Look beyond the Canadian border: AGF

Canadians need to consider global opportunities, said three AGF portfolio managers during a 2013 market outlook session.

The group included Stephen Way, Tony Genua and David Stonehouse.

One major reason for clients to look beyond our borders, they say, is that the U.S., European and emerging markets have improved. Though there are risks associated with global investments, the managers expect people to slowly move back to equities.

Read: Are clients ready for more risk?

One of America’s strongest sectors is financials, though Genua says banks won’t drive markets this year. He finds their growth and popularity similar to that of tech stocks 10 years ago, adding the “major challenge for financial institutions will be pressure on their net-interest margins.”

Stonehouse says it’s unlikely these equities will suffer from real estate risks, however, and predicts a housing correction wouldn’t impact their performance.

Read:

• U.S. banks are strong, says Buffett
• Canadian banks are safe

Overall, Genua says the major risks facing our southern neighbours relate to negotiations over the debt ceiling and the recent fiscal cliff deal.

Though shutting down government spending seems positive, it may be disruptive over the longer term, he adds. Those losing services and funding could experience lower consumer confidence.

Not to mention, Obama’s latest gun control efforts could also adversely affect future negotiations since they will intensify the wedge between the two parties.

Genua says there’s a 50-50 chance Congress will reach a debt ceiling solution and forecasts tough times for the next decade.

“It will take $3.3 trillion to settle the current debt-to-GDP ratio, and the cliff deal only [offers] 22% of that,” he adds. “Markets may push [U.S. officials] to come to terms, but I don’t foresee any great reforms on the horizon. It will be messy for the next two months.”

Read: Debt ceiling fight coming

Talks over the proposed U.S.-Canada oil pipeline will also impact markets and the relationship between the two countries, says Stonehouse.

While the Idle No More movement is making headlines across the country, he says, “When it comes to situations involving resource exploitation, you have the situation of two groups [First Nations and resource companies] grappling. You have a group lobbying on one hand, but also have the creation of jobs and opportunities on the other.

“In Canada, the TSX is more heavily driven by global mining rather than domestic activity, so the outcome of pipeline negotiations will be more interesting as we bargain with the Obama administration.”

Read: Mining firms face 10 key challenges: Deloitte

On a global scale, the managers pointed out several opportunities for your clients. Since investors have become inured toward Europe, they may be more willing to shed their home biases.

Way says the main risks on the global stage currently relate to Germany and Japan. Germany is having a tough time integrating monetary policy, which is straining citizens’ budgets and the country’s finances.

Read: German economy slows

“They’re only interventionist measures,” he adds, rather than effective solutions that will spur meaningful change.

The devaluation of the yen in Japan is also concerning, as well as the fact that the country’s bonds are negative.

Read: Hedge your bets on Japan

On the other hand, Way points out several emerging markets leading the pack. “Turkey has a great long-term story, South Africa has good consumer growth, and India has implemented some strong, meaningful reforms and has reduced fuel subsidies.”

Read:

• Global trade to rebound: HSBC
• Emerging markets to lead global growth

Turning to bond trends, Stonehouse recommends investment-grade and high-yield bonds. He says, “Government bonds have had a good run but are hitting the ceiling of opportunity.”

He adds, “Triple-B bonds will provide 4%-to-6% returns, and American high-yield products are also a good choice.”

Right now—though he’s underweight in bonds—he’s considering entertainment companies like MGM, as well as healthcare stocks that have attractive coupons; these products will hedge risk.

Read: Choose non-financial companies

When asked whether clients will switch between fixed and floating rates, Stonehouse predicted there may be some seasonal fluctuation, but finds the talk about the hawkishness of the Bank of Canada is premature.

Read: Is a shift from bonds to equities coming?

“The housing market will be a headwind and commodities will be challenging in Canada, and there’s no inflation and growth on the horizon either. Rates will stay low for a while,” he says.

Other trends to consider:

The world’s biggest REITs are positive: While there’s little retail development in the U.S., there are commercial opportunities in Europe and the private equity sector’s healthy transactions are driving retail investment.

Avoid utilities: The sector has grown, with stocks doubling and tripling in value. So consider companies and markets that have struggled in the past few years like the pharmacy sector. It has long-term potential. “Many of the patent problems in the U.S. are behind us,” says Genua.