This coming year will look very familiar to investors. That’s because the same issues that made 2015 such a challenging year to make money in – worries about Chinese growth, collapsed commodity prices and higher interest rates – won’t be going away anytime soon.
And as the Financial Pipeline celebrates its 20th year of providing financial information for the rest of us, investors could be forgiven for looking back to 1996 as a relatively uncomplicated and prosperous time.
The Berlin Wall had come down a few years earlier, the United States’ budget was firmly in surplus territory, interest rates were steadily coming down from the double digit levels at the beginning of the decade and the Chinese economy bounded ahead 10 per cent, setting the tone for several more years of double-digit growth.
It’s a very different world now as the global economy is still hobbled by the aftershocks of the 2008 financial collapse.
“I feel that in many ways, 2016 will be like more of the same,” said Norman Raschkowan, Senior Partner at Sage Road Advisors in Toronto.
“One of the most important things that people can do is maintain a bit of a longer term perspective. Like if they’re just looking out 10 or 12 months, it’s hard to see how a lot of things will change. But if you look out, say three years or five years, then you can be a little more optimistic.”
The headwinds are considerable, particularly on the resource-heavy Toronto stock market. Oil prices are still less than half what they were in mid-2014 and other commodity prices have also sunk as global demand has shrunk, particularly in the emerging economies.
“It’s amazing how commodity prices universally are in a downward trend – it’s not just oil, it’s metals, it’s food, like agriculture prices are down, it is right across the board,” added Raschkowan.
“And part of the reason is a consequence of low interest rates that were part of bailing the global economy out of the financial crisis, which encouraged everybody to borrow which is what the central bankers wanted – to spend money and invest.”
On a brighter note, Raschkowan thinks we will likely see commodity prices hit bottom in 2016.
Still, that’s cold comfort for investors on the Toronto market, where the S&P/TSX benchmark index finished the year down significantly.
So, what is an investor to do in ’16?
Some will want to look to the U.S. market, particularly since the American economy is strengthening while the Canadian economy will be hobbled by the fall in commodity prices.
“Really when you look at it from the investor universe, there’s just way better choices south of the border than there are in Canada,” observed John O’Connell, CEO of Davis-Rea Ltd. in Toronto.
Trouble is, investors are dealing with a Canadian currency that has been heavily pressured by falling commodity prices and a weakening Canadian economy.
“As energy prices are likely to start to rebound, next year, you could get a cyclical bounce in the Canadian dollar but I think fundamentally the Canadian dollar has more pain ahead of it,” he added.
What will also likely have a depressive effect on the loonie are higher interest rates in the United States as the U.S. Federal Reserve starts to move its key overnight rate from near zero, where it has been since the 2008 financial crisis.
And while the U.S. economy has turned into a major pillar of support, that doesn’t mean American corporations don’t have their own special challenges, the main one being a higher dollar as a result of advancing interest rates, which in turn could weigh on American corporate earnings.
“It is going to be a real drag, it’s going to present a significant headwind that U.S. companies are faced with,” said Raschkowan.
“And I think investors are probably going to be disappointed in a number of sectors with the types of earnings that are produced.”
At the same time, he noted that the companies competing with American firms will have the tailwind produced by lower domestic currencies.
“I think that is true for European companies as well as for many Canadian companies that compete in the U.S. market. So times are getting a bit more interesting for investing in Canada but also in Europe. And the U.S. may be the disappointment next year.”
Still, with U.S. growth coming in at around 2.5 per cent for 2015, the country’s economy looks pretty good compared to other Western economies and helps make up for the fact that China is struggling to keep growth up to around six per cent.
“You’re not going to see a recession (in China), you’re just going to see much slower growth than they’re accustomed to – there is still going to be growth,” said Raschkowan.
So, while it seems like 2016 will replay a number of the themes from the previous year, investors also want to keep an eye out for threatening scenarios. And one of these is what O’Connell called the disruptive power of technology, something he thinks investors aren’t taking seriously enough.
“Nothing is much more mundane than the taxi business and yet (Uber) comes along and created an app and completely upends the whole industry,” he said, pointing to the financial sector as one yet to have its “Uber moment.”
“Canadian banks have been reticent in getting involved with Apple pay or Google Wallet because they want to control the infrastructure and I think what the banks don’t appreciate is that consumers increasingly have that power in their wallet and their phones and the banks better get with it quickly or else they will continue to get disrupted.”
