Canada’s top economists, strategists and portfolio managers expect tepid growth for Canada in the near term, which will result in continued low interest rates, modest inflation and low equity market returns over the next few years, according to a new survey by Willis Towers Watson.
Its annual Survey of Investment Perspectives, published this week, showed that the majority of respondents expect the Bank of Canada’s overnight rate to remain at historic lows through 2016, hovering around 0.50%, with an increase to 1.50% expected over the medium term (2017-2020).
Read: Bank of Canada holds key rate at 0.5%
Respondents to the survey also predict continued low oil prices, with price per barrel expected to increase and then remain close to $60 until 2020 when respondents predict a further increase to $75. They are equally cautious about the Canadian dollar, with predictions that it will trade around $0.80 U.S. through 2016 and will see a modest uptick to $0.85 U.S. over the medium term.
“Lower for longer seems to be the general consensus of those who participated in our survey,” said Luiz Farias, Willis Towers Watson’s Canadian head of investments. “Continued low oil prices and a weak Canadian dollar may be a tailwind for exporters but, are definitely negative for Western Canadian businesses.
“As a consequence, we are starting to see some regional imbalances. Provinces dependent on mining and oil will continue to experience muted growth, while the traditional manufacturing provinces are likely to see relatively stronger employment.”
Read: Dismal start to 2016 signals more challenges ahead
Discussing the challenges for defined benefit (DB) pension plan sponsors, survey respondents predict annualized returns of just 6.5% for at least the next 10 years. “DB plan sponsors have to make their assets work harder and consider alternative investment strategies,” said Farias.
“Identifying and investing by macro themes is one avenue that sponsors should explore. Themes such as demographics, competition for natural resources, transforming economies and disruptive technologies can be used to frame investment decisions across asset classes to identify countries, sectors and companies that will benefit from them.”
Willis Towers Watson suggests that modest returns and continuing low interest rates will also have implications for defined contribution (DC) pension plans. Plan members who are looking to retire in this environment could be faced with the reality of higher annuity costs and a reduced source of retirement income. For employers that are concerned about a skill gap created by retiring workers, delayed retirement could be beneficial, added the report.
“The forecasts will impact DB and DC plan sponsors alike,” said Farias. “DB plan sponsors will need to explore all alternatives to achieve better risk-adjusted returns. Those that are willing to step outside of the traditional options, like publicly traded securities, may be more likely to optimize returns during what appears to be a prolonged period of muted growth.
“DC plan sponsors should monitor aggregate savings rates and the projected age at which employees will attain sufficient savings to retire. This will help plan sponsors provide targeted communications and education to better manage their workforce planning.”