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Investing

December 23, 2015

2016 investment forecast: “A bumpy ride”

With the expectation of stock market volatility in the year ahead, now’s a good time to review your investment risk profile and make sure you’re still comfortable with it.

Canadians may see their second technical recession in as many years, largely as a result of low oil prices and their impact on the national economy. That’s according to Sadiq Adatia, chief investment officer of Sun Life Global Investments.

“I don’t see a positive environment right now,” Adatia told me in an interview last week. “The first half will be negative in terms of gross domestic product growth. We may be better off in the second half.” Adatia anticipates a repeat of this year’s two-quarter dip that could come anytime between the current quarter and the first half of 2016.

Blame the sharp drop in oil prices. Since members of the Organization of the Petroleum Exporting Countries (OPEC) decided to squeeze out high-cost oil sands and shale producers with aggressive production levels, the Canadian economy has suffered. By mid-December, prices had fallen to US$37.35 and US$38.45 for WTI Crude and Brent Crude respectively.

“The question is how long we stay under $40,” said Adatia. “If we stay there for a good three months, then we could see major difficulties in the Canadian economy.”

It’s not just the oil patch that’s hurting. Adatia shared six observations on the year ahead:

  • The Bank of Canada might cut its overnight rate again. Significantly, this comes at the same time the U.S. Federal Reserve moves in the opposite direction. Adatia puts the possibility of another Canadian rate cut – the third since the beginning of 2015 – at 50%. Watch for a rise in mortgage rates in 2016, triggered by the Fed’s rate hike.
  • Don’t expect a major recovery in the loonie. Adatia is forecasting a Canadian dollar in the 70- to 75-cent range relative to the greenback.
  • Oil prices could turn around soon. Even the OPEC-member nations are feeling the effects of low prices. Adatia told me that Saudi Arabia, for example, needs oil priced at a minimum US$90 a barrel to balance its federal budget. “OPEC may not decrease supply, but I think that it might stop raising supply levels next year,” he said.
  • Unemployment will rise in 2016. “We’re seeing the energy companies already deciding to cut jobs,” said Adatia. “I think anybody dealing with energy companies will start to lay off people as well.” Look for consumer spending to weaken as a result.
  • Don’t count on a manufacturing recovery. Our manufacturing sector has struggled to compete globally for years. We may see a competitive advantage when the dollar is low, but you can’t count on that persisting. “I don’t think it’s going to cause people to jump back into the manufacturing sector, because they don’t know what will happen three years from now.” Eventually, interest rates will come back up in Canada, which will lift the dollar.
  • Keep an eye on global markets. There’s a real possibility that domestic stock and bond markets will end the year in negative territory. “International markets are where we see the biggest opportunity,” he said. “I think you’re going to see more quantitative easing in 2016 out of the eurozone and a better job market than we have seen in the last couple of years.” That said, be careful about currency risk when investing.

I asked Adatia if he has recommendations for Canadian investors. “As we get heightened volatility, it’s always a great test to go back and look at your risk profile to make sure you are comfortable with it,” he said. “It’s going to be a bumpy ride.”

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