A panel of market forecasters predicted further gains in equity markets at the Morningstar Investment Conference in Toronto on Wednesday, following a bullish start to the year as U.S. market indices set record highs and other major global markets reaped gains.
“We see continuing upside for equity markets this year, although there will likely be a tip up in volatility, and the speed of the increase will decline,” said Nelli Oster, investment strategist with BlackRock Inc. of New York and one of three members of a panel discussing the global stock market outlook.
Doug Porter, chief economist and managing director at Toronto-based BMO Capital Markets, said several worries that were overhanging stock markets earlier this year have not materialized, including the possibility of a financial crisis in Europe, a fiscal cliff disaster in the United States and slumping growth in China.
“There’s been a lot of quiet,” he said. “There’s either been positive news or at least non-negative news for the market.”
Market-friendly quantitative easing programs have continued in the U.S., and the central bank of Japan took similar aggressive action to stimulate growth, which boosted stocks, he said.
However, fellow panel members Oster and Wilfred Hahn, chairman of Toronto-based HAHN Investment Stewards & Co. Inc., said monetary policy alone won’t solve Japan’s slow growth issues.
“We are relatively cautious on Japan,” said Oster. “Longer term there is poor demographics with an aging population, as well as low immigration and low levels of innovation.”
She has been increasing her exposure to emerging markets, where she says risks are falling in the long term, while risks are increasing in some developed markets.
“Valuations in emerging markets are compelling, they’re trading at a 25% to 30% discount relative to historical valuation metrics,” Oster said. “On a relative basis, we’re still seeing good growth and better quality growth.”
For example, China is moving from growth based on infrastructure spending to consumer-led growth, and is benefitting from structural reforms such as the removal of government red tape and other impediments to small business.
Hahn likes the prospects for emerging markets long-term, citing their strong government balance sheets and low government and consumer debt levels, but warned that some export-reliant economies may be negatively impacted by slower growth in the developed world. He favors countries with high population growth such as India, Indonesia, the Philippines and Brazil.
Porter sees “real improvement” in the U.S. economy and employment levels, even while the government deficit has fallen to 4% of GDP from 10% during the worst of the recession.
“There has been tremendous improvement, and the U.S. economy is still growing at better than 2% in the face of fiscal tightening,” he said.
In the U.S., Oster is cautious on utilities and consumer stocks as investors move away from defensive companies to growth-oriented sectors such as energy and technology where prices are more compelling. She is also cautious on financial stocks such as banks, which she says face regulatory risks.
Porter also favors cyclicals, based on the U.S. recovery getting rolling and improvement in demand for manufactured goods.
Hahn said there has been dramatic underperformance in the materials stocks that make up much of the Canadian market and rock bottom prices may offer opportunities at current levels. However, he expects less exciting growth than during the commodity boom of a few years ago.