2011: Another year in transition

Plan members, as investors, appear to remain skittish and nervous about the stock market despite the relatively strong rebound in stock prices over the past two years. Notwithstanding a bump or two along the way, Canada’s TSX has regained all but about 10% of the losses it incurred in the six months following the bursting of the housing bubble in 2008 that jump-started the worst financial crisis since the Great Depression of the 1930s. Then again, who can blame investors for being reluctant to jump back in with both feet? Market participants—from the novice to the most sophisticated—have suffered two major setbacks in stock market activity since the turn of the new millennium: the tech wreck of 2000 and the world’s first major co-ordinated economic downturn eight years later.

There are a number of economic and financial factors that can be characterized as encouraging, mixed and scary at best. First, the economic recovery will only get stronger. Conditions such as the low interest rate and inflationary environment in the developed world will continue to support economic growth. In addition, stock markets will remain attractive from a value point of view. Corporate earnings have recovered and remain strong.

There are, however, a number of factors that could limit overall gains. The state of the fiscal health of many European countries—Portugal, Ireland, Italy, Greece and Spain, to name a few—is of major concern. The lack of employment growth in the United States is also of concern, and the potential of a slowdown in the emerging markets’ economic engines is not to be dismissed. The developed world’s economy can no longer depend solely on the American consumer to rescue it from the bottom. The spectacular growth of the developing world’s middle class and its strong consumption appetite—China’s in particular—have been major contributors to the North American economic rebound and are expected to continue to be so for the foreseeable future. Adopting tighter monetary policies as witnessed in China as a way of controlling economic growth to stem overheating and inflationary pressures will likely continue to dictate investor behaviour in our own market.

As plan members face daunting questions every day, it is increasingly important for plan sponsors to deal with a recordkeeper that will provide them with the proper tools and mechanisms to assist them in meeting their obligations. While plan sponsors must choose sound investments, they should also seek out essential education and tools such as investor profile questionnaires and investment selection tools.

Such tools help plan members steer the course during volatile times and keep true to their own risk profile and retirement goals. These are tools not generally available to most investors; hence, their use may be a factor in member behaviour generally being more conservative in volatile times than experienced in the marketplace as a whole.

Serge Pépin is head of investments with BMO Investments Inc.

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