According to Mackenzie, you are likely to earn a much better return by
investing in the stock markets of Great Britain, Canada, and Australia than
by focusing on Wall Street. American stocks are overpriced right now, as
are those of Japan. By contrast, Europe, Canada, and Australia are
As for bonds, don’t invest too heavily there. Government bonds with a
10-year maturity are likely to generate a negative return over the next
These are the conclusions of a white paper prepared by Todd Mattina,
Mackenzie’s chief economist and strategist, and Alain Bergeron, a senior
vice president and head of the company’s asset allocation team.
They believe that asset valuations are a key driver of total returns over
longer time horizons. “Historically, low asset prices relative to the
fundamentals have reliably predicted high long-run returns,” they write.
One of the main points they make is that using traditional value measures
like the price/earnings ratio does not provide a true reflection of asset
values. They describe that approach as “simplistic.”
“They (p/e ratios) can signal attractive value opportunities when the
fundamentals suggest otherwise,” says the report. “For example, a high p/e
ratio may reflect low expected interest rates, supporting higher
Conversely, a sudden drop in share prices could lead to a rapid drop in the
p/e ratio, suggesting an attractive value opportunity. “For example, as the
global financial crisis began to unfold in September 2008, share prices
dropped sharply in anticipation of a financial crisis and broader economic
slowdown. However, the p/e ratio based on trailing earnings in the last 12
months suggested incredibly cheap share valuations.”
The authors suggest investors need to look at the present value of future
cash flows. This means emulating the success of investors like Warren
Buffett by finding shares in companies that are cheap relative to
To help investors do this, the authors have developed a model called Multi
Asset Class Intrinsic Valuation (MACIV) for use within the Mackenzie
organization. For the mathematicians out there, this is described as “a
multi-stage discounted cash flow model that estimates fair value based on
the fundamental drivers of expected discount rates and expected cash flows.
It provides a systematic and macro-consistent approach to measure value for
any asset generating cash flows over time.”
If you don’t follow all that, the important point is that the authors
believe that over a seven-year cycle, asset prices converge to their
estimated fair value. So an asset that is underpriced now will rise more
quickly than one that is overvalued.
The Mackenzie executives base their projections on certain assumptions: “We
expect a slowdown in trend economic growth in most countries as population
aging slows workforce growth, capital accumulation slows in sympathy with
lower employment growth (keeping the ratio of capital to workers in
balance), and productivity remains below the post-war historical average.”
Canada should do well
Based on this, they forecast that the U.S. and Japanese stock markets will
each return an average of 3.1% annually over the next seven years. At the
other end of the scale are Canada at 8%, Australia (9.9%), and Great
Britain (11.2%). Excluding the U.K., the projection for Europe over that
time is a 6.9% annual gain. For Asia-Pacific, it is 4.6%.
For government bonds, the outlook is very discouraging. Using the authors’
baseline scenario, U.S. 10-year bonds would lose 1.2% annually for the next
seven years, while Canadian bonds would drop 2.2% a year. Even using more
favourable assumptions, bonds still end up in in negative territory at
-0.4% for the U.S. and -1.4% for Canada.
Mr. Bergeron stresses that this is one of several tools that can be used in
determining the asset allocation of a portfolio. “Even though bonds are not
projected to do well, no one should go to zero in their bond positions,” he
said. “You might underweight them, but you should still own some.”
Similarly, just because U.S. and Japanese stocks are projected to generate
a lower return doesn’t mean you should not own some. But your asset mix
should be adjusted to reflect that.
The authors believe that because the assumptions they use have long time
horizons (e.g., aging populations), their projections will not be
significantly affected by short-term developments, such as new initiatives
out of Washington.
“For example, Donald Trump’s policies may have a positive effect on
earnings growth, but that could be offset by the impact on inflation and
the discount rate,” said Mr. Mattina. “The anchor on which our projections
are based remains quite stable.”
The bottom line is that these projections are helpful in deciding on your
asset allocation going forward, but they should be just one of the
considerations that you use in making a final decision.
is one of Canada’s best-known personal finance commentators and
investment experts. He is the publisher of
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Notes and Disclaimer
© 2017 by The Fund Library. All rights reserved.
The foregoing is for general information purposes only and is the opinion
of the writer. Securities mentioned carry risk of loss, and no guarantee of
performance is made or implied. This information is not intended to provide
specific personalized advice including, without limitation, investment,
financial, legal, accounting, or tax advice. Always seek advice from your
own financial advisor before making investment decisions.
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