Canada's 2020 outlook

Learn what asset managers think will happen next year

Ruth Saldanha 31 December, 2019 | 1:11AM
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Vanguard Canada
Canada a bright spot among developed economies

For 2020, Vanguard forecasts continued slowdown in global growth – except for Canada. Vanguard sees Canada as a bright spot among developed economies, with a growth forecast at 1.6%. The Eurozone and U.S. growth forecast are both at 1.0%, while China is at 5.8%.

“Investors should prepare for a lower-return environment over the next decade, with periods of market volatility in the near-term. We expect uncertainty stemming from geopolitics, policymaking, and trade tensions to undermine global growth over the coming year,” said Todd Schlanger, senior investment strategist at Vanguard Canada. “For Canada, the picture is slightly rosier, with a resilient labour market and robust wage growth leading to growth levels stronger than most developed economies in 2020, with a slight improvement over 2019.”

Over a ten-year-period, Canadian equity market returns are forecast to be in the 3.5%-5.5% annualized range, with Canadian fixed income likely to be 1.5%-2.5% annualized over the same period. These returns are lower than the prior ten-year period, predicting a more challenging market period ahead for investors.

“As we enter into this new age of uncertainty, Canadian investors should prepare for volatility that could result from a lack of clarity on trade and slowing economic growth in the U.S. that may negatively impact Canadian exports and weaken commodity prices. Despite this, we see stability in the domestic housing market and favourable conditions relative to other developed markets with a better capacity to absorb an unexpected economic shock. Investors can’t control the markets, but they can control their investment strategy. By maintaining a diversified portfolio, keeping investment costs low, and focusing on the long-term while tuning out the daily noise, investors can improve their chances of investment success,” Schlanger said.

Bank of Montreal
Brian Belski, Chief Investment Strategist
Canada as a value play? YES! 

For the past several years, our overriding theme for Canadian equities has been, “As America Goes, So Goes Canada.” Granted, while we believe the U.S. will continue its secular trend of outperforming Canada in 2020, our overall theme for Canada relative to U.S. positioning remains very much intact. Canada as a value play? We think the answer is a resounding “YES,” especially when examining non-resource sectors.

Belski is underweighting healthcare (he prefers the U.S.) and utilities (Rising yields, low organic growth and high payout are a tough combination. Furthermore, Utilities rarely post back to back years of outperformance, he says). He is overweight in communication services, energy and financials. Here’s why:

Canadian Energy has underperformed the broader TSX for three consecutive years, representing its worst three-year period of relative performance from 1997 to 1999. We continue to believe WTI remains stuck in a longer-term range – a perceived negative for Canadian Energy stocks. However, when solely examining historical price performance trends, the decade of the 1980s is the only period when Energy stocks underperformed the TSX for more than three consecutive years. In fact, the average relative performance following three or more consecutive years of underperformance is +1.6%. Furthermore, when excluding the 1980s, Energy stocks exhibit an astounding +14.9% outperformance relative to the TSX. Therefore, given our continued Canadian Energy favouritism relative to U.S. Energy (thanks to heightened cash flow, dividends and management prowess), we believe there is a very good chance that the sector can snap its string of negative performance in 2020.

Given the sector’s outperformance, cash flow, earnings and dividend prowess, we remain quite frankly “mind-boggled” as to the overwhelming negativity encompassing the financials sector. As such, we remain overweight Canadian Financials and instead choose to focus on the adage of, “Don’t let the nonfacts get in the way of a good story.”

Desjardins Global Asset Management
Expect between 4%-6% returns from the TSX, 3% from bonds

Desjardins expects Canadian GDP growth to slow down to 1.5% in 2020 from 1.6% in 2019, while the U.S. economy will grow by 1.6% in 2020, a significant slowdown from the 2.3% growth registered in 2019. Inflation will remain below 2% in both Canada and the U.S. at 1.7% and 1.9% respectively. Desjardins expects no change from the Bank of Canada and the Federal Reserve as far as key lending rates are concerned. Yields for Canadian bonds maturing in 10 years should stay fairly low, with a forecast for the end of 2020 at 1.5% (currently at 1.66%).

Expected returns in 2020:

Money markets


Canadian Bonds




S&P 500


Source: Desjardins

Fiera Capital
Candice Bangsund, Vice President and Portfolio Manager 
Underweight fixed income, overweight equities

Our expectation for an eventual détente (and potentially de-escalation) in the US-China trade war should revitalize global growth prospects heading into 2020 and remove a key overhang that’s been plaguing sentiment and growth. These favourable developments will be compounded further by the lagged impact of reflationary efforts from major central banks that ultimately prove successful in rejuvenating growth, while policymakers have pledged their unrelenting support moving forward.

Underweight fixed income
We expect yield curves to steepen, with only modest repricing at the short end of the curve as policymakers pursue a sidelined approach. While central banks are likely done cutting rates (barring a severe deterioration in the macro backdrop), the bar for rate hikes remains high as policymakers maintain an increased tolerance for higher inflation until expectations become well-anchored. Meanwhile, the improved growth backdrop that fuels a modest revival in inflation expectations is expected to place upward pressure on the long end of the curve. That being said, the backup will be fairly modest by historical standards and will not destabilize economic or financial conditions, thanks to the accommodative central bank impetus that anchors rates at the short-end of the curve. What’s more, bond investors have largely exaggerated economic softness in 2019 and bond bulls could find themselves in a vulnerable position as macroeconomic tensions subside, with increased clarity on the global backdrop sparking an exodus out of bonds that are overvalued, overbought, and overcrowded – with the unwind accentuating the upward move in bond yields. In this environment, we maintain our underweight allocation to fixed income. Within the asset class, we maintain a short duration positioning, while also looking further up the risk spectrum towards spread product and inflation protection – both of which should thrive in the pro-cyclical environment of negligible recession (default) risks and rising inflation expectations.

Overweight equities
Equities have been resilient in the wake of the flurry of trade headlines and geopolitical risks this year. Year-to-date gains have predominately been driven by multiple expansion, whereby investors bid-up what they were willing to pay for equities given the string of pro-growth measures from global central banks and speculation for an amicable outcome on trade.

Looking ahead, we expect equity markets to continue grinding higher on the combination of both multiple expansion and earnings growth. Notably, stimulative central bank policies will help to nurture the recovery and extend the duration of the expansion, which should ultimately increase what investors are willing to pay for equities. Meanwhile, we expect earnings to play a more meaningful role going forward and momentum should improve on the back of a reinvigorated global growth backdrop. With so much gloom on the state of the economy, the bar is low for upside surprises to earnings forecasts and accordingly, equity prices. And while valuations have indeed risen in 2019, they are not yet in threatening territory, especially given the low (and in some cases, negative) interest rate environment that warrants above-average valuations. Moreover, with on-edge investors spending most of 2019 piling into cash and bonds, there’s plenty of dry powder prime for redeployment back into the equity space should investors embrace that the worst is indeed behind us.

The Canadian equity market remains an appealing place to invest, with the S&P/TSX trading at a steep discount to the S&P 500. With close to two-thirds of the index concentrated in cyclically-levered, value sectors, the TSX is a prime candidate for further upside from here.

Blackrock Canada
Kurt Reiman, Chief Investment Strategist
The improved global cyclical backdrop, ample fiscal and monetary policy space, very reasonable valuations and a conservative estimate for 2020 Canadian earnings suggest a potential for Canadian equities to outperform

Our first theme, Growth edges up, heralds a modest pickup in global growth. This provides a decent tailwind to Canadian economic activity after a year of steadily slowing global growth. We think Canadian growth can remain steady next year, especially if industrial production and manufacturing have reached a bottom and trend higher.

Our second theme, Policy pause, calls for economic fundamentals to drive global markets, rather than monetary surprises or fiscal stimulus. We think the same frame broadly applies to Canada but would note that Canada has greater monetary and fiscal policy flexibility than other developed markets in the unlikely event the economy hits a rough patch. The Bank of Canada (BoC) now boasts the highest policy rate in the developed world and never resorted to balance sheet expansion. This gives the BoC much more ammunition to respond to soft economic readings at a time when global financial conditions have already eased.

We have been skeptical of Canadian stocks and their potential to outperform the U.S. in recent years but now take a more constructive view. The improved global cyclical backdrop, ample fiscal and monetary policy space (and a willingness among policymakers to use it), very reasonable valuations (in this edition we also upgrade value to neutral) and a conservative estimate for 2020 Canadian earnings suggest a potential for Canadian equities to outperform next year.

We would also note that the dividend yield of the S&P/TSX Composite Index is nearly twice the level of the 10-year Canadian government bond yield, which further enhances the allure of equities. Stable-to-firmer oil prices, a modest uptick in global economic growth and a moderately pro-risk investment stance would tend to support the Canadian dollar. However, there’s a chance the Bank of Canada could cut rates if it viewed currency appreciation as a threat to the economy. Therefore, we expect the Loonie to trade in its long-standing range between the mid to upper 70 cent level. Given this, we retain our preference for unhedged currency exposure to global stocks as a structural volatility dampener for Canadian investors.

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Ruth Saldanha

Ruth Saldanha  is Editorial Manager at Follow her on Twitter @KarishmaRuth.


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