Inflation

Inflation

Expect strong single-digit returns in possible soft landing: Franklin Templeton’s 2024 Global Investment Outlook

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Investors can expect strong positive single-digit returns for the ten years between 2024 and 2034, portfolio managers for Franklin Templeton Investments told advisors on Thursday.

Ian Riach

Speaking at the 2024 Global Investment Outlook in Toronto, portfolio manager Ian Riach said Canadian equities will have expected returns in C$ of 7.2%, a tad below the 7.4% of U.S. equities and 8.6% for both EAFE and Emerging Markets and 8.1% for China. Riach is Senior Vice President and Portfolio Manager for Franklin Templeton Investment Solutions and CIO of Fiduciary Trust Canada.

Fixed-income returns are expected to be in the low single digits: 3.9% for Government of Canada bonds, 6% for investment-grade Canadian bonds and 4.8% for  hedged global bonds, again all in C$. See above chart for the Volatility of each of these asset classes, as well as the past 20-year annualized returns for each. From my read of the chart, expected returns of North American equities the next decade are slightly below past 20-year annualized returns but EAFE and Emerging Markets expected returns are slightly higher, with the exception of China.

Fixed-income investors who were dismayed by bond returns in 2022 will no doubt be relieved to see expected future returns of Canadian bonds and global bonds are higher than in the past 20 years. “Expected returns for fixed income have become more attractive; recent volatility [is] expected to subside​,” Riach said in the presentation provided to attendees.

Capital markets expectations (CME) are used to set Strategic Asset Allocation, which forms the basis of Franklin Templeton’s long-term strategic mix for portfolios and funds, the document explains: “Portfolio managers then tactically adjust.”

“This year CMEs are generally higher than last year. Primarily due to higher cash and bond yields as a starting point,” the document says.

Global equity returns are expected to revert to longer- term averages and outperform bonds​,  EAFE equities “look attractive,” and Emerging market equities are expected to outperform developed market equities​, albeit with more volatility.

Central banks may have to tolerate higher inflation, but are determined to at least get it closer to target in the short-run.  The Bank of Canada does have some room to tolerate a higher rate as its target is more flexible at 1%-3%.  This compares to the Fed’s hard-wired 2%.  Thus, rates in the US may stay higher for longer to bring inflation down to target

Risks of Recession

Riach described three major broad portfolio themes. The first is that Recession risks are moderating but “reasons for caution remain.” The second is that on interest rates, central banks have reached “Peak policy, but expect higher rates for longer.” The third is that “Among the risks, opportunities exist.” Addressing the narrow market of the top ten stocks in the S&P500 (the Magnificent 7 Big Tech stocks plus United Health, Berkshire Hathaway and ExxonMobi), market breadth should broaden to the rest of the market.

For portfolio positioning, Riach suggested selectively adding to Equities, overweighting U.S. and Emerging markets equities, underweighting Canada and Europe equities, and for Fixed Income,”trimming duration and prefer higher quality corporates.” In short, “a diversified and dynamic approach [is] the most likely path to stable returns.”

Jeff Schulze, Head of Economic and Market Strategy, ClearBridge Investments (part of Franklin Templeton) gave a presentation titled “Anatomy of a Recession.” A recession always starts as a “soft landing,” as the slide below illustrates.  “We’re not out of danger. Leading indicators point to Recession,” he said, “The base case is Recession.” While the S&P500 consensus is for earnings growth, the U.S. GDP is expected to worsen.

 

 

He described himself  not as a permabear but a permabull, at least until a year ago. If as he expects there’s a “soft landing” with stocks possibly correcting by 15 to 20% in 2024 Schulze would view that as an opportunity to add to U.S.  equities in preparation for the next secular bull market.

One of the catalysts will be A.I., not just for the Magnificent 7 but also for the S&P500 laggards. As the chart below illustrates, economic growth often holds up well leading into a recession, with a rapid decline coming only just before the onset of a recession.  Continue Reading…

The changing perceptions of Normal

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Image courtesty Outcome/Creative Commons

By Noah Solomon

Special to Financial Independence Hub

In response to rapidly accelerating inflation, central banks began raising rates aggressively at the beginning of 2022. Ever since, wild swings in bond markets have had a tremendous impact on virtually every single asset class.

This month, I examine the recent spike in rates from a historical perspective. Importantly, I will discuss the likely range of interest rates over the foreseeable future and the associated implications for financial markets.

When the Fed and other central banks were confronted with financial disaster in late 2008, they slashed interest rates to zero and deployed additional stimulative measures to ward off what many thought could be another Great Depression. Global rates then remained at levels that were both well below historical averages and the rate of inflation for the next 13 years.

In 2008, the runaway inflation of the 1980s and the painful medicine of record high rates that were required to subdue it were still relatively fresh in people’s minds. At that time, had you asked anyone what would be the most likely result of keeping rates near zero for over a decade, their most likely response would have been runaway inflation. And yet, inflation remained strangely subdued. According to most experts, this unexpected result is largely attributable to a relatively benign geopolitical climate and a related push toward global outsourcing.

This led to the notion of a “new normal” in which inflation was permanently expunged. Over the span of only 13 years, people went from fearing inflation to believing that it was a relic of the past unworthy of serious consideration. This false sense of comfort caused central banks and investors alike to be caught off guard in late 2021 when they realized that inflation had not been permanently vanquished but was merely hibernating.

These sentiments were evident in bond markets. After rates were slashed to zero during the global financial crisis, investors were skeptical that they would remain there for long before stoking inflation. Longer-term rates remained well above their short-term counterparts, with the yield on 10-year U.S. Treasuries retaining an average 1.9% premium above the Fed Funds rate from 2009 – 2020.

However, 13 years of ultra-low rates with no sign of inflation allayed such fears, with the yield spread crossing into negative territory late last year and reaching a low of -1.5% in May of 2023. Even the rapid acceleration in inflation in late 2021 failed to fully disavow investors of the notion that the era of low inflation had come to an end, with current 10-year rates falling below their overnight counterparts.

10 U.S. Treasury Yield Minus Fed Funds Rate (1995 – Present)

 

Equity markets danced to the same tune as their bond counterparts. When central banks cut interest rates to zero during the global financial crisis, investors were dubious that inflation would not soon rear its ugly head. Multiples remained relatively normal, with the P/E ratio of the S&P 500 Index averaging 16.4 for the five years beginning in 2009.

Over the ensuing several years, investors became complacent that the world would never again experience inflation issues, with the S&P 500’s P/E ratio climbing as high as 30 by early 2021. Multiples have since remained somewhat elevated by historical standards, indicating that markets have not fully embraced the fact that inflation may not be as well-behaved as what they are used to.

S&P 500 P/E Ratio (1995 – Present)

 

The Rising Tide of Declining Rates: Not to be Underestimated

According to legendary investor Marty Zweig:

“In the stock market, as with horse racing, money makes the mare go. Monetary conditions exert an enormous influence on stock prices. Indeed, the monetary climate – primarily the trend in interest rates and Federal Reserve policy – is the dominant factor in determining the stock market’s major direction.”

The 2,000-basis point decline in interest rates from 1980 to 2020 not only turbocharged aggregate demand (and by extension corporate revenues), but also dramatically lowered companies’ cost of capital. In tandem, these two developments were nothing short of a miracle for corporate profits and asset prices. Continue Reading…

Unlocking Wealth: Dividend ETF Investing

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Pixabay: Gerd Altmann

By Sa’ad Rana, Senior Associate, BMO ETFs

(Sponsor Blog)

When it comes to investment strategies, dividend or income investing holds a special place in the hearts of many investors, especially retirees. It’s not surprising, considering that dividends often constitute a substantial portion of a portfolio’s total return. Let’s dive into this popular approach and understand how Exchange-Traded Funds (ETFs) can be a game-changer.

The Dividend Advantage

Now, let’s dissect the significance of dividends in the realm of equity returns. Looking over the long-haul equity return expectations, the S&P has returned an average of around eight per cent over a 40+ year period[i]. In historical context, dividends have accounted for a significant portion of this return, ranging from three to four per cent. This underscores how dividends contribute almost half of the total equity market return annually[ii]. However, their true power lies in compounding. While you collect dividends each year, reinvesting them into equities sets the stage for exponential growth. This compounding effect is what propels your portfolio to higher echelons of growth.

Moreover, dividends are more than just monetary gains; they serve as a vital indicator of a company’s financial health. While not the sole indicator, companies with robust dividend policies often signal financial stability. It’s crucial to note, however, that not all dividends are created equal, a distinction we’ll explore further.

The Art of Portfolio Construction

We’ve witnessed a surge of interest in dividends:  evident in the significant influx of investments into the dividend space. But what are the actual benefits of incorporating dividend investments into your portfolio?

From a portfolio construction perspective, the benefits of including dividend-paying stocks are evident. We’ve examined 32 years of returns across various companies in the Canadian equity market. Dividing them into dividend growers, dividend payers, dividend cutters, and non-dividend payers, a clear pattern emerges.

The standout performers are the dividend Growers, showcasing the potential of quality dividend-paying stocks. Over this period, they have consistently outperformed the broad index, offering a higher average return. Moreover, when it comes to managing risk, dividend Growers and high-quality dividend payers exhibit a slightly lower level of volatility compared to the broader market. This suggests that a focus on sustainable, high-quality dividend stocks can lead to both enhanced returns and a controlled risk profile, making them a compelling addition to a well-rounded investment portfolio. It’s worth noting that not all dividends are created equal, and a discerning approach is crucial for maximizing the benefits of dividend investing.

Ensuring Sustainable Dividends

One of the crucial aspects of dividend investing is ensuring the sustainability of the payouts. Stepping into the shoes of a prudent investor, it’s imperative to avoid falling into yield traps: companies offering high yields but lacking the financial backing to sustain them. Enter the analysis of a company’s overall health, a task made easier by assessing key metrics.

Cash as a percentage of total assets and payout ratios are key indicators of a company’s financial fortitude. In recent times, the top quartile of companies has seen a surge in cash reserves, an encouraging sign of their resilience. Moreover, evaluating the payout ratio provides insights into the sustainability of dividends. A company paying out more than it earns in the long run is walking on thin ice, whereas those with ratios in the 40-50% range are on relative solid ground.

Dividends in an Age of Inflation

Amid the specter of inflation, dividend strategies have shone brightly. Companies with robust dividend policies, characterized by stable cash flows, have weathered the storm far better than their growth-oriented counterparts. Inflation, while posing challenges to certain sectors, has not dampened the dividend-driven approach. In fact, historical data (monthly excess returns over the MSCI World Index for the last 45 + years) indicates that dividend-paying companies fare even better in high CPI environments, providing a reliable anchor for portfolios.

At the heart of the resilience of dividend-paying companies lies their ability to generate steady and predictable cash flows. These companies often operate in industries with stable demand for their products or services, which provides a buffer against the uncertainties associated with inflation. By virtue of their financial stability, they’re better positioned to maintain and perhaps even grow their dividend payouts, providing a reliable source of income for investors.

Historical data, tracked against the Consumer Price Index (CPI) reinforces the notion that dividend-paying companies can act as a reliable anchor for portfolios during inflationary periods. These companies tend to exhibit a degree of insulation from the market volatility often associated with rising prices. By consistently delivering returns through dividends, they offer investors a source of stability in an otherwise uncertain economic environment.

Methodology Matters

In the realm of Dividend ETFs, the choices are vast, and not all ETFs are created equal. Each comes with its unique methodology, impacting performance. Factors such as weighting methodology, sector caps, and company quality screenings play pivotal roles in the outcome. This underscores the importance of understanding the underlying strategy before investing. Continue Reading…

Were you nervous before you Retired?

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By Fritz Gilbert, TheRetirementManifesto

Special to the Financial Independence Hub

“Were you nervous before you retired?”

I was recently asked that question, and it brought back a flood of memories from my “near-retirement” days.

I suspect most of us were nervous before we retired, but it’s not something we talk about.  I believe there’s value in sharing the psychological journey in those final days before retirement.  For folks nearing retirement, it’s reassuring to know they’re not alone.

Recently I had the opportunity to talk about it with a reader who is on the cusp of retirement. We had a wide-ranging discussion and the conversation became the trigger for today’s post.  I suspect many of the questions he asked are also on the minds of other readers who are approaching retirement.

This one’s for you, Mike.  Thanks for letting me share our discussion with the readers of this blog.  I trust they’ll all benefit from our discussion…

 

Were you nervous before you Retired?

That’s one of the questions a reader, Mike, asked me on a recent phone call.  Mike’s a month away from retirement and reached out to me a few weeks ago.  I typically decline reader requests for phone calls (unfortunately, a downside of writing a blog with a large following).  If I said yes to every request, I’d be spending far too much of my time helping folks on a one-on-one basis, time that could otherwise be spent writing and reaching thousands of people with the same effort. It’s a “scalability” thing, and I trust you understand.

However…there was something about Mike.

His initial email hit a chord with me.  Here’s what he said:

Good morning Fritz,

Have heard you on several podcasts and just finished your latest discussion with Jason Parker.  I will be retiring in January and your point about helping others hit a cord.  I would love the opportunity to speak with you about your blog.  I’m currently a financial advisor and feel there is a huge need for financial literacy for just about everyone.  As a former teacher, my passion is teaching/sharing.  Would like to understand better how you got started with your blog, what are some of the watch outs, and any other insights you could provide.

Thanks for your consideration and congratulations on living your best life!

What caught my attention?  The fact that he didn’t ask a single financial question and was focused on helping others. He had some ideas about teaching/sharing and he was considering starting a blog.  I appreciate readers applying the lessons I’m sharing in their lives and searching for Purpose in retirement.  I also had a bit more free time than I usually do, so I agreed to a phone call.

Following are some of the highlights of our discussion, in no particular order.  I trust you’ll find them of interest.

how do I retire

Questions From A Soon To Be Retiree

Should I start a Blog In Retirement?

My first reaction to any question that says “Should I start…” is to say yes.  It’s critical, especially in early retirement, to foster your creative curiosity and try anything that interests you.  Many won’t “stick,” but you’ll likely find a few that do.  Once you’ve found one or two, you’re on your way to a great retirement.

Mike has a passion for teaching and is exploring various avenues to reach others.  I strongly encourage anyone who has an interest in starting a blog to give it a try.  7 years ago, I started this blog on a whim.  I’m 100% self-taught and technically inept.  It’s easy to start a blog these days, with Bluehost and WordPress both designed for folks who have never built a website.  Starting this blog is one of the best things I’ve ever done and has become a Purpose of mine in retirement. I hope it works out as well for others who are considering it.

That said, it’s important to consider your motives.  If you’re doing it to make money, I suspect you’ll fail.  For 3 years, I wrote every week without making a dime and only started adding those annoying ads when I retired.  I get some complaints about them but believe I shouldn’t have to incur costs when there’s an option of generating some revenue for my “work.” As blogs grow, the costs increase (Mailchimp costs me $220/month based on my ~13k subscribers), and I felt it was time to at least cover my costs.  Making money has never been my motive, and it shouldn’t be yours.  Even now, after 7 years, the income from this blog basically pays my health insurance.  Nice to have, but not enough to change our life. Unless you’re in the 0.1%, you won’t get rich writing a blog. Continue Reading…

Focus on Blue Chips and hold the good ones indefinitely

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Uncover good companies for long-term investments and you will boost your portfolio returns over time. Learn more here and discover one of our top picks.

 

Long-term stock investment strategies aren’t built to make a fast dollar. They are built to prosper over time, and most importantly, teach you how to pick the right stocks.

In our view, your goal as an investor, particularly if you follow a conservative investing strategy like the one we recommend, is to make an attractive return on your investments over a period of years or decades. Failure means making bad investments that leave you with meager profits or losses. Continue reading to learn about good companies for long-term investments.

Visa Inc., symbol V on New York, is on our list of good companies for long-term investments

Visa has been a terrific performer for our subscribers since we first recommended the stock at $19 (adjusted for share splits) in the December 2010 issue of our Wall Street Stock Forecaster newsletter.

A big part of Visa’s appeal is that it gets most of its revenue from the fees it charges card issuers and merchants using its network. This unique business model means the banks — and not Visa — are responsible for evaluating customer creditworthiness and collecting payments, which helps to cut risk for investors.

The company first sold its stock to the public at $11 a share in March 2008. We held off recommending it at that time, as the best way to cut the risk of investing in initial public offerings is to wait till after the next market slump and/or recession comes along. Thanks to Visa’s unique business model, it was able to avoid big losses during the 2008-2009 financial crisis.

Even though rising interest rates and inflation could slow consumer spending, we feel Visa has many more years of growth ahead. The COVID-19 pandemic accelerated the shift to online shopping, while the easing of restrictions will spur the use of credit and debit cards to pay for airline tickets and hotel rooms.

Visa is also making shrewd acquisitions that enhance its expertise in new areas, such as buy-now-pay-later payment plans. These moves will let it stay ahead of smaller firms with potentially disruptive fintech (the combination of financial services and technology services). 

The company also continues to reward investors. In the first half of fiscal 2022, it spent $7.05 billion on share buybacks. It still has $9.8 billion remaining under its current authorization.

Visa has also increased its dividend each year since the 2008 IPO.

Visa is a buy for long-term gains.

Spotting good companies for long-term investments lets you profit from long-term growth in the economy

For decades — as long as I’ve been involved with the stock market — some brokers have claimed that they favour the “buy and hold” investing strategy in principle, except when the market was so treacherous and unpredictable that their clients had to indulge in short-term trading, options or whatever to make any money. Continue Reading…