2012 will start slow, pick up in latter half, experts say
by Ray Turchansky
Experts forecast restricted economic growth in most of the world in 2012 due to political waffling in Europe and the United States, but financial markets could pick up in the last half of the year.
As TD Economics puts it, the year will be more naughty than nice.
Consensus is that emerging markets will continue to be good places to invest in, some solid American companies have been beaten up and represent good opportunity, there is movement in Canada to “invest in the West,” and the best sources of fixed income will be corporate bonds and preferred shares.
Economists Craig Alexander and Leslie Preston write: “We expect financial conditions in Europe to get worse before decisive action is taken, likely sometime in the first half of the year. That means the high level of market volatility looks set to continue in the coming months. The second half of 2012 is expected to bring better prospects, with equities likely to outperform bonds.”
TD expects Europe to muddle along, while the U.S. will be handcuffed by a lack of fiscal stimulus, and political headwinds could blow the economic recovery off course.
As for Canada, TD says weakened commodity prices will hinder our growth the first half of the year, but economic activity “should improve in late 2012 and into 2013.”
Interest rates are expected to hold steady all year, unless they are lowered due to a return to recession in Canada, so fixed-income suggestions are for provincial and corporate bonds, as provinces try to spend their way out of deficits and companies excluding financials sit on tons of cash.
The bank believes the average Canadian home is overpriced by 10 per cent, and prices will fall by that amount over the next two years due to softer employment and then interest rate hikes in 2013. Among 12 major cities, prices will fall the most in Vancouver and Toronto, while Edmonton and Calgary will hold up best. Specifically, it thinks existing Edmonton home prices will be down 1.1 per cent this year, increase 0.2 per cent in 2012, then fall 2.8 per cent in 2013. In other words, they’ll stay relatively flat.
Scotiabank economist Warren Jestin predicts the U.S. and Canada will both have modest 1.8 per cent economic growth in 2012. Long-term, he echoes the view of The Economist magazine, saying China will replace the U.S. as the largest economy in the world by the end of the decade. China has already supplanted Canada as America’s biggest trade partner.
Jestin says Canadian exports of resource products to China and other emerging markets will remain strong. However, there will be an overall 70 per cent reduction in Canadian exports, due mostly to manufacturing, primarily from Central Canada. In the auto industry, for example, he writes: “Canada now produces nearly one million fewer vehicles than a decade ago and is getting a much smaller share of the auto sector’s North American investment than over the past decade.”
Indeed, Moody’s Investors Services just put Ontario on credit watch, changing its bond outlook from stable to negative. The “have not” province, which now is a recipient of transfer fees from other provinces, is up in arms at a new plan for health-care funding from the federal government to be tied to provincial economic growth.
Thus is it that many investors are being steered toward western-based companies, often in the resource area.
In North America, there is disagreement over where to invest. Jestin says that “in today’s challenging global environment, Canada remains one of the best places to work and do business.” Conversely, Ted Rechtshaffen of TriDelta Financial notes that the S&P 500 index in the U.S. is about to have a better return than Canada’s S&P/TSX index for only the second time in 10 years, and says “there represents greater opportunities to find ‘cheap’ companies in the United States.” Scotiabank sees the TSX rising 9.5 per cent and the S&P 500 increasing 1.0 per cent in 2012.
TD economist Dina Cover expects Greece to default on its sovereign debt in the first half of the year, causing the region to return to recession, but she thinks that after commodity prices fall in the first quarter, they will rebound in the second half.
She sees West Texas Intermediate oil dropping to $80 a barrel early in the new year, but rebounding to $100 in the third quarter. Similarly, she sees gold being in the area of $1,550 US an ounce in the first quarter, but to hit $2,100 in the fourth quarter. Among base metals, copper prices will fall 12 per cent in the first quarter, but all base metals will recover sharply in the third quarter.
Scotiabank sees the Canadian dollar being $1.02 US at the end of 2012 and $1.04 at the end of 2013, while West Texas oil averages $95 US in 2012 and $104 US in 2013, with gold averaging $1,675 US in 2012 and $1,600 in 2013.
CIBC World Markets expects the Canadian dollar to be at par with the greenback at the end of 2012, and retrace to 98 cents US a year later.
The CFA Institute of global chartered financial analysts reports its members in Brazil, Russia, India, China and Australia predict significant economic growth in their countries during 2012, while 85 per cent of European members see no prospect of growth. In Canada, 88 per cent of analysts think growth here will stay the same or improve slightly.
The Calgary-based investment firm McLean & Partners Wealth Management Ltd. says emerging markets, led by China, will be the world’s bright spot in 2012. It thinks the European Union will make progress toward a long-term debt solution. And it touts corporate bonds and preferred shares in Canada and the U.S.
Adrian Mastracci, portfolio manager with KCM Wealth Management in Vancouver, says he prefers consistent investment quality of income rather than chasing high-yield investments that may not be sustainable.
