Advisor Forum preview: Investment strategies for 2005

(November 24, 2004) Inflation is coming back, and that means higher interest rates and a likely end to the recent cyclical bull run, says Gavin Graham of Guardian Group of Funds.

Graham, who is presenting a session on global investment outlook at this year’s Advisor Forum conferences, says Canadian stocks have been performing relatively well over the past year.

However, the growing strength of the U.S. economy will lead to the return of inflation, he forecasts, and as a consequence, will also lead to higher interest rates.

“What you want to be in depends on where we are in the economic cycle, and that can be discerned by looking at interest rates,” Graham says.

“It’s not rocket science. If interest rates are going down, generally financial assets will be performing well because the risk-free rate that you get in GICs and bank deposits becomes less attractive,” he says, noting that rates have gone up three times in the U.S. in recent months and twice in Canada.

That’s a trend that will likely continue. “It’s highly likely that Mr. Dodge and Mr. Greenspan will raise rates another quarter point by the end of the year.”

So what does that mean for investors, since rising interest rates are generally not good for conventional fixed income instruments?

“Four years ago, you were telling your clients, sell growth stocks and buy bonds. Now you tell your clients, don’t buy conventional long-dated bonds.”

Still, Graham likes high-yield and real return bonds and is also a fan of income trusts, despite naysayers who worry about their recent run-up. “You’ll get a 6-8% yield. It’s still an attractive product.”

“The banks are still up despite rising rates, so don’t bet against them. And health care is a buy because none of us are getting any younger.”

The other main story of 2004, the decline of the U.S. dollar, will probably continue next year, Graham thinks. “They want the U.S. dollar to go down because that’s how you solve your current account deficit. You make imports more expensive and exports cheaper, and gradually over time you get a J-curve, where it gets worse initially and then it starts getting better.”

The loonie will probably be at 85 cents US at the end of the year, Graham predicts, noting that some people are calling for parity because the fundamentals for Canada look as good as they have in the last 30 years.

Graham appears at the Advisor Forum in Montreal next week (Dec. 2-3) and in Toronto (Dec. 8-9). For details on other speakers at the Advisor Forum, please click here.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com