Experts: Canadian recovery to be slow, steady

As rocky as the global economic outlook remains, there will be no double dip recession said two of North America’s leading financial experts.

At the CFA Institute’s annual dinner in Toronto, Patricia Croft, RBC Global Asset Management’s chief economist, and Bob Doll, vice-chairman and chief investment officer at New York-based BlackRock Advisors, both said the economic recovery will be slow and bumpy, but we won’t experience another global slowdown.

“We peg the likelihood of a double dip at less than 10%,” said Croft, speaking to hundreds of Ontario-based CFAs.

Doll pointed out that there has never been a double dip in America’s history and there won’t be one now.

“Economies hitting a direction up or down tend to continue in that direction unless we hit them over the head with something,” he said. A major crisis in the Middle East or a policy error could send the economy plunging, but it’s unlikely that will happen. “It’s no different when you’re in a recession,” he added. “It’s hard to reverse that trend too – you need stimulus to move upward.”

Still, growth is going to be slow. Croft said that most of the world is still grappling with the consequences of long-term debt and quantitative easing. “Years of massive misallocation of capital cannot be followed by an effortless recovery,” she said, quoting Tim Price from PFP Wealth Management.

Doll said the environment will be neither feast nor famine and points to range of good and bad news to prove it’ll be a slow, but steady, recovery. “We got better than expected leading economic indicators, better than expected home sales, worse than expected unemployment claims – two is okay, one is not so good and that’s how it’s going to be,” he said. “We have to get used to this muddling through.”

Canada’s outlook remains positive – Croft said we’ve filled every job lost during the recession – but we’re not quite out of the woods yet. Poor productivity performance and a possible housing bubble could slow growth, but the country’s biggest problem is the U.S. and its still volatile economy. “We really need to hitch our cart to a different horse over time,” she said.

The Canadian stock market will experience ups and downs over the next few years too. Croft explains that investors should expect the under-6000 point lows that we experienced in 2002, but we’ll likely also reach 15,000-point highs. Her forecast for Q4 2011 is 13,500.

Advisors may need to change their investment strategy to deal with those extreme market movements. “It means tactical asset allocation becomes key and buy and hold much less so,” she said.

Doll cautions people not to think stock market gains equals positive economic growth. “How can revenues for the U.S. stock market be triple to nominal U.S. GDP?” he asked. “Do not confuse the U.S. stock market with the U.S. economy.” He pointed out that 40% of the S&P 500’s revenues come from outside America. That said, the S&P 500 will end 2010 at 1199 and hit 1249 at the end of 2012.

As for the U.S. economy, he’s glad to see the housing market’s blood bath has stopped. Prices aren’t improving, he said, but they’re no longer going down “and that’s a noose around the neck that’s alleviating to some degree.”

He’s also points to 750,000 new jobs that were created since January as positive sign. It’s not enough to lower the unemployment rate, but consumers have more money to spend.

Doll’s mostly concerned about U.S. debt, but said the country has gotten out from under massive debt before and it’ll do it again. “The percentage of debt to GDP has been higher than it is now twice in last 100 years – after the depression and post-World War II,” he said. “We had this problem before but we dug our way out of it.”

He added that investors shouldn’t simply look at government debt only when determining where to put their money. “Don’t invest in any country and only look at one sector,” he said. Consumer debt, for instance, doesn’t look so bad. “Consumers are addressing their problems and selling the consumer short is mistake,” he said. “They are smarter than most people give them credit for.”

Still, he thinks emerging markets will outperform developed ones. The lack of debt problems, plus strong middle class growth makes developing areas attractive. As for the developed world, it’s North America – not Japan or Europe – where people should overweight.

Doll and Croft both think that Gold is going up, but the higher prices won’t be related to inflation. “It’s about the desire to hold hard assets in a brave new world,” said Croft.

“Gold has gone up because it is world’s forth currency,” added Doll. “The U.S. dollar will limp across the finish line as a reserve currency across world.”

They didn’t say how high gold will climb, but it could make a significant jump – Croft thinks the U.S. dollars’ days are numbered. “It took 40 years to go from pound to the U.S. dollar, and we’re beginning a 40 year process of moving from the U.S. dollar to Yuan.” The U.S. dollars decline will make the Canadian loonie stronger; Croft thinks it will hit $1.15. “Then investors will need to rethink hedging strategies,” she said.

When it comes down to it, Croft and Doll are, as the BlackRock exec said, cautiously optimistic. Markets are improving, but there needs to be a more positive story before the recovery can be complete. “We’ve had a decent rally in equities and that’s on the back of less bad news,” said Doll. “In the long-run for equities to work we need good news.”

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Bryan Borzykowski is a freelance journalist based in Toronto.

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Bryan Borzykowski