As we ring in the new year, it’s a great time to take stock of¦ well, our stocks. And the rest of our personal investments, for that matter. Of course, there is no crystal ball that can predict the future. So, PROFIT did the next best thing. We asked those in the know — financial advisers and economists — to tell us where they see the markets going, and how your portfolio can profit in 2008.
“Overall, we see the economy slowing but still doing very well,” says Mark Kinney, managing director of Toronto-based wealth-management firm Newport Partners. “That said, there are some cracks that are showing, and they will start to expand going forward.”
While the Canadian stock market has experienced a broad-based rally and low levels of volatility over the past five years, in the past year “leadership in Canada is narrowing a lot,” explains Kinney. Take out a few star performers, including RIM, Alcan and BCE, and the stock market is basically flat. Over the next couple of years, you’ll no longer win by blindly investing in equities regardless of sector, he says. Instead, you’ll need to select well-run companies that heed business fundamentals. Consider moving away from index-related products in favour of a more active approach to stock-picking.
Some sectors should perform nicely overall, however. “You’ll still see resource-related activity do quite well,” says Adrienne Warren, senior economist and manager at Scotiabank in Toronto. With high global demand, the price of raw materials and commodities such as oil, agriculture and energy will remain firm. As a result, she says, “you’ll see the Western provinces outperform.”
Construction will also fare well, says Warren: “Even if our housing market slows down, as we expect it will over the coming year, the renovation marketis still booming. And there’s tons of infrastructure investment going on, with roads and ports and the like, across the country and lots of non-residential construction related to energy.”
On the downside, manufacturers and exporters face slimming margins and lost jobs because of a slowing U.S. economy, a strong Canadian dollar and tons of competition from overseas, says Warren. That’s likely to continue, if not accelerate, next year.
Overall, “be more defensive and broader in how you invest,” says Kinney. We’ve been on a market upswing for the past six years, so many investors have become complacent and underestimate risk. “Ask yourself how you’d react if your stock portfolio went down 20%.” Try diversifying into other investment vehicles, such as mortgage investments, hedge funds or private equity.
Experts tend to agree that the loonie will remain strong in 2008. “I thinkUS95¢ is going to be a good consensus number over the next 12 to 18 months,” says Thane Stenner, managing director of Vancouver-based Stenner Investment Partners. To profit from this slight decline, “we’re advising clients to shift a fair amount of their Canadian-dollar assets into U.S. dollars.” He also suggests diversifying into more foreign investments over the next two to three years.
The best investments are likely to be in the emerging economies, especially China and India, which have been growing at approximately 10% and 8% a year, respectively. “Their [growing middle class of] consumers will continue to drive those countries forward for the next 20 years,” says Kinney. While you’ll risk short-term volatility over five to 10 years, “risk is diminished and the growth opportunity is large.”
Europe also is picking up considerable steam, and is expected to outperform the U.S. economy. “We think the U.S. will continue to be weak, and that it has downside risk,” says Kinney. Indeed, amidst a sagging economy, the full impact of the subprime credit crunch is yet to come.
You might, however, find a bargain on a U.S. vacation property. Over the course of 2008, the value of U.S. real estate will drop “a good 25%-plus before it bottoms out,” says Stenner. “Be prepared to buy when the newspaper headlines are the most negative.” With some slowdown expected to spill from the U.S. into the Canadian housing market next year, he says, “expect your own real estate values to flatten, or in some areas to correct by 10% to 15%.”
Warren says that the impact of the global credit crunch will probably be tighter credit availability and slightly higher long-term interest rates, with some lowering of short-term interest rates. Stenner’s advice: “Lock in longer-term rates now, extend terms on your debts to reduce your monthly cash-flow needs, or just pay down debts now.”
NOW Hear thIS!
Tune into episode 16 of the Business Coach podcast starting December 18, when entrepreneurial wealth specialist Peter Merrick shares his tax-planning and wealth-building tips. Find it at PROFITguide.com