Hub Blogs

Hub Blogs contains fresh contributions written by Financial Independence Hub staff or contributors that have not appeared elsewhere first, or have been modified or customized for the Hub by the original blogger. In contrast, Top Blogs shows links to the best external financial blogs around the world.

Diversified & Dynamic: 2023 Global Investment Outlook

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By Ian Riach, Franklin Templeton Canada

(Sponsor Content)

Investors may see key improvements in conditions in the capital markets and the wider economy in 2023 and beyond, according to the Capital Market Expectations (CMEs) from Franklin Templeton Canada. We presented our CMEs at Franklin Templeton’s Global Investment Outlook in Toronto on December 6.

We develop a proprietary set of CMEs annually, using top-down fundamental and quantitative research​. Using an outlook for the next seven to 10 years, we review the expected returns and risk of investable asset classes: equities, fixed income, alternatives and currencies.​ Our economic outlook and 10-year asset class forecasts are driven by macro expectations, current valuations and various asset class assumptions​. The CMEs are annualized 10-year return expectations, and they are intended to coincide with the average length of a business cycle and are aligned with the strategic planning horizon of many institutional investors.

Our process also considers long-term macroeconomic themes to complement the objectivity of our quantitative analysis. This year, we factored in three major themes:

Growth: We expect to see moderate growth in the next phase of the economic cycle, driven by advances in technology and increasing productivity. Demographics will likely be a slight headwind to growth as populations in developed markets age.

Inflation: Inflation is expected to remain slightly higher than the targets established by central banks over the medium term​​. Rising wages and energy prices are sticky aspects of inflation.​​

Fiscal and monetary policy: Central banks, including the Bank of Canada, will keep up their aggressive fight against high inflation​​. Not surprisingly, this will hamper economic growth. On the other hand, we expect fiscal policy by governments to remain accommodative. Fiscal policy can result in higher government debt, which can be inflationary.​​ But if government stimulus targets, say, capital projects such as infrastructure, then it can be beneficial to long-term growth. Policymakers are ​​walking a tightrope now.

Capital Market Expectations

With that background, here is a concise summary of our expectations over the next several years:

  1. The expected returns for fixed income assets, like bonds, have become more attractive. We also expect the recent volatility in fixed income markets to subside.​
  2. The returns of global equities are expected to revert to their longer-term averages and outperform bonds.​
  3. Stocks in Emerging Markets are expected to outperform developed market equities over the next seven to 10 years​.
  4. A diversified and dynamic approach to investing is the most likely path to achieving stable returns over the long run.​

The chart below sets out our range of expectations for key assets compared to historical averages:

Note that these return projections are higher than our 2022 outlook and are closer to their long-term averages.

Franklin Templeton Canada uses its CMEs to shape strategic asset allocation for our portfolios. However, we do not just “set it and forget it”.  We employ a dynamic asset allocation process over the shorter-term, taking into account market conditions. While we are optimistic over the next decade that returns will favour risk assets, our short-term preference (next 12 months) is to be cautious as recession risks rise. Continue Reading…

Innovation is the key to growth

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By Erin Allen, CIM, VP Online ETF Distribution, BMO ETFs

(Sponsor Content)

It’s simple, innovation has the potential to create higher productivity: the same input generates higher output.  As productivity moves higher, more goods and services are produced, and as such the company or the economy grows.

Innovative companies in turn will displace industry incumbents as they see an increase in efficiencies and productivity leading them to gain market share. The long-term growth potential of these innovative companies is what investors in this space are after.

In the late nineteenth century, the introduction of the telephone, automobile, and electricity changed the way we communicated, travelled, transported, and powered our economy. The world’s productivity went through the roof as costs dropped, creating demand across sectors.

 Source: BMO ETFs, Nov 2022

Today, the global economy is undergoing a technological transformation that will shape the future. Innovations in areas such as artificial intelligence, robotics, DNA sequencing, energy storage and blockchain technologies are evolving at a rapid rate and seeing cost declines that are expected to further lead this growth.

BMO Global Asset Management offers three ETF series in partnership with ARK Invest that focus on disruptive innovations. BMO ARK Innovation Fund ETF Series (ARKK), BMO ARK Genomic Revolution Fund ETF Series (ARKG), and BMO ARK Next Generation Internet Fund ETF Series (ARKW).  ARK believes innovations should meet three criteria and invests accordingly in these unconstrained, high-conviction portfolios.

3 Criteria for Innovations

  1. Dramatic cost declines
  2. Cuts across sectors and geographies
  3. Serves as a platform for additional innovations.

For illustrative purposes only. Source: ARK Invest

Continue Reading…

Retired Money: Direct Indexing has drawbacks but a hybrid DIY strategy may have merits

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Image courtesy MoneySense.ca/Unsplash: Photo by Ruben Sukatendel

My latest MoneySense Retired Money column looks at a trendy new investing approach known as “Direct Indexing.” You can find the full column by clicking on the highlighted headline: What is direct indexing? Should you build your own index?

Here’s a definition from Investopedia : “Direct indexing is an approach to index investing that involves buying the individual stocks that make up an index, in the same weights as the index.”

When I first read about this, I thought this was some version of the common practice by Do-it-yourself investors who “skim” the major holdings of major indexes or ETFs, thereby avoiding any management fees associated with the ETFs. It is and it isn’t, and we explore this below.

Investopedia notes that in the past, buying all the stocks needed to replicate an index, especially large ones like the S&P 500, required hundreds of transactions: building an index one stock at a time is time-consuming and expensive if you’re paying full pop on trading commissions. However, zero-commission stock trading largely gets around this constraint, democratizing what was once the preserve of wealthy investors.   According to this article that ran in the summer at Charles River [a State Street company], direct indexing has taken off in the US: “ While direct index portfolios have been available for over 20 years, continued advancement of technology and structural industry changes have eliminated barriers to adoption, reduced cost, and created an environment conducive for the broader adoption of these types of strategies.”

These forces also means direct indexing can be attractive in Canada as well, it says. However, an October 2022 article in Canadian trade newspaper Investment Executive suggests “not everyone thinks it will take root in Canada.” It cast direct indexing as an alternative to owning ETFs or mutual funds, noting that players include Boston-based Fidelity Investments Inc, BlackRock Inc., Vanguard Group Inc., Charles Schwab and finance giants Goldman Sachs Inc. and Morgan Stanley.

An article at Morningstar Canada suggested direct indexing is “effectively … the updated version of separately managed accounts (SMA). As with direct indexing, SMAs were modified versions of mutual funds, except the funds were active rather than passive with SMAs.”

My MoneySense column quotes Wealth manager Matthew Ardrey, a vice president with Toronto-based TriDelta Financial, who is skeptical about the benefits of direct indexing: “While I always think it is good for an investor to be able to lower fees and increase flexibility in their portfolio management, I question just who this strategy is right for.” First, Ardrey addresses the fees issue: “Using the S&P500 as an example, an investor must track and trade 500 stocks to replicate this index. Though they could tax-loss-sell and otherwise tilt their allocation as they see fit, the cost of managing 500 stocks is very high: not necessarily in dollars, but in time.” It would be onerous to make 500 trades alone, especially if fractional shares are involved.

Ardrey concludes Direct indexing may be more useful for those trying to allocate to a particular sector of the market (like Canadian financials), where “a person would have to buy a lot less companies and make the trading worthwhile.”

A hybrid strategy used by DIY financial bloggers may be more doable

I would call this professional or advisor-mediated Direct Indexing and agree it seems to have severe drawbacks. However, that doesn’t mean savvy investors can’t implement their own custom approach to incorporate some of these ideas. Classic Direct Indexing seems similar but slightly different than a hybrid strategy many DIY Canadian financial bloggers have been using in recent years. They may target a particular stock index – like the S&P500 or TSX – and buy  most of the underlying stocks in similar proportions. Again, the rise of zero-commission investing and fractional share ownership has made this practical for ordinary retail investors. Continue Reading…

How to Monetize your Creative Hobby as a Side Hustle

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Image Source: Pexels

By Beau Peters

Special to the Financial Independence Hub

Side hustles are becoming more popular than ever. As technology advances, e-commerce stores and selling platforms like Etsy have made it possible for people to monetize their creative hobbies and turn them into viable businesses.

Even if you don’t want to run a full-fledged business, the hobby you love could end up becoming a successful side hustle if you’re willing to put in a bit of time and effort. Whether you want a little extra cash each month or you’re trying to build a brand name for yourself, selling your creative products online can help you find financial independence: and have fun doing it!

So, whether you’re into photography, pottery, crocheting, or drawing/painting, chances are there’s an audience out there that would love to purchase your creations.

Let’s take a closer look at how you can monetize your creative hobbies and make a profit doing what you love.

Think of yourself as a Business

The best thing you can do as you work to monetize your hobbies is to think of what you’re doing as a business. Even if you’re only working on it part-time for a little extra income, you’ll end up being more successful with a business mindset. That includes understanding things like:

  • Finances;
  • Marketing;
  • Sales
  • Customer service

You’ll also want to make sure you understand how creative operations work. Even if you’re doing everything on your own, creative operations will make it easier for you to manage your workflow and optimize every step of what you’re doing. When you’re putting time into a side hustle, every second counts. Creative operations make it easier to produce high-quality work as efficiently and effectively as possible.

Consider whether you can commit to the business side of your side hustle. You don’t need to devote all of your time to it, but if you want to make money and build up a following, having certain business practices in place is important. It’s also crucial when it comes to keeping things organized and keeping your finances in order. You don’t have to have a marketing degree to market your side hustle. However, if you’re not sure about running your side hustle like a business, consider hiring someone on a part-time basis to keep things moving forward and to ensure you’re staying organized.

Find Financial Freedom

It’s estimated that 40% of Americans currently have a side hustle. The uncertainty of the COVID-19 pandemic caused many people to start freelancing or forced them to look for ways of bringing in extra income. Even in a post-pandemic society, the popularity of side hustles continues to grow, especially for those who love what they’re doing. Continue Reading…

Recession “most probable” scenario for US and Europe in 2023: Infrastructure plays attractive, says ClearBridge

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Image: Pexels/Engin Akyurt

’Tis the Season for economic forecasts. Further to the Vanguard 2023 outlook highlighted on the Hub yesterday comes various forecasts from Franklin Templeton Investments and its sub-advisors.

The selections below suggest Recession is the most likely scenario for 2023 — something Vanguard also forecast — and ClearBridge Investments sees Infrastructure assets as more promising than global equities during this period. Clearbridge runs the Franklin Clearbridge Sustainable Global Infrastructure Income Active ETF.  See also this blog on Infrastructure investing from BMO ETFs, which ran on the Hub late in August.

As with Monday’s blog, we’ve highlighted relevant paragraphs directly from the horse’s mouth, including the subheadings from the various money managers. Unless otherwise indicated, images are from our image banks.

ClearBridge Investments: U.S. economic outlook by Investment Strategist Jeff Schulze

Recession is the path of least resistance

As we look ahead to 2023, recession has gone from a distantly possible scenario to the most probable one, and the potential pivot by the Fed that many equity investors are hoping for is unlikely to occur.

Our views are grounded in the reading of the ClearBridge Recession Risk Dashboard of 12 economic indicators, which has been flashing red for the past four months, indicating a recession. Eight of the 12 underlying indicators are signaling recession, including traditional recession precursors, like the 10- year/3-month Treasury yield curve, which inverted this fall. This portion of the yield curve has correctly anticipated the last eight recessions dating back to 1970, providing an average of 11 months of warning.

Image: Pexels/Mart Production

A recession is not a done deal, however. The most likely positive path involves what we have dubbed the “immaculate slackening” where the labor market tightens but not too many jobs are lost. Job openings are still more than 3 million above their pre-pandemic level (but down 1.5 million from the peak), while the total number of persons employed is only around 1 million greater than before COVID-19. This suggests room exists to loosen labor demand but not destroy as many jobs, which would help restore balance and ease wage gains. Importantly, this could help ease inflation, particularly in service industries where wages are a larger component of prices.

The most important factor to achieve a soft landing is a substantial reduction in inflation, which would allow the Fed to back off its aggressive actions. With inflation unlikely to return to 2% in 2023, and the labor market proving resilient, the Fed is likely to continue to tighten monetary policy to slow the economy and curb price increases, which will ultimately result in a recession. Monitoring the health of the labor market will be important in the coming year, given its role as a key inflation barometer for the Fed. We will also be looking for signs of weakening consumption outside of the most interest rate sensitive areas as evidence that a slowdown is taking deeper root.

ClearBridge Investments: Global infrastructure outlook by Portfolio Managers Charles Hamieh, Shane Hurst and Nick Langley

Infrastructure earnings more secure than global equities; U.S. expected to focus on renewables

From no growth in 2020 to rapid growth in 2021 to slow growth in 2022, we look at 2023 with a base case of recessions in the U.S., Europe and the U.K.

The impact on infrastructure, though, should be muted, particularly for our regulated assets, where the companies generate their cash flows, earnings and dividends from their underlying asset bases, as we expect those asset bases to increase over the next several years. As a result, infrastructure earnings look better protected compared to global equities.

Infrastructure assets more secure than global equities. Image from Franklin ClearBridge

Most infrastructure companies have a link to inflation in their revenue or returns. Regulated assets, such as utilities, have their regulated allowed returns adjusted for changes in bond yields over time. As real yields rise, utilities look poised to perform well, and we have currently tilted our infrastructure portfolios to reflect this.

As a result, the underlying valuations of infrastructure assets are relatively unaffected by changes in inflation and bond yields. However, we have seen equity market volatility associated with higher bond yields impact the prices of listed infrastructure securities, making them more compelling when compared with unlisted infrastructure valuations in the private markets.

On top of its relative appeal versus equities, infrastructure should benefit from several macro drivers in 2023 — and beyond. First, energy security is driving policy right now, and a significant amount of infrastructure will need to be built to attain energy security. High gas prices and supply constraints brought on by the Russia/Ukraine war have highlighted the importance of energy security and energy investment. This is supportive of energy infrastructure, particularly in Europe, where additional capacity is needed to supplant Russian oil and gas supply, and in the U.S., where new basins are starting up, in part to meet fresh demand from Europe. Continue Reading…