Recently, I attended a talk by Don Drummond, former Chief Economist at the TD Bank at an event organized by PWL Capital here in Ottawa. Here are some key points that Mr. Drummond make in his talk:
The 2008-09 Recession
The 2008-09 recession was unique in three respects: (1) Unlike previous recessions, this was the first time that world economic output decreased. (2) The synchronized recession meant that monetary policy across the globe was synchronized as well. (3) The global economic framework is changing. Between 1980 to 2026, emerging markets would go from accounting for 1/3rd of world economic output to 2/3rd of it.
The implication for investors: (1) Diversification across global stock markets does would not help much in this environment and (2) Investors need to have some exposure to emerging markets in their portfolios.
Modest Asset Class Returns
Mr. Drummond urged investors to be realistic about return expectations. In an environment with subdued inflation rates of 2 percent or less, bond yields can be expected to remain low as well — 3 to 4 percent. Economic growth is likely to clock in at a real rate of 2 percent. As a result, Canadian stocks can be expected to return 6 to 7 percent and a balanced portfolio just 4 to 5 percent.
The biggest asset in household balance sheets tends to be real estate. Historically, housing prices increase at an average of 1 to 2 percent in real terms. Since today’s housing market is far from normal, Canadians should expect very modest gains in housing prices (if at all).
Will Baby Boomers dump assets en masse?
Mr. Drummond said that it is a fallacy that Baby Boomers nearing retirement will dump their stock holdings. Firstly, there is little historical basis in the claim because it is only since the 1980s that stock ownership has become widespread. Today, the alternative to stocks offer very low yields. The low yields were one reason why so many seniors were invested in income trusts. Also, the current tax regime discourages holding safer investments in taxable accounts.
Different groups of investors looking at the same set of economic data are reaching different conclusions. The bond market sees low inflation but the gold market expects high levels of inflation. Mr. Drummond thinks it is the bond market that is right because the Bank of Canada has an explicit inflation target of 2 percent and the central bank will do everything it can to keep inflation at that level. It is true that there is extraordinary monetary stimulus in place. Inflation is still low because the velocity of money is low. When economic growth returns to normal levels, it will be quite easy for the Bank of Canada to withdraw the stimulus.
Other media coverage of Mr. Drummond’s talk:
Canada not immune to global economic challenges – The Gazette
Canadians need to save more as portfolios yield less – Canoe Money