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Look Outside Canada For Equity Opportunities

global tradeNow that the world’s economic engines appear to be in gear, with only the occasional sputter, equity markets are in a good position to continue their winning ways through 2014. And by far the best place to reap these rewards is outside Canada.

Investors finally seem to believe in a healthy economy and have welcomed the U.S. Federal Reserve’s plan to taper its economic stimulus program during the course of this year. That’s in contrast to recent years, when rumours of tapering caused market tremors.

At Sun Life Global Investments, we believe in ‘smart investing’ – maintaining a strategic view, but with the flexibility to deviate according to ever-changing market conditions. This requires an ongoing evaluation of global economic growth and capital markets in order to pursue tactical strategies aimed at enhancing our strategic position.

Current Conditions

As a result, based on our assessment of current conditions and in synch with our long-term views, we continue to favour equities over bonds. The equity markets should continue to benefit from the economic recovery – except here in Canada, where growth may be held back by slowing home sales and high consumer debt. We think interest rates will continue to remain low in the near future, despite the Fed’s tapering intentions.

We expect Canadian stocks to underperform again in 2014, with U.S. and international markets poised to excel. This would continue the trend of last year, when the S&P 500 posted a 41 per cent total return in Canadian-dollar terms, while the MSCI EAFE Index rose 32 per cent. The S&P/TSX Composite gained 13 per cent.

We believe U.S. stocks will achieve strong gains this year, possibly even in the high single digits. The U.S. housing market has bounced back from the depths of 2009. Housing debt has fallen dramatically, with 14 per cent of Americans financially underwater with respect to their home debt (situations where home value is less than mortgage value) in 2013, nearly half the level of the year before. This translates into five million more Americans who will be able put more money into the economy which could boost the home-building, financial, technology, and healthcare industries. On top of this, evidence suggests overall corporate earnings and balance sheets remain strong.

Looking abroad, European and emerging market economies appear to be on the road to recovery. In the Eurozone, the worst-case scenario appears to be in the past, now that countries like Greece and Ireland seem to have solved their sovereign debt problems. Some concerns remain, though, such as Italy’s debt burden – although its 10-year bond yields have fallen. Europe is roughly where the United States was several years ago in terms of recovery, with improvements in GDP, unemployment, and export data.

But we feel the best long-term investment opportunities are to be found in emerging markets. Multi-national companies continue to invest in these countries and they remain the strongest growth prospects. Consumer wealth is growing there as well, and we expect this to boost the consumer discretionary, financials, and telecommunications sectors.

The good news in the U.S. and overseas is in contrast to the situation here at home. We think Canadian real estate prices have been too high for some time and it’s possible our housing market could decline 10 per cent or more in the coming years. At the same time, Canadians’ credit-market debt is at a historic high – at more than 164 per cent of disposable income in the third quarter of 2013 – and we suspect this will restrict consumer discretionary spending.

Safe Haven

So it seems Canada’s reputation as a safe haven for foreign investors, along with our currency, has taken a hit due to slower economic growth. In recent years – amid recession in the United States and in Europe and worries about China – our resource and financial sectors have attracted outside money. The reality is that the perpetual heavy concentration in those two sectors creates a diversification problem, which eventually sours foreign investors. This seems to have been the case in 2012 and 2013, with the money leaving Bay Street in favour of better, balanced values elsewhere.

Fixed income investments are unlikely to provide attractive gains in 2014, although the outlook may be brighter for some foreign bonds. But this sector shouldn’t be overlooked, as we believe a balanced portfolio still needs some bonds because they can offset potential equity losses in the event of economic turmoil or political unrest.

In summary, equities remain our focus this year, where we see excellent opportunities in the United States and emerging markets and to a lesser extent Europe. Be wary of Canada, though, and keep an eye for any signs of rising interest rates.

Sadiq S. Adatia is chief investment officer of Sun Life Global Investments (Sadiq.Adatia@sunlife.com).

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