Financials will be the top-performing Canadian equity sector this year, according to forecast surveys presented by Mercer LLC this morning at a breakfast in Toronto.
Despite sub-prime woes and the ongoing credit crunch, 29% of the investment managers surveyed pegged financials as the surefire top performer, while the consumer staples group followed closely at 26%. Energy and materials showed a strong presence in the survey, but managers were divided closely on whether the two resource-laden sectors would outperform or perform poorly.
The three top-pick large cap stocks chosen for the coming year were CIBC, TD Bank Financial Group and Research in Motion, which was one of three stocks responsible for the bulk of TSX returns last year.
The managers surveyed largely expect oil to end the year at US$85 per barrel and the dollar to finish the year at parity. As well, managers forecasted a 50 basis point drop in the Bank of Canada’s overnight rate target, along with modest equity returns of 5% to 8.4% and bond returns of 2% to 4.2%.
Merger and acquisition activity is expected to decrease significantly, and the managers widely agreed that any deal activity would most likely fall occur within the materials and energy sectors.
“M & A activity is expected to be less of a catalyst in 2008 than it has been for the last four years,” said David Kaposi, a principal at Mercer, in a presentation.
Infrastructure was widely considered by those surveyed (54%) to be the non-traditional investment mandate that would increase most this year, followed by hedge funds (50%) and active currency (33%), while investment in private equities was thought least likely to increase (8%).
Kaposi outlined three general predictions that Mercer sees for 2008. To start, first time investors in alternative assets will prefer more easily understood asset classes. Mercer predicts that these investors, in search of a more diversified portfolio, will migrate first to domestic real estate and global infrastructure before becoming comfortable enough to move into more complex asset classes.
Secondly, currency management will gain new prominence and investors will worry they’ve missed the boat on U.S. dollar decline.
“As investors foreign currency exposure increases, the unintended effects of a short-term currency boost will have a bigger impact on returns,” said Kaposi. “Therefore determining what to hedge and how much to hedge will become more important as your non-Canadian currency exposure grows.”
And finally, Mercer predicts that focus on benefit adequacy for defined contribution plans will increase. More specifically, firms will want to ensure that pension plan members are aware that retirement income planning is ultimately their own responsibility.
In the current volatile market, defined benefit pension plan sponsors will increase focus on financial risk management, said Scott Clausen, also a principal at Mercer.
In a legislative environment such as Ontario’s that could make surplus risky, “plan sponsors of fully-funded mature plans may prefer to start de-risking their pension plans as the surplus approaches a level that may not be useful,” said Clausen, in a presentation. “A combination of funding, investment and design strategies could all be used to help employers reduce the financial risk.”
Financial stocks to lead the way in 2008: survey
Investment managers divided on prospects for energy and materials sectors
- By: Regan Ray
- January 16, 2008 January 16, 2008
- 11:10