This morning, CIBC released its 2014 outlook, A Look To The Future. The extensive 60-plus page overview leads off with chief economist Avery Shenfeld’s Ten for fourteen, a list of the macroeconomic developments that will shape investor returns next year.
Shenfeld believes the foundation for a secular bull has been laid even though economic growth in 2013 has been underwhelming, with “the climb in bond yields and equity prices consistent with a typical cyclical turn towards better times.”
Here’s what he thinks investors can expect when the calendar turns over to 2014:
1. Lighter U.S. fiscal drag
The world’s largest economy took action to rein in its deficit this year, which may help its long-term fiscal picture slightly but was a significant negative for growth, according to CIBC. With midterm elections looming, Shenfeld expects Congress to reach a “less-than-grand budget deal” that averts another government shutdown and doesn’t take as much away from growth as the sequestration cuts enacted this year did.
2. Restored momentum in Emerging Markets
Shenfeld pins down a couple reasons why emerging market economies haven’t been growing at as fast of a clip as some expected. He attributes the slowdown in growth to “self-inflicted wounds” from policymakers in the BRICs nations, and sluggish growth in advanced economies that resulted in lower demand for their exports. However, he already sees signs of a pick-up in China, where raw materials imports have risen in the second half of 2013. Shenfeld calls this a critical indicator for Canada.
3. Shallow glide for U.S. rates
As the Fed scales back on quantitative easing, Shenfeld expects that the central bank will employ “unrealistically dovish guidance about future short rate policies, and an opaque tapering plan, to hold long rates at acceptable levels.” When the Fed announces the beginning of tapering, he expects the threshold for the first rate hike will be lowered, which will help leave the 10-year Treasury yield only slightly above 3 percent at the end of the year. Since rates in Canada are closely linked to those of the U.S., he anticipates that bond yields north of the border will follow a similar trajectory.
4. Don’t expect BoC hikes until 2015
Shenfeld sees the removal of the tightening bias not as a sign that rates might be cut, but rather as an indication that the first rate hike is too far in the future to mention at present. He anticipates that the jobless rate will continue to decline while inflationary pressures remain muted.
5. Asymmetric monetary policies
The Bank of Canada’s policy stance has been considerably less accommodative than the United States’ for the last five years, which is why Shenfeld doesn’t think the central bank will raise rates too quickly when the output gap narrows. However, he believes the market will be pricing in an overnight rate of roughly 2 percent by the end of 2015, which will keep the loonie range-bound against the greenback and see the currency appreciate relative to the euro.
6. Growth lifts industrial demand
While talk of the waning commodity super-cycle has weighed on miners and energy stocks, Shenfeld thinks firming demand will provide support for these segments going forward, even in the face of growing supply.
7. Growth helps Canadian earnings
As CIBC has mentioned before, U.S. equities have outperformed their Canadian counterparts since the recession ended on the back of superior earnings. Shenfeld thinks the TSX will play catch-up in 2014, however, with CIBC’s top-down model calling for earnings growth of 12 percent. The chief economist added that equities tied to global growth are likely to outperform defensive yield plays as well as stocks tied to domestic spending.
8. Housing a drag on growth
Shenfeld writes that the “risks of excess supply are tempering the pace at which new projects are now being launched,” as a wave of new condominiums are scheduled to be completed in 2014. A slowdown in this segment will keep Canada’s headline growth rate well below that of the United States’, but this isn’t all bad news. “The silver lining is that a pull-back in new supply will help contain the pace of local housing price corrections when interest rates climb more materially in 2015,” Shenfeld concludes.
9. Business capex upturn
According to Shenfeld, this reduced spending on new construction will be offset by increased capital spending by businesses, especially in the energy sector. He writes that diminished downside risks to resource prices will contribute to a pick-up in exploration and production budgets. However, given the still-strong loonie, capex in manufacturing might remain weak.
10. Capture the 65+ market
As the population ages, Shenfeld points out a couple segments that could stand to benefit: wealth management and health care. “Spending by those over 65 is expected to grow at roughly twice the pace as Canadian overall household outlays,” he writes.
You can find the full note here.