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Now for our 2015 Financial Forecast

US Equities over Canadian Equities – Again we expect the US equity market to outperform Canada. While we do not expect a repeat of the outsized U.S. returns that have occurred over the last two years, we do expect US equities to produce decent single digit returns (7-9%).  Last year we had thought that returns in the U.S. would be mainly based on earnings growth as earnings multiples seemed to be at a reasonable level. Analysts were expecting 10% growth in earnings and as it turns out earnings grew about 7% despite currency headwinds and continued global strife.   The multiple also expanded a bit to deliver the roughly 13% US$ return. The major concern in Canada revolves around oil. If oil decides to hang around the $50 – $60 level it looks like earnings estimates could come down and the expectation of 16% earnings growth that is currently in the market could easily fall.

Canadian Equities – As noted above we still expect positive returns for the TSX in 2015, but oil and the trickledown effect of its precipitous decline especially in western provinces is the big question mark.   Valuations for many of the dividend payers (especially the banks) continue to remain reasonable especially in a low interest rate environment and could have some multiple growth and earnings growth to pick up the slack from a poor energy market.. 

Sectors to Outperform –Two stocks with some cyclical US exposure we think will do well next year are 3M and Allegion as the US economy continues to gain traction. Health Care stocks could be another solid performer next year as the fears around Obama Care subside, mergers continue and demographics are favourable. Another name that we see both strong earnings growth and dividend growth in 2015 would be Apple.

Oil  – It would be great to say that we see a big rebound this year but we think we are going to stay at reasonably depressed levels for some time. The question is whether approximately $50 oil is a new price driven by supply and demand, or the result of more complicated components of the market. While we don’t see a bounce back to $100 oil, we still believe that the pendulum has swung too hard in one direction, and we will see some bounce back from here. However, the bounce back won’t be as large as many predict. Hopefully we have seen the worst for oil and we will be able to capitalize on a couple of tradable rallies but we don’t think we will have many major long term holdings in the sector this year. We will also be looking at related industries such as Western Canada real estate and some potential impact to bank earnings.

Currency – USD/CAD  – Despite all the positive momentum in the US we think the majority of the move off the bottom has now occurred and we are mostly due for a pause. The U.S. dollar bottomed in late 2011 and has gained 23% adding significant gains to our U.S. equity holdings. The range we are looking at is $0.80 to $0.90. The expectation for further gains in the US dollar will continue as the longer term trend for the US is positive, the improving economy has helped bolster the U.S. government balance sheet and net export numbers continue to improve providing less of a headwind.  This currency trend will put additional pressure on Canadian investments vs. US investments – but we believe this pressure will be pretty small at this stage.

Interest Rates  – Similar to our views in 2014, we do not believe there will be significant moves higher on either the short or long end of the curve, but we do see some small increases later in the year. Global economic growth continues to have its challenges, deflationary concerns abound. Developed nations’ interest rates will remain near historical lows.

Bonds  – Do higher interest rates mean poor bond returns? The reality is that it depends on how you manage bonds. The first issue relates to higher interest rates. How much higher? We believe this will be limited to small increases. With the yield curve, do we focus on the short end (1 year or overnight) or the long end (10 years plus)? Much of the ‘flattening’ has already happened with sizable declines in long term rates in 2014. We see small changes at both ends. What about Government bonds vs. Corporates vs. High Yield? These decisions will shift throughout the year.

At TriDelta, we believe in an active bond strategy in order to take advantage of the shifts within the bond market, as much as the general trend. For 2015, this would likely mean taking advantage of some late 2014 trends. High yield bonds had a weak end of the year with worries in a few corporate sectors. We have taken some gains on Government Bonds of late, and will be looking at some Corporate and High Yield names that will benefit from a robust domestic economy. As for moving to the long end or short end, we have leaned longer and benefited by this for most of 2014. With the 10 year Canadian yield currently at 1.82%, we are taking a small pause as we feel there may be a better entry point for long bonds than we are at today.

Global markets – At TriDelta our focus is firmly on North American markets (US & Canada) and this for good reason as it is where the best risk adjusted returns have been in recent years. We do however monitor global markets and relative opportunity, and it is likely that our portfolios will reflect more of a global flavour as and when opportunities arise.

Global capital markets remain largely unattractive relative to the US & Canada. Most strategists cite the poor global GDP growth, which appears to have been priced into equity markets to a significant degree and this is a pre-requisite for future opportunities, particularly if, as and when growth & stability returns. For now we believe better risk adjusted opportunities exist in North American markets.

The Eurozone for example is fraught with uncertainty as they struggle with a multitude of issues such as high unemployment, Greece potentially exiting the euro and the more recent Russian risks and fallout. As a result these markets trade at a discount and may be headed even lower in the near term.

The emerging markets also remain an area of concern although we did invest a small amount due to its relative valuation in 2014. We do see opportunities particularly in markets that are commodity importers or energy importers.

Alternative Investments  –  Our view is that new investment asset classes are always worth reviewing. If we find something that we are comfortable with, we will incorporate it into our overall recommendations. If regulatory changes come about in Ontario in 2015, we will be able to offer some of these solutions to non-accredited investors as well. These strategies can include real estate, mortgages, business lending, factoring, and many others that emerge over time. With professional due diligence, there is an ability to find alternative income strategies that fit an investor’s goals, and that are not closely correlated to other investment markets.

We expect 2015 to be a positive year overall for clients, but with lower returns than most clients enjoyed in 2014. While these are predictions for the year, as information changes we will adjust our approach to take advantage on behalf of our clients. The key is to provide an investment portfolio that is open to all investment options available – and not limited to a small subsection of opportunities. In tandem, we need to be consistent with each client’s profile, what their goals are, and what their risks are. This investment discipline will serve clients well in sunny and stormy conditions. We are quite certain that 2015 will see some of both!

This report was written by the TriDelta Investment Counsel – Investment Management Committee.

TriDelta Investment Management Committee

Cameron Winser VP, Equities

Edward Jong VP, Fixed Income

Ted Rechtshaffen President and CEO

Anton Tucker Executive VP

Lorne Zeiler VP, Wealth Advisor

For more information – please contact Ted Rechtshaffen, President and CEO, TriDelta Financial at 416-733-3292 x221 or tedr@tridelta.ca