fully priced. Second, monetary policy is tightening in several cases, particularly in China where inflation is an issue. Third, emerging markets are notoriously volatile and could prove vulnerable to the effects of slowing growth.
Gorman concludes that, "Overall, we expect financial markets in 2008 to overcome significant, well-documented risks and generate solid returns."
Bank of America and
Home Depot/> were little changed, and Citigroup declined
during the year.
Prediction No. 3: A) The Canadian stock market would rise for a fifth
consecutive year in 2007, recording a single-digit
advance. B) We would begin to see a rotation from the
cyclical sectors to the less cyclical. C) Canadian
stocks would underperform the U.S. market for the
first time since 2001.
Outcome: A has proven correct. B has proven true in recent
months as investors have become more risk-averse. C is
too close to call, although the less cyclical U.S.
market seems to have better momentum.
Prediction No. 4: Bond investors would earn coupon returns of about 4%
in 2007.
Outcome: We fell short of the forecast. The Scotia Capital
Universe recorded a return of slightly better than 3%.
Prediction No. 5: There would be a flurry of mergers among energy
trusts, reflecting impaired cash flow among many of
the weaker, lower calibre trusts.
Outcome: This trend was indeed very pronounced, with smaller,
natural gas-oriented trusts proving particularly
susceptible and being taken out at depressed
valuations. We also underlined the importance of
holding the highest calibre energy trusts such as
Bonavista, Arc and Vermilion. Bonavista and Vermilion
outperformed their peers while Arc was in line with
the energy trust sub-index.
Prediction No. 6: Europe to be the best major international stock market
in 2007, reflecting attractive valuations, solid
earnings growth and high dividend yields. Japan would
not fare as well.
Outcome: This has proven accurate, with Europe generating solid
returns while Japan has lost some ground. Nonetheless,
the Euro slipped versus the Loonie, negating returns
for Canadian investors.
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