Over the past three years, a typical balanced portfolio could have provided an average annual return of more than 10%, which has created a form of habit for savers, they say.
“Interest rates are really very low,” Jean-René Olliet said in an interview a few days before Christmas. It would be difficult to require a bond portfolio to generate a yield of 3% when the Canadian 10-year government bond rate is 1.50%. For US stocks, we’ve had 21 times earnings for the next 12 months, which isn’t a godsend. “
A higher multiplier doesn’t necessarily herald the disappointment of 2022 for stock markets. In contrast, the correlation between valuations and returns is stronger in the long run. “The more we pay, the lower the future returns,” warns Jean-René Oeh.
The chief economist at the National Bank, Stephane Marion, also looks to 2022 with caution. For now, however, he sees no reason to revise his forecast downward, but will keep a close eye on how China adjusts to the Omicron variant.
“The biggest risk factor is China’s behavior with a zero-tolerance policy [à l’égard de la propagation du virus]The economist explains. If China maintains this policy, and appears to be, it could have supply chain effects due to its strategic location. However, I’m willing to live with this uncertainty if the string loosens up after a more difficult first quarter. “
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Stephane Marion believes that the Bank of Canada and the Federal Reserve in the United States should also begin to tighten monetary policy next year in order to curb rising inflation. However, interest rates are expected to remain below the level of inflation, which is seen as a stimulus to the economy.
The economist predicts: “I think central banks will be cautious.” They realize that inflation is higher than expected, but they are going to raise rates, maybe a little faster, but to move them into higher inflation territory, that would be amazing. “
Currently, the consensus of economists expects five rate hikes in Canada in 2022. In the Desjardins group, only two hikes are expected. “I, I do not believe it, that we will succeed in introducing five increases in the main rate and that the Canadian economy will get out of it,” comments Michel Doucet.
He said that the very rapid rise in interest rates could derail the economic recovery. In 2021, note that 50% of new mortgages have variable rates. With so many households exposed to higher interest rates, he said, the Bank of Canada cannot move very quickly.
Invest near home
In this context, Stephane Marion increases the weight of Canadian stocks. He notes that the S&P/TSX, the main index of the Toronto Stock Exchange, is trading at nearly 14 times analysts’ expectations for earnings for the next 12 months. That ratio is 21 times for the S&P 500, which includes the 500 largest publicly listed US companies. Historically, the S&P/TSX has been an index that has done well in a context of rising inflation. He stressed that it is an indicator that provides more protection against inflation than the US indicator.
The economist also expects the Canadian dollar to rise against the US dollar, which is unfavorable for Canadians who own US dollar-denominated assets.
Stephan Marion predicts that earnings for S&P/TSX companies will increase on average by 7% in 2022. He believes that the index will reach 22,500 points by the end of the year. The large US companies in the S&P 500, for their part, will see their earnings grow at an average rate of 6.4%. His target for the New York index is 4,900 points for 2022.
Desjardins strategists are more optimistic about the two indicators. Their target is 23,000 points for the S&P/TSX Index and 5,200 points for the S&P 500 Index.
Preferring the value method over the growth method, Jean-René Ollet, for his part, favors several sectors with a strong presence in Canada: finance, energy companies and the materials sector.
For growth stocks, such as the technology sector, higher interest rates are a “handicap” because they lower the relative value of future earnings relative to bonds. “We will return to growth stocks,” Jean-René Olliet predicts. We are in post-COVID economic momentum, but the likely pace of our economies will return to normal in 2023 or 2024. In a world of modest growth, companies that succeed in delivering stronger growth will receive an assessment bonus. “
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