Investors can expect North American stock markets to rise for the third consecutive year in 2011, according to TD Waterhouse’s Investment Outlook. The U.S. equity indices will lead, with low double-digit returns, while the primary Canadian index should post high single-digit returns.
Acknowledging that macroeconomic issues will continue, chief portfolio strategist Bob Gorman says: “In a tug of war between macroeconomic fears and solid fundamentals, the latter should prevail in 2011.”
Overall U.S. economic growth is expected to be in the 2% to 3% range, boosting corporate profits, but avoiding a much-feared inflationary environment. That should keep monetary policy loose, which will inspire investment.
“In the wake of the mid-term election, a new balance of power in Washington should, on balance, make for a more supportive environment from an investment standpoint,” the TD report says. “It is no accident that the third year of the Presidential term has historically generated the highest returns within the four-year Presidential Cycle, a pattern that may re-assert itself in 2011.”
Small cal stocks, which tend to lead a recovery, are now seen to be overpriced in the U.S., suggesting large-caps will lead in 2011. Financial stocks in particular will benefit from a recovery in confidence, while consumer goods will attract conservative dividend-focused investors.
In Canada, the energy sector will benefit from a strengthening global economy, after lagging the rest of the market through 2010. Gorman also likes the banks, predicting “solid earnings and dividend growth”.
The Canadian bond market will see yields creep higher, as investors move assets out of fixed income and into equities. Returns for 2011 will likely be limited to between 1% and 3%. High quality corporate bonds will outperform government issues as corporates did not receive as much attention during the rush to safety.
Outside of North America, Gorman expects Northern Europe to be one of the stronger regions, as equities there currently have low price-to-earnings multiples and higher dividend yields, thanks in large part to the gloom that has hung over the continent for the past two years.
Japanese markets may even snap out of their long-term funk, and generate high single digit returns.
The page may have turned for the emerging markets, however, as inflation fears will drive the central banks of India and China to tighten monetary policy. Economic growth will still be in the high single digits, though, and corporate earnings should rise.
“Overall, China, which lagged other emerging markets in 2010, will likely outperform the group in 2011, with a low double-digit return, propelled by solid valuations and earnings growth,” the report says. “Emerging markets, as an asset class, should record high single-digit returns in 2011.”
(11/29/10)