MONTREAL – Although it can cause stock market turmoil, the Omicron variant should not cause a major stock market shock. However, investors should temper their expectations after three exceptional years in the markets.
The above is advice from Desjardins Wealth Management Michel Doucet and his colleague Jean-RenÃ© Ouellet for those seeking advice in 2022.
Over a 10-year period, the two strategists estimate that an investor with a balanced portfolio (60% stocks, 40% bonds) should expect an average annual return of between 3 and 4%.
Over the past three years, a Balanced Model Portfolio should have provided an average annual return of over 10%, which they say has created a form of habit among investors.
“Interest rates are already very low,” Ouellet said in an interview a few days before Christmas. âIt will be difficult to ask a bond portfolio to generate a 3% return when the 10-year Canadian government bond is yielding 1.50%. On the US equities side, we’re at 21x the next 12-month earnings, so that’s not a good deal. “
A high multiple is not necessarily the sign of a disappointing 2022 for the stock markets. However, the correlation between valuations and returns is stronger over the long term.
âThe more you pay, the lower the future returns,â Ouellet warned.
The chief economist of the National Bank, StÃ©fane Marion, is also looking at 2022 with caution.
For now, however, he sees no reason to revise his forecast lower, but he will keep a close eye on how China is adjusting to the Omicron variant.
âThe big risk factor is China’s behavior given its zero tolerance policy towards the spread of the virus,â he said. âIf China maintains this policy, and it looks like it will, it could have impacts on the supply chain given its strategic position. Having said that, I am prepared to live with the uncertainty if the chain ends after a tougher first trimester. “
THE WORD ‘I’
The Bank of Canada and the Federal Reserve (Fed) in the United States are also expected to start tightening monetary policy next year to curb rising inflation, Marion said. However, interest rates are expected to remain below the level of inflation, seen as a stimulus to the economy.
âI think central banks will be careful,â he said. “They know inflation is higher than expected, but they will raise rates, maybe a little faster, but to bring them into higher territory than inflation would be surprising.”
“For now, the consensus of economists is for five rate hikes in Canada in 2022. I do not believe that we will succeed in raising rates five times and that the Canadian economy will recover,” said Doucet.
If interest rates rise too quickly, the economic recovery could derail, he said. By 2021, he said 50% of new mortgages will be at variable rates. With so many households exposed to rising rates, the Bank of Canada can’t move too fast, he said.
INVEST CLOSER TO HOME
In this context, Marion is ready to fill up on Canadian equities.
He pointed out that the S & P / TSX, the Toronto Stock Exchange’s flagship index, is trading at nearly 14 times analysts’ earnings forecasts for the next 12 months. âHistorically, the S & P / TSX is an index that has performed well in an environment of higher inflation. It is an index that offers protection against inflation, more than the US index,â he said. -he declares.
The economist also expects the Canadian dollar to appreciate against the US dollar, which is unfavorable to Canadians who hold assets denominated in US dollars.
Marion expects corporate profits in the S & P / TSX to increase an average of 7% in 2022. He believes the index will hit 22,500 points by the end of the year. Large US companies in the S&P 500, for their part, would see their profits grow at an average rate of 6.4%. His target for the New York Index is 4,900 points for 2022.
The forecasts of Desjardins strategists are a little more optimistic for the two indices. Their target is 23,000 points for the S & P / TSX and 5,200 points for the S&P 500.
By favoring the value style over the growth style, Ouellet favors several sectors that are well represented in Canada: financials, energy companies and the materials sector.
âFor growth stocks, such as the tech sector, rising interest rates are a drag because it reduces the relative value of future earnings versus bonds. We are in post-COVID economic momentum, but the potential pace of our economies will return to normal in 2023 or 2024, “he said.” In a world of modest growth, companies capable of achieving higher growth will deserve a valuation premium.
– This report by La Presse Canadienne was first published in French on January 1, 2022.