By Michael Woods, CFP, CIM
Like most investors, Walter and Winnie Bago have experienced some volatility in their portfolios since the summer of 2015. While they can handle the volatility, they wonder what types of returns they can expect going forward in order to estimate their income and plan their future road trips. No one can predict the future, but the world is currently experiencing a slow-growth problem. The following excerpt from the May 2016 Odlum Brown Report, written by Murray Leith, Executive Vice President and Director, Investment Research, at Odlum Brown Limited, provides some clues as to what investors can expect.
“Excessive borrowing is the primary cause of the world’s slow-growth problem and yet the authorities keep trying to solve it by promoting even more leverage. In other words, they keep fighting the disease with the disease. Even reputable organizations like the International Monetary Fund (IMF) don’t seem to grasp the world’s challenges. In their April World Economic Outlook, ‘Too Slow for Too Long,’ they downgraded the global growth outlook once again and stated, ‘Monetary policy must remain accommodative in the face of deflationary pressures, including through additional unconventional measures if needed.’
Our heads spin when we read such statements. Do they not understand that too much borrowing caused the world’s deflationary problems? Clearly not, as they believe central banks should accommodate more borrowing. While not explicitly stated, the IMF’s support of “additional unconventional measures” likely means they are in favour of negative interest rates, a concept we consider scary.
In our view, the U.S. Federal Reserve and other central bankers are doing more harm than good, creating a riskier world. By striving to promote unattainable growth rates in an overleveraged world, they ultimately create more leverage and less stability. Consider what has happened in the corporate sector, which was in relatively good shape coming out of the Great Financial Crisis. Corporations took advantage of low interest rates and borrowed to make deals, buy back stock and invest in their businesses. But they overdid it, and many corporate balance sheets are now distressed, particularly those in the resource sectors.”
In light of the above, it is important to understand the following:
1. The return received by an investor in the stock market is a function of the price paid for the asset as well as the growth and cash flow of the company underlying the stock.
2. We have a global debt problem resulting in more resources being used by all factions of the economy to pay the interest and principal on that debt.
These points lead to citizens and corporations having less disposable income to spend on discretionary items or on growing their businesses. Given this, we can conclude that, on average, investors can expect lower returns and increased volatility as markets deal with issues that arise from excess debt.
Walter and Winnie can continue to expect positive returns from their investments over the business cycle throughout their retirement, but perhaps they should budget based on lower returns than they achieved in prior years.
Michael Woods is a Portfolio Manager At Odlum Brown Limited.
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