Transcript: 10-Year Forecast — Emerging Economies Likely to Shine

Transcript: 10-Year Forecast: Emerging Economies Likely to Shine

[Éric Morin, Assistant Vice-President, Asset Allocation and Currency Management, CIBC Asset Management]

In our opinion in the next 10 years, the most attractive asset classes are emerging economies - bonds and equities. Why? There are three reasons. The first one is that macro-economic prospects in emerging market economies are projected to be substantially better than those in advanced economies. Growth in emerging market economies over the long term, on average, is projected to be about three times bigger than growth in advanced economies overall. The second reason is that from a Canadian investor perspective, our view is that there will be currency depreciation of the Canadian dollar compared to the currencies of emerging market economies over the medium-term and over the long-term. This increases the attractiveness of emerging market returns. The last reason, and perhaps the most important one in the near term, is the fact that valuations for emerging market equities is substantially more affordable than U.S. equity valuations.

[What’s weighing on growth for advanced economies?]

Looking at the next 10 years, our outlook for financial assets in advanced economies is weak. In the case for equities, our view is that economic growth will be particularly weak by historical standards and compared to growth projected in emerging economies. This will weight on equity returns, and one of the reasons why growth is projected to be weak is because of monetary policy normalization. So rates are low, central banks have to increase them, and this will weigh on profits down the road and on equity valuations. The second reason, and this is mostly for the U.S. is the fact that price-to-earnings ratios are really elevated by historical standards, but also really elevated compared to the P/E ratios that prevail in the emerging economies. So looking ahead, we assume a convergence between both P/E ratios, not an exact convergence but a convergence that will result in better returns for equities in emerging economies, and more modest returns for U.S. equities.

[Bond performance over the next decade]

For bonds our outlook is modest by historical standards and also compared to emerging market economies because of two reasons. First, interest rates are low, and second is the fact that the action of central banks to normalize their policy stance will weight on the return just because higher interest rates down the road will result in lower prices for bonds, so there is an inverse relationship between both. And this inverse relationship will result in weak financial returns for bonds. In light of these results looking ahead, investors should consider increasing their position in emerging economies asset classes such as bonds and equities.

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