Investment opinion: the next 180 days

On this page, we outline what we expect the economy and stocks to do over the next 180 days. This assists us in listing 25 stocks that we expect to beat the market and 25 stocks that we expect to lag behind over this period.

Building wealth takes a long time. It involves saving and investing money, year after year.

Some young people are horrified at the thought of how long it might take them to build their wealth. Some say, “By the time I have enough money, I’ll be too old to enjoy it.” But in fact, what’s a pleasure at one age—like dancing until dawn—is replaced by other pleasures—like attending a symphony concert.

Still, for young investors in a hurry to ‘get rich quick’, we make short-term predictions four times a year. We make a 180-day forecast for the economy and stocks. We pick 25 stocks that we expect to beat the market over that period and 25 stocks we expect to lag behind. Just remember to put little faith into predictions, including ours. Predictions are the weak link in the investment process. Billionaire Warren Buffett has said, “Stock market forecasters exist to make fortune tellers look good.”

Canada and World Markets Economic Outlook

Canada’s GDP is expected to grow by 2.3 per cent in 2014. (GDP, or gross domestic product, is the value of the goods and services an economy produces in a year). That’s partly due to a snapback as the weather improves. More important, Canada is expected to profit from an upswing in the economies of its trading partners. Our top 10 trading partners buy 90 per cent of Canada’s exports.

The United States and the United Kingdom are expected to do the best of the G7 (Group of Seven advanced countries). Their GDPs are expected to grow by 2.8 per cent in 2014. With 77 per cent of Canada’s exports going to the U.S., faster growth there adds to our growth. The same is true for the U.K., Canada’s third-largest trading partner.

China is Canada’s second-largest trading partner. In 2014, its GDP is expected to jump by 7.2 per cent. That’s the most of the world’s major economies. But its second-place ranking falls to third—behind the EU (or European Union) countries as a group.

The recent trade agreement should further raise trade with the EU. It’s growing faster this year. Even the Euro-zone has turned around. After a recession last year, the European nations that share the euro are expected to grow by 1.1 per cent in 2014.

Similarly, the recent trade agreement with South Korea should raise trade with our eighth-largest trading partner. What’s more, South Korea’s GDP is growing at a relatively fast 3.3 per cent.

The Canadian and American economies could grow faster than expected. That’s because some companies are sitting on piles of cash. If they start to invest more vigorously, economic growth would pick up. Alternately, cash-rich companies could reward shareholders like you with dividend increases, one-time special dividends, or share buybacks.

Another factor that could assist the Canadian economy in 2014 is the lower loonie. It has fallen to 90 U.S. cents, down sharply from above par. A lower loonie makes Canada’s exports more affordable in foreign markets. And some commodity prices have recovered. This can raise Canadian exports, of course. Meanwhile, the lower loonie makes imports more costly. This leads to what’s known as ‘import substitution’. Rather than travel abroad, for example, more Canadians would travel within Canada.

Faster economic growth should let Canadian companies raise their earnings. As we often say, company profits are the main factor in setting stock prices in the long run. Benjamin Graham, the father of fundamental stock analysis, once said that in the short run, the stock market is a voting machine. But in the long run, it’s a weighing machine. With earnings likely to grow in 2014 and interest rates likely to remain low, we’re cautiously optimistic that stock prices will rise further. Just remember that a ‘correction’ could set back prices by 10 to 20 per cent.

Keep in mind some risks for stocks

The stock market is forward-looking, assessing future prospects. If the Canadian economy and company earnings do better than expected, stock prices would likely rise. Still, there are also several risks that could hurt Canadian stocks.

One risk for Canadian stock prices is a potential fall in U.S. stock prices. After all, the Canadian market usually follows the U.S. market. After such a strong year for stocks in 2013, a pullback in U.S. stocks could happen this year. If so, Canadian stocks would likely get sideswiped.

A second risk is that some companies’ sales may fail to grow much. While many companies earned more in recent years, these earnings came about from cost cutting—not from higher sales. Without a pickup in sales, it’s harder for companies to keep raising their profits quickly in a sustainable way.

You need to accept some risk to profit

Unforeseeable risks also exist. What will happen in Ukraine? Will Iran abide by its agreement not to produce an atomic bomb? Will pipelines link Alberta’s oil sands to refineries and export terminals? The fact is, the world’s an unpredictable place. We’re bound to face issues of which the outcomes are difficult or impossible to predict.

But if you wait for a risk-free time to invest, then you’ll always be sitting in cash instead of putting that cash to work. Should a risk-free environment appear, it might be time to sell. After all, when things can’t get any better, they can only get worse.

Given some risks, it’s best to focus on ‘dividend aristocrats’ that raise their dividends each year. Most of the 20 stocks that we expect to beat the market are dividend aristocrats. They’re apt to rise. Their growing yields attract income-seeking investors who bid up their prices. Dividends give you cash to take advantage of bargains. And your dividends give you a return even when stock prices go nowhere.

Remember to diversify across the five economic sectors. Also remember to diversify within each economic sector. Within the financial sector, for instance, you might buy one bank, one life insurer and one mutual fund company.

Invest gradually. That way, when prices are higher, your purchases buy fewer shares. When prices are lower, your purchases buy more shares. Such dollar-cost averaging lets you profit. You end up buying most of your shares at below-average prices.

The long-term outlook for stocks is favorable. Keep buying high-quality, dividend-payers for long-term gains and rising dividends.

 

The Investment Reporter, MPL Communications Inc.
133 Richmond St.W., Toronto, ON, M5H 3M8. 1-800-804-8846

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