The global financial crisis has receded, stock markets have soared and there's even talk the economy is reviving. Yet Canadian investors remain traumatized enough to have taken $90-billion that might otherwise be in the stock markets and stashed it in savings accounts, money market funds, guaranteed investment certificates and other places that pay next to nothing but offer near impregnable safety.
"The numbers say that risk avoidance has been on the rise for sure," said Earl Bederman, president of the analysis firm Investor Economics. "The question that arises right now is how much of this is a temporary adjustment to the circumstances of last year and how much of it is going to be permanently on the sidelines?"
It's a matter the investment industry will try to resolve as the annual sales blitz for registered retirement savings plans and, since last year, tax-free savings accounts gathers momentum.
Some in the industry are optimistic investors will come back to stock market-focused investments that generate the highest levels of fee income for investment firms.
"I think the snap back is going to be all of a sudden," said Heather Pelant, head of the iShares family of exchange-traded funds for BlackRock Asset Management Canada. "There's going to be a tipping point and my guess is that it's going to be early in 2010."
|
Market Outlook:
|
But others have a sense that the conservative investing trend may hang on for a while.
Financial industry consultant Dan Richards conducted one-on-one and group interviews with investors recently and noticed what he describes as "a new precariousness" in their outlook. These people have come to understand that their jobs and pensions cannot be counted on with certainty and, lately, they've been hearing some experts say their houses may be overvalued.
"When people feel cut adrift from the things they felt they could rely on, it creates huge levels of anxiety," Mr. Richards said. "In response, people are saying that in one thing they can control, their investments, they'll take certainty."
The investment dealer CIBC World Markets estimated last September there was about $120-billion in excess savings, or money that would be invested in stocks and mutual funds in more normal times. People have since drawn down about $30-billion of that amount, but the conservative trend remains strong.
The consulting firm McVay & Associates says retail deposits held by banks soared almost 27 per cent for the 12 months ended Nov. 30, which compares to normal growth in the 4- to 7-per-cent range.
The story is that money is flowing strongly into high-interest savings accounts, even though returns are commonly around 1 per cent and top out at 2.1 per cent.
Of course, that's a home run when viewed against the 0.1-per-cent returns that some of the biggest money market funds are offering these days. GICs, meanwhile, are paying no more than 2 to 3.6 per cent for five years.
Rebounding after a catastrophic 2008, the S&P/TSX composite index surged last year by 33 per cent. Working on behalf of Franklin Templeton Investments, the polling firm Angus Reid recently delved into the question of how much investors benefited from this rally. The poll results suggested that about 87 per cent of investors flat out missed it, and 86 per cent weren't even aware of the extent of the turnaround.
Commenting on the poll results, investment dealer Scotia Capital has noted that money going into mutual funds is still focused on the comparatively stable bond and balanced categories: "It appears that the 2009 equity recovery has not widely registered with the retail crowd."
The usual pattern after a jarring bear market is for people to park their money in safe, easily cashable places for a while and then move back into stocks and equity funds.
"That pattern, to me, is consistent with an environment that is healing and secure," said Mr. Bederman of Investor Economics. "The kind of liquidity preference we're seeing now suggests that this healing has not yet taken place."
Demographics further argue for persistently conservative investing. Mr. Bederman said that 40 per cent of all financial wealth, about $2.5-trillion, is controlled by households over the age of 65. After their experience with stocks in 2008-09, many of these people are unlikely to jump quickly back into the markets.
"That's why we say the adjustment to the shock of 2008 is going to play out over a longer period of time," he said.
The biggest impediment to investors returning to stocks may well be the big rally of 2009. The rebound was almost as astonishing as the bear market plunge that preceded it, and the result may have been to unsettle investors further rather than reassure them.
Ms. Pelant of the iShares ETF family said she especially worries about the investors who sold their stocks and funds during the market plunge and have been spectators during the rebound.
"These people sold at the wrong time and they've missed this 33-per-cent rise in the market. I find that so painful I almost can't think about it."
****
By the numbers
$90-billion: Amount that Canadian investors have parked in safe, but low-interest-earning, investment vehicles
26.6%: Rise in deposits held by banks for the 12 months ended Nov. 30
33%: Amount the S&P/TSX composite index surged last year
CIBC World Markets, McVay & Associates,
Rob Carrick