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Three major risks loom for Canadian economy in 2019, says report

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The Canadian economy is expected to grow about 2% -- roughly in line with central bank estimates, but several risks loom, says the 2019 Global Market Outlook from Russell Investments.

The report cautions that the threat of “triple C” – consumption, crude oil and competitiveness – will be critical in shaping the outlook for 2019 and beyond.

On the first point, about 60% of Canadian economic output is attributed to personal consumption, which is highly correlated to housing trends which are slowing.

Secondly, the report says the price of Canadian Western Canada Select (WCS) crude oil has become increasingly volatile because of problems dealing with building domestic pipelines. “A healthy energy sector is not only critical for business investment, but also exports, as energy products account for nearly 20% of total Canadian exports,” states the report. Both consumption and crude oil prices are expected to have an almost immediate impact on growth prospects for next year.

Canada less competitive than major trading partners

In addition, Canada has become less competitive than its American and Mexican counterparts. The federal government recently announced that it aims to address this issue through tax breaks for businesses and other measures, but the report calls this “merely a start.”

Among other Russell Investments forecasts:

  • GDP growth is expected to be 1.7%-2.1%
  • Bank of Canada policy interest rate will hover between 2.00%-2.25%
  • Government of Canada 10-year bond yield year-end range: 2.4%-2.8%
  • Canadian-US dollar exchange rate is expected to be $0.73-$0.79

Elsewhere in the world, the report predicts volatility will continue into 2019 given U.S. Federal Reserve tightening, trade wars, China uncertainty, Italy’s budget standoff with the European Commission and Brexit.

Russell Investments believes that 2020 marks the danger zone for a U.S. recession, which gives equity markets some upside in the year ahead. “However, late-cycle risks are rising—and monitoring these risks will be critical to avoid buying a dip that turns into a prolonged slide.”

 

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Show patience in a world of instant gratification

We live in a world where we expect results right now. We want same-day package delivery, faster Internet speeds, coffee ready for pickup before we even get to the café and a hot date by tomorrow night. Instant gratification has become an obsession. It doesn’t help that our attention spans keep getting shorter.

Unsurprisingly, this short-term focus also translates to the world of investing. The individuals responsible for managing your hard-earned savings and the money that needs to last through your retirement years are often being judged on a short-term basis. You don’t rush a winemaker during the maturation process, you don’t rush an engineer building a bridge and you certainly don’t rush a surgeon performing open-heart surgery. All of these professionals need time to do their job right. Then why do people have such impatience with money managers? It’s very difficult for people to part with their money – we totally get that. While your first instinct may be to ditch those underperforming investments and replace them with recent winners, you need to come to terms with the fact that underperformance from top portfolio managers is more than normal. You should even count on it!

It happens to the best

If you need empirical proof, consider the chart below. The study looked at 197 fund managers who had top-quartile performance over 10 years. Although each of the managers in this study delivered outstanding long-term returns over the 10-year period, almost all of them experienced periods of short-term underperformance.

 

Let it grow

When you plant a tree, you give it time to grow while the sun and rain nourish it.  You don't keep digging up the sapling to check its roots, and you don't panic in the winter when the leaves fall because it's just part of the natural cycle.

The same applies to investing. You give your portfolio the time it needs to grow and benefit you in the long-term, and you don’t panic when growth stalls temporarily versus an index. A long-term perspective brings peace of mind and enhances the power of compounding, also known as the eighth wonder of the world, but that’s reading for another day. Take a look at this chart illustrating how top managers’ performance improves as you extend your holding period.

It’s rare for an investment manager to outperform the benchmark index over an extended period without experiencing bouts of underperformance. If you just accept this phenomenon and keep your focus on the long term, the serenity that comes with it is priceless. And most importantly, the chances of reaching your financial goals increase dramatically. 

Manager performance improves over longer holding periods

Frequency of excess returns over their benchmark by rolling period time horizon

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