Over the last decade, Canadian investors have experienced solid five per cent to seven per cent annual portfolio gains, outperforming those of the previous decade, according to a report by TD Economics.
“The falling yield environment, coupled with increased risk taking, provided a constructive backdrop for investors. Among the asset classes, U.S. equities stole the show, with a 15 per cent average annual return when translated into Canadian dollars,” said the report.
“Though recent returns have been favourable, we believe that returns are poised to come down over the next decade. With Canadian and U.S. interest rates currently sitting at close to their longer-term ‘neutral’ levels, fixed income government and corporate bonds are likely to deliver more modest returns than what we’ve seen historically.”
TD said the return of equities will be dependent on expectations for corporate profit growth and the multiple investors are willing to pay for those profits.
“Our assumptions point to equity returns in the four per cent to seven per cent range on average over the next decade. With respect to Canada’s equity performance, this would mark the status-quo relative to the past 10 years. However, for the U.S., it implies a hefty moderation relative to its past showing,” it said.
“While there appears to be little scope for domestically-generated corporate profits to run much faster than GDP growth in Canada and the U.S. going forward, the ability for corporations to increase exposure to higher growth emerging markets provides upside to our estimates on profits and equity market performance.”
The report said Canadian investors have experienced impressive portfolio returns over the course of the current economic expansion.
“Though there have been bouts of weak equity returns (i.e. the oil shock of 2015 and trade tensions in 2018), investment returns have largely been supported by healthy economic growth in Canada and the U.S., as well as low inflation. Furthermore, central banks in Canada and the U.S. erred on the side of caution by keeping interest rates ultra-low well into the current cycle and then have tightened only gradually,” explained TD.
“This policy rate backdrop has resulted in continued steady gains for investors in bonds and has generated an increase in risk taking. This, in turn, has boosted equity prices, with U.S. returns averaging double-digit gains. An investor with a portfolio focused on income generation … has received an annual return of over five per cent on average, whereas an investor in a growth-oriented portfolio has received a return of over seven per cent.”