It’s been an up-and-down year for equity markets, but things could be looking stronger in 2016, says Jeff Singer, Investors Group’s Chief Investment Officer.
He’s “cautiously optimistic” on equity market performance, adding that most companies will have a resumption of corporate profit growth, which should allow for upward moves in stocks, he explains.
“Profit growth is critical to long-term advances in the equity markets because the value of equities is significantly influenced by the level of profit associated with those companies,” says Singer.
Last year was the first year since 2009 that corporate profits in the United States and many other parts of the world have been stagnant or down, and that has impacted the markets. The S&P 500 was up just 1.5 percent as of the end of November, while Canada’s S&P/TSX Composite Index, which has also been impacted by falling oil prices, was down by about 8 percent.
Things will improve in 2016 if oil prices plateau or rise and if the dollar stabilizes.
Profit growth among Canadian companies struggled this year largely because of overall slower global growth, but also due to falling oil prices and the dropping dollar. Things will improve in 2016 if oil prices plateau or rise and if the dollar stabilizes.
“This sets us up for better economic and corporate profit growth,” he says.
His stance on fixed income is more complicated. Bonds are barely offering any sort of yield – the 10-year Government of Canada benchmark bond is hovering at around a low 1.6 percent.
“Right now established blue chip companies are paying a higher dividend yield than you get on a bond coupon and that is extremely unusual,” Singer explains.
The concern for bonds is twofold: If you own bonds and hold them until maturity, then you are locked into a low return. If interest rates go up – which he thinks they will, if not over the next 12 months, then in the next three to five years – the price of those bonds will fall. (Bond prices drop when interest rates rise.)
“Most people don’t think about the possibility of losing money on a bond,” says Singer. In 2016, though, it’s a real possibility.
However, bonds are still an important part of a portfolio. Even in this low-rate environment, they’re less volatile overall than equities, and bonds have a history of keeping portfolios afloat during downturns. Just don’t expect fixed income to add big gains to a portfolio like it has in recent years.
As well, Singer emphasizes how important it is for investors to maintain a long-term time horizon, regardless of how markets perform.
“They should not be overly concentrated in one geography or sector, and they should have broadly diversified portfolios,” says Singer. “I recommend coming up with an investment plan and sticking to it. That’s the way to build long-term wealth.”