Money managers predict equity reversal in 2003
09-01-2003
Jim MacDonald

The survey, released today, was conducted by Mercer Investment Consulting, a firm based in Toronto. Mercer asked 89 institutional investment managers, including 49 from Canadian firms, last month for their outlooks for the economy and capital markets in 2003.

Canadian institutional money managers were decidedly bullish on equities for 2003, but had mixed outlooks for bonds.

Here are highlights of the 2003 Manager Forecasts for capital markets from the Canadian money managers:

* The returns of bonds are expected to become less attractive than those of equities in 2003. As for predicted returns for bonds, Canadian managers produced a range from minus 4% to gains as high as 7%. The median return was 3.8%.

* The predictions for one-year returns for equity markets (Canadian, U.S. and global) ranged from 10% to 12.5%.

* The outlook was most favourable for equities in emerging markets with large-cap stocks expected to outperform small-cap issues.

Looking further down the road, Canadian managers forecasted a median return of 8% over the next five years for North American equity markets, and 9% for international markets. Bond markets are expected to produce median returns of 4.9% over the next five years. Mercer said this differential between equities and bonds is consistent with long-term estimates of the equity risk premium.

In 2002, the S&P/TSX composite index declined more than 12%, the S&P 500 Index slipped 22%, while the Scotia Capital Bond Universe Index climbed 8.7%.

The Canadian managers also had high hopes for the domestic economy. Here are some economic highlights of the 2003 Manager Forecasts:

* GDP growth of 3.0% in Canada and 2.5% globally

* Interest rates will remain stable at 3.0% for the first six months of the year, but the Bank of Canada is expected to raise rates by a total of 50 basis points by the end of the year.

* The median forecast for the Canadian dollar was 67 cents US by year-end, up from the current level of 64 cents.

* Unemployment is predicted to remain near the current level of 7.5%.

* Mergers and acquisitions will increase sharply in Canada, especially in the financial services sector.

The firms that participated in the Mercer forecast together manage approximately $10 trillion Cdn for pension funds and other institutional investors.

In a separate forecast, Mercer actuary and principal Paul Purcell doubts there will be any increase in retirement savings limits soon.

"My prediction would be that this is not going to happen on this Prime Minister's watch. He's had 10 years to do it so far and hasn't, and I doubt he'll want to make this part of his legacy," Purcell told reporters.

Last November, the Commons Finance Committee urged the federal government to hike annual RRSP and RPP contribution limits from $13,500 to $19,000. Purcell said it is more likely that former federal finance minister Paul Martin would increase contribution limits, should he become prime minister.