The experience of Canadian investment advisers suggests investors have become more open-minded about stocks. Advisers report that clients are moving money out of savings accounts and into mutual funds that either mix stocks and bonds together or hold only stocks. Those who already have balanced portfolios are moving into more aggressive blends of stocks and bonds.
A big factor in this recent shift in attitude toward stocks, says a veteran adviser in Waterloo, Ont., is the arrival of 2012 account statements. The S&P/TSX composite index was up 7.2 per cent last year, including dividends, and the average Canadian equity fund return was 7 per cent. “A lot of people were surprised how positive things were last year, based on what they’d heard from their neighbours and the press,” said the adviser, who declined to be named because her company does not allow her to be quoted by the media.
And that 7 per cent, while much lower than what a lot of global equity markets returned last year, compares very favourably to federal and provincial government bonds, whose yields are so small that, after taxes and inflation, the investor gains little – or worse.
“People are finally getting through their heads that part of my risk is negative real yield” and declining purchasing power, says BlackRock Canada’s Mr. Archard. “If I’m going to really have a long-term portfolio ... I’ve got to be in [stocks].”
SOME BULLS TURNING CAUTIOUS
Let’s say the positive feelings continue and investors spend the first part of the year making the switch back to stocks. Are they right on time, or too late?
Mr. Archard thinks the rally will last as investors start to understand the improving economic fundamentals in some regions, including the U.S.
“Last year was a really nice year across multiple asset classes, and if you thought about the day-to-day conversation, it wasn’t about, ‘Hey we have nice equity returns, nice fixed-income returns.’ It was, ‘Is Greece going to blow up? Is Italy going to blow up? Is the U.S. going to blow up?’
“And in the midst of that, [many] economies are slowly creeping back to solid ground. That’s what the focus is on and why I’m still feeling like this is a long-term good story.”
Still, many professional strategists who have been bullish on the markets – and have seen the markets gain almost as much in January as they had projected all year – are now growing cautious.
George Vasic, who until this week was the Canadian equity strategist for UBS, said that with corporate profit margins at a peak and economic growth likely to be slow, the markets should trade at a discount to their normal levels. The long-term average for North American stocks is to trade between 14 and 15 times earnings estimates for the year ahead.
Today, the market trades at about 13 times forward earnings – which makes “a case for a limited upside in equity markets,” he said. (Mr. Vasic was let go from UBS on Thursday as part of a cost-cutting initiative that saw the bank cut 20 jobs in Canada.)
And there is always the prospect of a return of bad news from one of the financial world’s trouble spots. Europe’s debt crisis is being managed by policy makers, but it hasn’t been solved. The U.S. government’s borrowing limit needs to be raised again by May, and will again become the subject of intense political arguments. Fixing America’s large fiscal deficit will hurt growth.
Michael Hanson, the senior economist at Merrill Lynch, says he’s concerned about the impact of the expiration of the U.S. payroll tax cut, one measure already taken to narrow the fiscal gap. His firm is modelling a 5 per cent decline in disposable income and consumer spending growth of just 0.5 per cent in the first quarter.
“The market has probably decided the various policy risks weren’t that big a deal, and not until they see the pain will they react. But I think in the first quarter, we will.”