Continue with your investment program, including regular additions to your small-cap funds, if these suit your temperament and objectives. But maintain a balance between conservative funds and aggressive funds.
Our current thinking
Global economic growth, which began to decelerate in the second half of 2018, is likely to wane further as we move into 2019. Among the factors that have contributed to this trend are rising interest rates, falling stock prices, European political and trade tensions, troubles in emerging markets, and the rise of protectionism.
In the US, the fiscal stimulus provided by tax cuts boosted the economy and corporate profits last year. In 2019, this stimulus will begin to wear off.
All these factors have caused many economists to decrease their growth expectations for 2019. TD Economics, for example, forecasts the world’s real gross domestic product will rise 3.4 per cent this year, down from estimated growth of 3.7 per cent in 2018, and actual growth of 3.8 per cent in 2017.
But the TD economists also note that “this figure still depicts a pace that is slightly above the global economy’s long-term running speed”. So the world economy may not be in as rough a shape as the decline in world stock markets in recent months would have you believe.
Mind you, the factors noted above still pose a risk to the global economy. Chief among these are protectionism as exemplified by the China-US trade spat.
But, assuming the trade tensions between China and the US can be satisfactorily resolved, the outlook for the overall global economy in 2019 is not all that bad. Such a backdrop could support a rise in stock prices, but caution is warranted in view of the risks and uncertainties that currently prevail.
Investment strategies to adopt
Investors with investment time frames of at least five years should continue to invest gradually in equities. Emphasize Canadian stocks, which have underperformed US stocks over the past year. In fact, if you have several years to retirement, you might want to increase your investments in more aggressive funds if they suit your temperament for risk. We suggest IA Clarington Canadian Small Cap and Sentry Small/Mid-Cap Income. But keep these aggressive funds to a manageable portion of your portfolio.
We feel that up to 25 per cent of your equities portfolio is sufficient for foreign equity funds. By emphasizing Canadian equities, you avoid the possibility of large losses due to currency fluctuations if you invest in unhedged foreign equity funds. Also, Canadian dividend income benefits from special tax treatment that you don’t get when investing in foreign equities.
Those who have invested in US mutual funds have done relatively well this past year. Our US funds have suffered less than those in Canadian and other markets. But that may be more of a reason to go easy on these funds and emphasize those in Canada and elsewhere.
Very conservative investors should stick with diversified offerings in all markets.
This is an edited version of an article that was originally published for subscribers in the January 18, 2019, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.
Money Reporter, MPL Communications Inc.
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