Overall, Canada’s financial outlook for 2020 is positive.
That’s according to manager Patrick McAllister with RBC Equity and Portfolio Management.
He spoke with the Fort McMurray Chamber of Commerce at the group’s first luncheon of 2020 adding the glass is half full.
While economic expansion continues, McAllister mentioned two risk factors when managing equities: Inverted yield curve and declines in manufacturing.
An inverted curve results when demand for long-term bonds outpaces short-term securities among investors.
This leads to high prices on bonds and high yields for securities, which should mean a recession is imminent.
“There’s certainly a recognition amongst our team that we are in the late cycle,” McAllister said, “but there’s also a recognition that we could also be in the late-cycle for quite some time. So, it’s not a foregone conclusion that we’re going to lapse into a recession in the next 12 months.”
He said Canada in 2020 would maintain its GDP growth from the previous year at 1.5 per cent.
As for the decline in manufacturing, he said that happened for the last 50 years in the United States.
According to McAllister, the ‘silver lining’ is there are more jobs available than there are people looking for employment.
80 per cent of the GDP in the U.S. relies on American consumers and with growth in the service sector, McAllister said that the market is in good health.
“On balance, we still think that the [economic] expansion is intact, and on that basis we recommend a full commitment to equity investing.”
So, McAllister recommended investors maintain the commitments to their equity portfolios while preparing for choppier waters ahead.
“Trimming your gains on some winners and a little more allocation to consumer staples [and] utilities that are going to be a little more resilient in their earnings power in a downturn.”
McAllister touched on other areas: Housing, energy, and the rise in STEM and skilled trades.
Barriers and bright spots
McAllister said housing is a little more affordable, but seller’s markets in larger cities like Toronto remain.
Also, homeowners continue to spend money on debt servicing instead of saving.
“Canadian household leverage continues to be at highs. I think that’s going to be a sore point, when the next recession does arrive, that perhaps we’re less prepared for it than we should.”
He added the de-leveraging process in Canada may be more painful than the past American experience in the next recession.
As for the energy sector, McAllister said the conversation begins and ends with pipelines.
“Trans Mountain expansion is the made-in-Canada solution to our problems. It would help diversify us from the U.S. market and also reduce the discount on our oil.”
McAllister said the RBC would continue to examine in 2020 adding they hope to see tangible construction progress on the pipeline between Edmonton and Burnaby, B.C.
Also on the subject of diversifying, there are opportunities in science, technology, and skilled trades.
McAllister called tech an emerging resource for Canada encouraging young people to pursue futures in science, technology, engineering, and math.
“I think it goes underappreciated because it’s maybe not as represented in our TSX Composite [or] equity market, but the employment level in the technology field is robust, it’s a million people strong, and it’s growing like gangbusters.”
He said the Greater Toronto Area added more jobs in technology in 2017 than San Francisco, Seattle, and Washington combined.
The next Fort McMurray Chamber of Commerce luncheon is on Feb. 20, 2020.
For information on nominations for the Board of Directors, go to their website.