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Our Canada-based clients want income to live on. They would also like capital appreciation. What they don't want is another 2008-2009, where the stock market fell almost 50 per cent.
So let's look at some of the factors that might impact 2012, and how we are investing the money in the CIBC Monthly Income Fund.
The Canadian economy looks reasonably stable going into 2012. Debt-to-GDP, at about 34 per cent, is better than most countries. The Federal Government deficit is low, and many foreign investors prefer Canadian Government bonds to their own.
There has been some concern about rising consumer debt and house prices, but moral suasion from the Bank of Canada seems to have slowed the pace of the increases.
The U.S. economy will likely slow in 2012, but still show a modestly positive rate of growth. The economy is still in rehab, as consumers continue to reduce debt and foreclosures continue to put pressure on the housing market.
Recent economic data has perhaps been better than investors expected, but the recovery is too slow to put a dent in the stubbornly high unemployment rate. The Federal Reserve has promised to keep interest rates low until 2013, and would probably provide more stimulus if it is needed.
The main problem in the U.S. has been the inability of politicians to instill confidence or take decisive action. As we enter an election year in the U.S., we expect a lot of campaigning but little action, and the economy may suffer as a result.
Throughout 2012, various tax and unemployment benefits will expire, reducing personal income by about $200-billion or 1.35 per cent of GDP. And by the fall of 2012, investors will be weighing the consequences of the new automatic spending cuts passed by Congress (automatically triggered by the supercommittee's failure to agree on a deficit reduction package), and the need to once again increase the U.S. debt ceiling in early 2013.
Turning to Europe, we see a recession looming in 2012, because the 17 countries in the European Union, the European Central Bank, and the International Monetary Fund continually fail to agree on a plan of action.
We expect a sluggish global expansion of about 2 per cent well into 2013. Next year, we believe Canada will grow by 1.6 per cent, the U.S. 1.7 per cent, and Europe 0.5 per cent. However, we see a 35 per cent chance of a global recession, mainly due to policymakers doing too little, too late.
Stocks we like An example of a name we've added as a bond substitute is Canadian Apartment Properties REIT .
It owns 29,000 apartments across Canada, of which 2,467 are recent acquisitions. About two-thirds are in Ontario, with a mix of 37 per cent luxury, 54 per cent mid-tier, and 9 per cent other.
Apartments are generally the most stable of all REITs, because people pay their rents. The REIT may get above-average rent increases in 2012 as it matches up with taxes.
Management is continually looking for ancillary revenues such as allowing cellphone towers on the buildings, renting extra parking spaces, and using independent electric meters. We see this helping to maintain margins.
CAR.UN has a distribution yield of 5.3 per cent, which we think is quite stable. The main risk, in our view, is rental competition from condominiums, but thus far condo rents are more expensive than apartments.
AltaGas Ltd. is another stock we favor. It has three businesses: gas processing and liquids extraction, power, and distribution.
It has six extraction facilities that process gas for producers to remove the liquids. Most of this is done on a cost-of-service basis, and the company tries to hedge a good proportion of the remaining exposure to commodity prices.
The exciting part of the company's story is on the power side. It is building a run-of-river hydroelectric facility (called Forrest Kerr) in British Columbia for about $725-million, and has a 60-year sales agreement with BC Hydro, the provincial power utility.
This facility will come onstream in 2014, and should make a significant contribution to earnings. Two smaller facilities (McLymont & Volcano) are also in the works for 2015 and 2016.
AltaGas currently pays a $1.32 dividend per share, yielding around 4.6 per cent. We expect dividend growth of about 5 per cent a year.
David Graham is Vice President, Equities with CIBC Global Asset Management.