Economists hit mark on outlook for last year, but stock-pickers' forecasts fall short

Open this photo in gallery:

Economists, caught off guard by a robust Canadian economy in 2017, kept their forecasts solid but unspectacular for 2018 – and pretty much came in on target.

Equity strategists, however, largely missed the mark as they predicted a year of solid but unspectacular gains in Canadian stocks – leaving most Canadians who shared that optimism poorer.

These are the takeaways in our annual look back at predictions for Canada’s economy and markets. A year ago, Canadian economists were explaining how they’d underestimated the country’s consumers, who propped up the economy as they kept on spending. This year, they mostly reiterated their Goldilocks forecasts – not too hot, not too cold – and the economic numbers came in just right.

“After a very robust 2017, we were expecting a slowdown in growth to something more sustainable,” said Craig Wright, chief economist at RBC Dominion Securities Inc. “As the economy’s pushing up against capacity, there’s a natural tendency to slow.”

Mr. Wright’s forecast of 1.9 per cent GDP growth for 2018, tied for the lowest of six forecasts among the big banks’ economists, may turn out slightly conservative. With three quarters of numbers in, the GDP figure for the full year should settle in around 2 per cent (RBC’s current estimate) to 2.1 per cent (the estimation by the folks at BMO Nesbitt Burns Inc.). The economics squad at CIBC World Markets Inc. was in the middle of the pack for forecasts on GDP and inflation, while also predicting the lowest unemployment rate and the weakest Canadian dollar. And it seems poised to come very close in nearly all of its predictions. “Overall, not bad at all in terms of accuracy,” said chief economist Avery Shenfeld, who generously examined his errors a year ago and is now allowed to note his successes.

Mr. Shenfeld allows that CIBC was “pessimistic on oil, too pessimistic in terms of the annual average,” as were all of the bank economists. The National Bank economics team, whose forecast also included 2.5 per cent GDP growth, was the highest, with a prediction of US$60 West Texas Intermediate (WTI) crude oil. “We felt that U.S. production would zoom ahead and that OPEC and Russia would ease their prior production restraint, both of which in fact happened,” Mr. Shenfeld said.

Douglas Porter of Bank of Montreal, who forecast an average WTI price of US$57 a barrel for 2018 (versus US$50.91 in 2017), noted that BMO “looked overly cautious for much of the year; not so bad now!” (He believes the full-year average will end up being just under US$65 after peaking above US$75 in early October, yet falling below US$50 in the last days of December.)

While the economists can be generally satisfied with their forecasts, stock-pickers, most of whom predicted a year of meaningful gains for the S&P/TSX Composite, have to look back on 2017 and re-examine assumptions.

In the Reuters Global Equities Poll conducted in October, 2017 – when the Composite bounced around the 15,800 mark – the median “end of 2018” projection of 26 forecasts was 16,750, a gain of about 6 per cent for the year. Many forecasts topped 17,000 and some exceeded 18,000. The Composite closed 2018 on Monday at 14,322.86.

In an e-mail last week, Manash Goswami, senior vice-president and portfolio manager at First Asset Investment Management Inc., explained his firm’s 18,200 year-end 2018 forecast from October, 2017. Mr. Goswami said most economic data in Canada and the United States showed positive trends, corporations were posting strong growth in revenue and profits. Oil seemed to be on the upswing and central banks in Canada and the United States were raising rates, two things that should have boosted energy and financial stocks, each a huge contributor to the Composite.

“Given this backdrop we did not think it was unreasonable for the TSX to continue to trade at an elevated multiple,” he said. “We thought a 5 per cent return for the balance of 2017 and 5 per cent to 10 per cent return in 2018 were reasonable expectations. We were fully invested and favoured more pro-cyclical sectors such as financials, industrials and technology.

“Around the middle of 2018 this view changed,” he said. “We began to see slowing in economic data. Equity markets outside of North America (including China/Europe) were rolling over. Coupled with global trade war risk (U.S./China), and NAFTA uncertainty, we became more cautious and started to become more defensive in our sector allocations, favouring sectors such as utilities and real estate, as well as raising our cash weight to about 30 per cent.”

Ron Meisels of Phases & Cycles Inc., a firm that does technical analysis of stocks, was one of the closest, forecasting 14,500 for the end of 2018. He looked at the macro thesis for an aging bull market that suggested the sectors that typically outperform – energy and financials and gold – also dominate the Composite. But then he looked at technical indicators for each of those sectors and came away unimpressed with their 2018 potential. Gold equities, for example, were falling, under a major downtrend line and under its own 200-day moving average. “Technically speaking, it was a very weak condition."

Matthew Skipp, president and chief investment officer of SW8 Asset Management Inc., forecast 14,250.

He says he was “somewhat cynical” about many economic and financial measures underlying Canadian equity markets, such as the transportation problems and cracks in the housing market, and he was concerned about global markets and valuations in general, and the lack of a correction in U.S. markets specifically.

However, like a true contrarian, he said last week: “If I made a bit of an outlier call to the downside last year … I think the markets in Canada and the United States are in the process of trying to find a short-term bottom. When you’re interviewing the guy with the call to the downside, it’s probably a decent sign of a short-term bottom.”