The past won’t repeat; go for a dividend

“We’re not double-dippers at Scotia Economics. We believe that we are on the road to recovery, we just believe that we’re not going to go back to before the recession began,” he said. “If you follow familiar approaches and strategies—all the familiar things that you did before the recession began and avoid the unfamiliar—you’re probably following a losing strategy over the next 10 years.”

Growth is slowing to 2% to 2.5% in North America—quite a contrast to the days under Alan Greenspan’s Federal Reserve Bank, when it was thought the economy could cruise along at 3% to 3.5% growth rates before hitting inflationary speed bumps.

“We saw, at the beginning of the year, a burst of activity related to inventory accumulation, of course we had pedal-to-the metal fiscal policy and lifetime lows in interest rates. All of those things gave us a bit of a head fake.”

Reality check
No more, according to Jestin. “The shift from better-than-expected economic news to somewhat worse-than-expected economic news is just simply reflecting the fact that inventory accumulation doesn’t go on forever.”

The good news: “next year, interest rates are going nowhere fast,” he said. On the other hand, “you’re not going to see another broad thrust of fiscal stimulus.”

The result? Two percent growth in North America, less than that in Europe, and even less in Japan. Of course, there are slowdowns in emerging markets, too. “It will be terrible next year” Jestin grinned. “China’s growth is going to slow to about 9%, India may fall to 7% and Brazil to 5%.”

Again, the news is both good and bad. That benefits parts of Canada—particularly the West—because of overseas demand for resources, except for natural gas, which is not a global commodity. “Bet on cold weather forecasts, but that’s like betting exclusively on economic forecasts,” he said.

But it doesn’t benefit manufacturing. Despite a rebound in auto sales, “let’s be rational about expectations,” Jestin said, predicting that there will be fewer cars sold in 2015 than at the pre-recession peak. One reason is that “we’re building cars that last longer.” Another is that older drivers buy cars less frequently. Finally, the market penetration is pretty high in North America.

Last year, China produced more cars and trucks than the U.S., Canada and Mexico combined.

That has implications for North American manufacturers. They can’t compete on price, so they will probably compete on skills and service, including by becoming distributors for offshore manufacturers. But manufacturing jobs will not increase.

Something old, new and “green”
Still, opportunities exist, providing one recognizes some fundamental trends. The first is the aging population. Retirees will want their lifestyles catered to, but their retirement also means a labour shortage.

In addition, “the green revolution is very far from over,” moving beyond the “talk” stage to the “work” stage, according to Jestin. “First, we see a shift to improving energy efficiency, and second, to improving environmental outcomes.”

With that shift producing more jobs than those displaced in manufacturing, three themes emerge: the new world, the old world and the green world. They are seen as “where all the challenges lie, but that is where all the investment and business opportunities lie as well,” he said.

Within this macroeconomic outlook, CIBC chief economist Avery Shenfeld predicted an even lower growth rate—below 2%. “By the standards of most recoveries, this is a half-speed recovery,” he said. “Where are you going to park your money in that sort of environment?”

In a world of low interest rates, all the safe havens are sporting T-shirts: Got here before you. Yes, rate rises are a ways off—perhaps not till 2012. Still, he asked, “does that make it worthwhile to buy a 10-year U.S. Treasury at something like 2.5%?”

He cited three potential reasons. One is deflation. But rapid disinflation tends to affect countries with high inflation rates rather than those with low ones. Japan is the exception to the rule. “I wouldn’t place huge bets that you’re going to be rewarded in the bond market from a further decline in inflation.” Shenfeld argued.

Second, under quantitative easing, the U.S. Federal Reserve will likely buy U.S. government bonds. Studies estimate that the impact of quantitative easing is a 20-basis-point reduction in 10-year yields. US. 10-year yields have already contracted 25 bps. Bond markets have priced in quantitative easing.

“The final thing that could help the bond market is if the stock market is the worst of all places to invest,” he noted. “Instead, I think the equity market is actually sitting on pretty firm ground.”

Firm ground, but not bull market ground. According to Shenfield, equities will “creep higher rather than moving explosively higher over the next year-and-a-half. But I think the all-in returns, including dividends, will in fact beat the return on bonds.”

Scot Blythe is a Toronto-based financial freelance journalist.

(10/29/10)