- Major U.S. and Canadian equity indices will post low double-digit and high single-digit advances, respectively.
- Canadian bond returns will be in the 1-3% range.
- Emerging markets will generate high single-digit returns.
TD Waterhouse today released its 2011 Investment Outlook, predicting that, after forecasting advancing stock markets in both 2009 and 2010, American and Canadian equities would rise for the third year in a row in 2011.
“While there are significant macroeconomic concerns we should still be cognizant of, we feel stock markets will continue to climb the proverbial wall of worry in 2011 and advance for the third successive year,” says Bob Gorman, Chief Portfolio Strategist, TD Waterhouse. “In a tug of war between macroeconomic fears and solid fundamentals, the latter should prevail in 2011.”
Mr. Gorman states that the following six themes will dominate the financial markets in 2011:
U.S. Stock Market
|1.||The American economy faces serious issues including fear of a double-dip recession, deflation, continued soft housing market and tepid commercial real estate. While all are legitimate concerns, the worst fears will not likely be realized and will instead be outweighed by the following factors:|
- The U.S. should have modest economic growth in the 2-3% range, sufficient to boost corporate profits but not enough to ignite inflation and a sharp tightening of monetary policy.
- Valuations are reasonable based on S&P 500 operating earnings and an earnings yield, which is well above bond yields.
- U.S. corporate balance sheets are in very good shape and are characterized by record liquidity, which in combination with low price to earnings (P/E) multiples, should result in supportive merger and acquisition (M&A) activity.
- Monetary and fiscal policy should continue to be accommodative.
- In the wake of the mid-term election, a new balance of power in Washington should, on balance, make for a more supportive environment from an investment standpoint. It is no accident that the third year of the Presidential term has historically generated the highest returns within the four-year Presidential Cycle, a pattern that may re-assert itself in 2011.
|2.||Within the U.S. equity market, small cap stocks are considerably more expensive than large caps stocks and an overdue rotation of leadership from the former to the latter should commence in 2011.|
- Large-cap tech companies, which have generally exhibited excellent operating results in 2010 but mixed stock market performance, should do well in 2011 as fears of a double-dip recession recede and corporate tech spending increases.
- For conservative investors, the strong dividend growers found in the consumer packaged goods sector will provide good total returns in 2011.
- As credit conditions slowly improve, large-cap financial stocks, which have lagged, will see better performance.
Canadian Stock Market
|3.||Canadian equities, like their U.S. counterparts, are characterized by reasonable valuations, in absolute terms and relative to bonds, and should rise for the third successive year, with a high single-digit advance.|
- The energy sector, which has lagged in 2010, should do better in 2011, buoyed by a higher average price for oil.
- The major banks’ shares should do well, based on relatively low current valuations plus prospects of solid earnings and dividend growth in 2011.
Canadian Bond Market
|4.||As fears of deflation and a double-dip recession likely dissipate, bond yields will creep up modestly, reflecting a still-low rate of inflation.|
- Canadian bond returns will be in the 1-3% range in 2011.
- High quality corporate bonds will outperform government issues, reflecting the higher coupons and shorter duration of corporates.
Major Foreign Stock Markets
|5.||Northern Europe, specifically Germany, Switzerland and Great Britain, will continue to be the best region among the major foreign markets, reflecting reasonable growth prospects in combination with attractive valuations. P/E multiples are low and dividend yields are high, supporting a high single-digit advance in their equity markets.|
- Japan’s stock market will fare better in 2011, generating an upper single-digit return as upward pressure on the yen should dissipate, reducing pressure on the export sector.
|6.||Inflation, especially in the food sector, will necessitate further monetary tightening in India and, to a lesser extent, China. This more restrictive monetary policy will act as a headwind for these markets and temper their gains in 2011.|
- Continued economic growth in the upper single digits and consequent corporate earnings growth will be the major equity market drivers in 2011.
- China’s tightening of credit conditions, reversing the sharp expansion of credit during late 2008 and early 2009, will put pressure on its real estate sector.
- Overall, China, which lagged other emerging markets in 2010, will likely outperform the group in 2011, with a low double-digit return, propelled by solid valuations and earnings growth.
- Emerging markets, as an asset class, should record high single-digit returns in 2011.
2010 Predictions and Results
Here is how Mr. Gorman’s themes for 2010 played out:
|Prediction No. 1:||The U.S. stock market would rise for a second successive year and post a high single-digit return.|
|Outcome:||This has proven accurate. At the time of writing, the S&P 50 Index has advanced close to 8%, in line with forecast.|
|Prediction No. 2:||There would be a rotation of leadership from U.S. small cap stocks to large cap issues in 2010. Large cap consumer stocks, which had lagged in 2009, would fare better in 2010 and tech stocks, our favourite group in 2009, would continue to outperform.|
|Outcome:||Despite a widening valuation gap between more expensive small caps and cheaper large caps, the anticipated rotation has not yet occurred. The large cap consumer names, characterized by substantial, growing dividends, have advanced as expected. Meanwhile, tech operating results have been strong, in line with expectations, although their stock performance has been mixed, reflecting fears of a double-dip recession.|
|Prediction No. 3:||Canadian stocks, like their American peers, would also rise for a second straight year and record a high single-digit advance. There would be a rotation of leadership into the more defensive sectors characterized by more consistent sales, earnings and dividend growth and away from more volatile sectors that had done especially well in 2009.|
|Outcome:||This has worked out as expected. The S&P/TSX Composite Index has risen over 9% year-to-date, in line with forecast. There has been a marked shift into the dividend growth stocks in sub-indices such as Consumer Discretionary and Telecom, which have outperformed and away from 2009’s more volatile, strong performers such as Energy.|
|Prediction No. 4:||Canadian bonds would generate returns in the 3-4% range, with investment grade corporate issues outperforming government bonds for the second successive year as corporate spreads shrink.|
|Outcome:||This has been mixed. The DEX Bond Universe has a return of about 6% year-to-date, although this figure has been slipping as bond yields creep higher. Corporate issues have handily outperformed government debt as spreads have come in as anticipated.|
|Prediction No. 5:||Europe and Japan would post high single-digit or low double-digit returns. Our favoured region was northern Europe due to attractive valuations in combination with reasonable growth prospects.|
|Outcome:||Northern Europe has fared best, as expected, with overall returns in the upper single digits, though southern Europe has dragged down returns for Europe. Japan’s Nikkei Index is down slightly for the year due to upward pressure on Japan’s export sector caused by a stronger yen.|
|Prediction No. 6:||Emerging equity markets would generate high single-digit returns in 2010.|
|Outcome:||This has worked out as expected. Individual markets’ results have varied quite a bit, with India posting a double-digit advance, Russia a high single-digit return and China recording a loss but overall returns are in line with forecast.|
About TD Bank Financial Group
The Toronto-Dominion Bank and its subsidiaries are collectively known as TD Bank Financial Group. TD Bank Financial Group is the sixth largest bank in North America by branches and serves more than 18 million customers in four key businesses operating in a number of locations in key financial centres around the globe: Canadian Personal and Commercial Banking, including TD Canada Trust and TD Insurance; Wealth Management, including TD Waterhouse and an investment in TD Ameritrade; U.S. Personal and Commercial Banking, including TD Bank, America’s Most Convenient Bank; and Wholesale Banking, including TD Securities. TD Bank Financial Group also ranks among the world’s leading online financial services firms, with more than 6 million online customers. TD Bank Financial Group had CDN$603 billion in assets on July 31, 2010. The Toronto-Dominion Bank trades under the symbol “TD” on the Toronto and New York Stock Exchanges.
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