- Positive factors in U.S. will outweigh negatives and yield high
- Canadian equity markets will lag U.S. but still generate single-digit
- Fixed income will earn more in 2008 than 2007
- Europe will again be best international market
TORONTO, Dec. 17 /CNW/ - TD Waterhouse today released its 2008 Investment
Outlook, offering insight into future market trends and their impact on
investment portfolios. The Outlook predicts that, despite continuing fall-out
from the sub-prime lending crisis in 2008, several positive factors in the
U.S. economy will more than offset the negatives and will cause the U.S. stock
market to rise for its sixth consecutive year.
The annual report also examined its 2007 predictions and found that five
out of six were accurate.
"The biggest question facing investors at the moment is whether the five
year-old global bull market will see a sixth year, or whether the sub-prime
lending crisis will tip the U.S. into recession and cause a bear market," says
Bob Gorman, Chief Portfolio Strategist, TD Waterhouse. "But there has been so
much coverage of the sub-prime crisis that we believe it's already embedded in
current market prices. Therefore, other strong fundamentals, when combined
with the stimulative effect on markets of the presidential cycle, will
outweigh the sub-prime impact and keep the economy out of recession
Gorman predicts that the following six themes should dominate the markets
U.S. Market Outlook
The U.S. stock market will rise for the sixth consecutive year, with the
most likely outcome being high single-digit returns. Positive factors
contributing to this outlook include:
- An S&P 500 Price:Earnings (P:E) ratio of between 15-16, in line with
the historical average and indicating stocks that present fair value.
- U.S. stocks that are inexpensive compared with bonds. Their earnings
yield (earnings divided by share price) is about 6.25% based on the
P:E multiple of 16 cited above, or about 50% higher than the 4.15%
yield of a U.S. 10-Year Treasury bond.
- An accommodative monetary policy designed to stimulate the economy and
help the financial sector. This will bring cuts to the Fed Funds rate
and a steepening of the yield curve.
- Some downward pressure on the Canadian dollar in 2008, boosting the
value of U.S. investments.
- The decline of the U.S. dollar has caused a surge in U.S. exports,
which has more than offset weakness in the housing industry.
- A U.S. presidential election year, which historically brings solid,
positive stock market returns. Contraction of the U.S. housing sector
has been more than offset by surging U.S. exports.
On the negative side, there will be continuing fall-out from the
sub-prime mortgage sector, primarily from increased mortgage loan defaults as
sub-prime mortgages come due over the next six months and their rates are
adjusted upwards. As well, the massive oversupply of new housing stock, which
has already caused the median price of a U.S. home to fall by 5.1% in the past
year, will keep the U.S. housing market in recession.
There will be continuing rotation into large caps in the U.S. market, a
theme that was pronounced in 2007. Large cap growth stocks, generally out of
favour since the bursting of the tech bubble in 2000, will be particular
beneficiaries of this trend. Good examples are high-calibre tech companies
like Cisco, Oracle and Microsoft, which are benefiting from pent-up demand for
their products, strong balance sheets among their corporate clients and
surging U.S. exports.
The Canadian equity market, like its American counterpart, should rise
for a sixth consecutive year and generate single-digit returns. The impetus in
2008 will not come from commodity prices, as was the case through much of the
current bull market. Rather it will come from the continued rotation into less
cyclical sectors, exemplified by major insurers like Manulife, Sun Life and
Fixed income investors will earn between 4 to 4.5% in 2008 - more than
the sub-coupon returns generated in 2007. Slower economic growth should
translate into a lack of upward pressure on bond yields. After the widening of
corporate bond spreads in 2007, we expect corporates to outperform government
bonds in 2008.
Europe should once again be the best-performing major international
market, generating positive, single-digit returns. This reflects solid
earnings and dividend growth along with good valuations. Japan, after a poor
year in 2007, will likely post better returns, close to those in Europe.
Caution is warranted in the emerging markets in 2008. First, they are no
longer cheap and are, as a group, fully priced. Second, monetary policy is
tightening in several cases, particularly in China where inflation is an
issue. Third, emerging markets are notoriously volatile and could prove
vulnerable to the effects of slowing growth.
Gorman concludes that, "Overall, we expect financial markets in 2008 to
overcome significant, well-documented risks and generate solid returns."
2007 Predictions and Results
Here is how TD Waterhouse's six themes for 2007 played out:
Prediction No. 1: The U.S. stock market would rise for the fifth year
in a row.
Outcome: At this point, it seems the U.S. market will have
advanced as suggested. However, it will fall slightly
short of the low double-digit return forecast and will
be below the Canadian market, especially when
considering the adverse impact of the strengthening
Canadian dollar on foreign investments.
Prediction No. 2: U.S. large cap companies would outperform their
smaller counterparts in 2007.
Outcome: This forecast has proved accurate to date. The large
cap Standard & Poors 500 Index (S&P 500) has
out-performed the small cap Russell 2000 Index by 644
basis points (6.44%) in 2007 to date. Whether this is
borne out for the full year's returns is not yet
clear. Also, the share prices of Bank of America and
Home Depot were little changed, and Citigroup declined
during the year.
Prediction No. 3: A) The Canadian stock market would rise for a fifth
consecutive year in 2007, recording a single-digit
advance. B) We would begin to see a rotation from the
cyclical sectors to the less cyclical. C) Canadian
stocks would underperform the U.S. market for the
first time since 2001.
Outcome: A has proven correct. B has proven true in recent
months as investors have become more risk-averse. C is
too close to call, although the less cyclical U.S.
market seems to have better momentum.
Prediction No. 4: Bond investors would earn coupon returns of about 4%
Outcome: We fell short of the forecast. The Scotia Capital
Universe recorded a return of slightly better than 3%.
Prediction No. 5: There would be a flurry of mergers among energy
trusts, reflecting impaired cash flow among many of
the weaker, lower calibre trusts.
Outcome: This trend was indeed very pronounced, with smaller,
natural gas-oriented trusts proving particularly
susceptible and being taken out at depressed
valuations. We also underlined the importance of
holding the highest calibre energy trusts such as
Bonavista, Arc and Vermilion. Bonavista and Vermilion
outperformed their peers while Arc was in line with
the energy trust sub-index.
Prediction No. 6: Europe to be the best major international stock market
in 2007, reflecting attractive valuations, solid
earnings growth and high dividend yields. Japan would
not fare as well.
Outcome: This has proven accurate, with Europe generating solid
returns while Japan has lost some ground. Nonetheless,
the Euro slipped versus the Loonie, negating returns
for Canadian investors.
About TD Bank Financial Group
The Toronto-Dominion Bank and its subsidiaries are collectively known as
TD Bank Financial Group. TD Bank Financial Group serves more than 14 million
customers in four key businesses operating in a number of locations in key
financial centres around the globe: Canadian Personal and Commercial Banking,
including TD Canada Trust; Wealth Management, including TD Waterhouse and an
investment in TD Ameritrade; U.S. Personal and Commercial Banking through TD
Banknorth; and Wholesale Banking, including TD Securities. TD Bank Financial
Group also ranks among the world's leading on-line financial services firms,
with more than 4.5 million on-line customers. TD Bank Financial Group had
CDN$422 billion in assets as of October 31, 2007. The Toronto-Dominion Bank
trades on the Toronto and New York Stock Exchanges under the symbol "TD", as
well as on the Tokyo Stock Exchange.
For further information:
For further information: or to receive a copy of the 2008 Investment
Outlook, please contact: Stephen Ledgley, NATIONAL Public Relations, (416)