Will Canadian capital markets disappoint investors in 2020?

While a recession may not be likely, institutional investors can expect dampened performance in many capital markets heading into 2020, according to Bill Yun, executive vice-president at Franklin Templeton’s multi-asset solutions business, at an event in Toronto on Tuesday.

Forward-looking expectations for capital markets from Canadian government bonds to emerging market equities are all in positive territory, according to the investment firm’s 2020 outlook, but most are expected to be somewhat muted compared to their performances over the last 20 years, he said. “If you’re looking at your typical 60/40 portfolio, you may not be able to achieve your required rates of return.”

Read: What headwinds do stocks face going into 2020?

However, even with modest growth and inflation expected globally, it would take some kind of exogenous shock for a recession to actually occur, he added.

Underpinning that muted but positive outlook, central banks have broadly proven amenable to taking action to push the economy forward. Meanwhile, uncertainty — whether protests in Hong Kong or Argentina, impeachment proceedings for U.S. President Donald Trump reaching a new stage or the various potential outcomes of Brexit — is causing hesitation on a macro level.

Trade export volumes are in a slump worldwide, with much of the turmoil due to the trade dispute between the U.S. and China. “It’s certainly going to impact business confidence,” said Yun. “And if you don’t have a lot of confidence . . . around where this trade war is going, that’s going to lead to reduced spending, which could impact our capital investments, which could impact profits, job growth, wage growth, etc.”

With other areas of the economy struggling, Yun noted the U.S. consumer, in its current relative health, is likely to support further expansion. But here in Canada, the consumer may not be up to the task, said Ian Riach, senior vice-president and portfolio manager at Franklin Templeton’s multi-asset solutions business, also speaking during the event.

Read: Global institutional investors sober as markets rally: survey

Indeed, Canadian institutional investors may want to re-examine whether their portfolios are suffering from a home bias, overexposing them to the health of the Canadian economy, which could prove relatively lacklustre in 2020. Franklin Templeton expects the Canadian dollar to be weaker in 2020, said Riach, noting the firm is also taking a cautious tone on Canadian stocks and is neutral on domestic bonds.

“[Canada’s] where we’re deviating most from our long-term strategic mix.”

Overall, capital expenditure is down, primarily due to the downturn in the oil patch, he said, but also due to pressure from decreased spending by manufacturing sub-sectors like automobiles. “These trends don’t bode well for economic growth in our minds.”

Notably, Canadian consumers are far more debt-ridden than their American counterparts, said Riach. “With capital expenditures down, the heavy lifting for growth has largely been borne by the Canadian consumer, but we’re not sure how much longer than can be sustained.”

Read: Study finds Canadian home country bias in equities hurting pension funds