Where should you put new money now?
Continue to add to stock funds, emphasizing diversified, conservative offerings. Longer-term, risk-tolerant investors may want to be more aggressive with specialized funds.
We think the argument for a continuation of the bull equity market is compelling, especially since there are few attractive investment alternatives to stocks. Low interest rates, and the likelihood that rates will move up in 2015, after all, make fixed-income investments unattractive.
That said, risk often increases when stock markets rise, and there are good reasons for caution right now. To start with, the economic divergence between the U.S. and other major global economies remains unsettling. European growth continues to be sluggish, and Italy is actually in recession. Japan, too, entered recession in the third quarter, but the country is expected to report feeble growth for the year. Economic growth in China fell to its slowest pace in five years during the third quarter. And it’s likely the country will undershoot its official 2014 growth target of 7.5 per cent.
Sluggish growth in Europe, Japan and China will certainly have a negative impact on North American growth, though the extent of that impact remains open to debate. But some of that impact will be offset by lower oil prices, which will provide relief for consumers and hopefully boost domestic demand.
Meanwhile, the general outlook for the U.S. economy remains positive, and Canada should benefit from increased business activity there.
Strategies to adopt
Longer-term, risk-tolerant investors may want to become more aggressive in certain areas. For example, the decline in oil prices has presented a longer-term buying opportunity in beaten-up energy stocks, in our view. Over time, we expect stronger global growth, particularly in emerging markets, to increase demand. And if oil remains below $70 a barrel, look for producers to cut back on supply, thus bringing supply and demand into better balance. We recommend Mackenzie Canadian Resource Fund for its exposure to energy stocks.
Contrarian, risk-tolerant investors may also find some appeal in gold equities, which have recovered a bit lately, but are still well in negative territory compared to five years ago. We recommend RBC Global Precious Metals Fund for exposure to gold.
More conservative investors, those with less time, should stick with the conservative, diversified funds in our monthly Planning Guide. These include Beutel Goodman Canadian Equity, Franklin Bissett Canadian Equity, Mac Ivy Canadian and Mawer Canadian Equity Funds.
Among foreign equity funds, Capital Group Global Equity and Mac Ivy Foreign Equity are good conservative choices.
Canadian Mutual Fund Adviser, MPL Communications Inc.
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