There’s some eye-opening optimism in the latest investment return projections produced for financial planners.
Every year, the FP Canada Standards Council issues Project Assumption Guidelines to set out long-term projections for inflation and financial market returns. This year’s guide includes expectations for stock market returns that will strike most investors as realistic. It’s the guidelines for cash and bonds that really stand out. To put it mildly, they’re quite optimistic.
Bear in mind that these projections are strictly to be used for long-term projections of 10 to 30 years or more. In no way should they influence your thinking on what to expect in 2019 or the next few years. For cash, which basically means T-bills, the projections call for a return of 3 per cent. The projection for fixed income is 3.9 per cent. In early May, one-year T-bills had a yield of 1.7 per cent and the FTSE Canada Universe Bond Index (a proxy for the entire bond market, corporate and government bonds together) had a yield of about 2.4 per cent.
Martin Dupras, one of the authors of the project assumption guidelines, explained that the returns for cash and bonds, as well as stocks and inflation, are based on forecasting done by a wide variety of organizations, including the Canada and Quebec pension plans. The point of consulting all these sources is to remove any bias individual planners might have in their work with clients.
Interest rates appeared to be trending higher as late as last fall, but slow economic growth lately suggests a flat rate outlook or even possibly a rate cut. Yet, the projections for bonds and stocks clearly suggest a view that the low interest rate cycle we’ve seen since the 2008-09 recession will eventually end. “The next few years will be tough, and everybody knows that,” Mr. Dupras said. “But on a long-term basis, I am quite certain we will get back to higher figures.”
Inflation is projected at 2.1 per cent, close to what we’ve seen in the past 12 months or so. Guidelines for Canadian stocks call for annualized total returns of 6.1 per cent, foreign developed markets are at 6.4 per cent and emerging markets at 7.2 per cent. Mr Dupras said it’s estimated that dividends will account for one-third of total returns and share price changes the rest.
Expectations for bonds in the 2019 guide are the same as last year. The projection for Canadian stocks is down from 6.4 per cent last year, while foreign markets are down from 6.7 per cent and emerging markets are down from 7.4 per cent.
Coming up next: How to use these stock and bond market projections to benchmark your own portfolio.
Rob Carrick