A mid-year investment outlook

It’s been a tumultuous year for equity markets. A drop in oil prices has pushed down Canadian stocks while the turmoil in Greece has sent global equity markets on a roller coaster ride.

Hayes Miller, North American head of asset allocation for Baring Asset Management, provided BenefitsCanada.com with his mid-year investment outlook.

Q. What do you think about the Greek deal?

I think the importance of the Greek deal to the European markets is grossly exaggerated. Obviously people are more concerned about the political than the economic matters here, because even a Grexit would result in the elimination of 2% of eurozone GDP, nearly all of which is confined to Greece and its bank depositors.

There is very little financial impact in the rest of Europe except that assets of the various bail-out programs are now available for other markets, which are now much less at risk from default and will be at even less risk when their populations watch what happens to Greece.

Read: 7 forecasts for 2015

Q. If Greece’s parliament doesn’t approve a deal how does that change your outlook?

It matters to Greece, but not so much anywhere else.

Q. What’s your outlook for Canada?

The Canadian market, I guess, obviously, has been relatively weak, and the Canadian dollar as well. It does strike us as being not just an energy play, but sentiment certainly treats it like an energy play. All in all the domestic economy doesn’t look too bad. But I don’t know that there’s any catalyst for investors to come flocking to Canada right now, so we have, we’ve been underweight.

Read: Global growth to pick up in 2015 and 2016: Expert

Q. What do you think about the U.S. market?

We’re currently underweight the U.S. market, we’re obviously starting from higher valuations than you find in most other markets. The U.S. has had very positive growth characteristics. We’re getting a little bit concerned about the wage growth, and the fact that peak profit margins that we saw coming out of the crisis, which were built on cutting costs and getting much higher productivity gains out of workers, has really kind of dissipated almost completely at this point.

Productivity gains have fallen quite a lot since then. Hiring is up, wage growth is up, so you know, corporate profitability has to fall. It’s probably the beginning of a period in which labour share of GDP rises and profit share of GDP falls.

Our expectation for the U.S. market is going to be flat for the rest of the year. I would expect it to be volatile, though.

Read: The outlook for Japan

Q. Where do you see value?

No question that when you talk about value, financials is numero uno in the United States and globally. The second area where you find some value, but not as much as you’d think is energy. Then you sort of have to kind of scratch around. I personally think that there’s a fair amount of value available in the telco sector but more in Europe than in the United States.

European telcos have been consolidating. The regulators have taken a view that It’s in their interest to have fewer carriers, fewer competitors in those markets and they’re allowing deals to happen that otherwise wouldn’t have been happening. We haven’t really seen a lot of it yet, but by and large all of this consolidation is very efficient, it creates greater efficiencies, and I think it really helps a lot of companies compete on a more even basis.

Their payout ratios have fallen from 90% to 60%, so their dividend levels are much more covered and much more secure. And of course, the European telco sector, which yields 4.5% to 5%, is sitting here in economies where the bond yields yield negative after five years, anyway, and so there’s a dearth of income opportunities there.