The global economy is at a pivotal inflection point as protectionism threatens to derail trade growth and trigger a retreat in business investment, the head of the Caisse de dépôt et placement du Québec says.
Michael Sabia said markets have failed to price in risks related to geopolitics and protectionism in the wake of the election of U.S. President Donald Trump, as investors cherry-pick the things they like to hear such as promises of tax cuts and infrastructure spending. The next six to 18 months will mark a period of high uncertainty as we wait to see if companies begin committing capital in earnest or pulling back, he said.
"We're asking if the markets have become too complacent," Mr. Sabia told reporters Friday at a news conference to discuss the Caisse's 2016 results and outlook. "Is this an Alice in Wonderland [fantasy world]?"
World trade volumes grew just 1.2 per cent last year as protectionist forces strengthened and global economic growth softened, National Bank Financial economics said in a report on Friday. Outside a recession, it was the worst performance since 2001. International trade represented about 32 per cent of global gross domestic product in 2016.
"In our opinion, if protectionism takes hold in a significant way, there's a major risk of rupture" in trade, said Roland Lescure, the Caisse's chief investment officer. "Confidence takes time to come back. It can be swept away in a day."
Caisse executives said they've positioned the pension fund manager's investments to meet the uncertainty, building on a 7.6-per-cent return in 2016. The performance last year was helped by strong gains in Canadian equities, as oil and commodity prices recovered and bank stocks steamed ahead.
Canada's second-largest pension fund manager posted net investment income of $18.4-billion in 2016 compared with $20.1-billion the year before, according to a statement issued on Friday. Net assets climbed to $270.7-billion as of Dec. 31, up from $248-billion at the end of 2015, the pension fund said.
The performance beat the 6.8-per-cent average estimated return of Canadian defined-benefit pension plans in 2016, as measured by RBC Investor Services. Over the past five years, the Caisse has posted a 10.2-per-cent average return on its investments.
In a sweeping strategic shift helmed by Mr. Sabia, the Caisse has been expanding its international investments while increasing its exposure to what it calls more concrete, "less-liquid" assets such as infrastructure and real estate in a bid to diversify and generate more stable returns.
The change is a direct result of yields in fixed income markets, which are now slumping at historic lows as well as what Caisse executives view as the unpredictability of stock movements amid a heightened focus on short-term returns. At last count, 59 per cent of the pension fund manager's exposure was outside Canada.
The Caisse plans to increase the share of those less-liquid assets to as much as 35 per cent of total assets by 2022, up from 28 per cent today, Mr. Sabia said. The change will mean cutting its holdings in traditional bonds and expanding its investments in things such as corporate credit, real estate debt and equipment financing.
Strong returns of 22.7 per cent on the Caisse's Canadian stocks helped the pension fund manager close out the year positively. Shares in energy and financial companies in particular did well. The Caisse's strategy of increasing holdings in Canadian stocks with higher exposure to the U.S. economy, such as Alimentation Couche-Tard Inc., was also beneficial, the Caisse said.
Among the Caisse's private equity investments last year was the purchase of a significant ownership stake in global advisory firm AlixPartners. It's a bet by the pension fund manager that it can profit from strong demand for the company's corporate restructuring work in the years ahead.