Neil McIVer's and Mark Jasayko's 2010 predictions
as published in the Vancouver Sun Editorial - DECEMBER 29th, 2009
Few would argue 2009 was a cataclysmic one for the world economy. January started off in a state of near panic, with capital markets tumbling, once-glorious financial institutions going bankrupt, housing prices continuing their free fall, particularly in the U.S., and world governments infusing massive amounts of money into the system to ward off utter collapse.
We have ended the year on a brighter note, although there is still much recovery to take place. What will 2010 bring? Here are some of our predictions:
CANADIAN STOCK MARKET
The lack of industrial diversification will help the Canadian stock market as the continued demand for our resources translates into higher share prices for companies in the country's large resource sector. The Canadian market should achieve close to double-digit returns without the volatility that the U.S. market will experience next year.
AMERICAN STOCK MARKET
Government liquidity gave a big kick to U.S. stocks in 2009, and the latent effects of that public spending will provide some help in 2010. After a bit of a roller-coaster ride in the first half of the year, the U.S. stock market will end 2010 where it started.
The U.S. dollar is likely nearing the end of its weakening compared with the Canadian dollar and other major world currencies. Over 2010, the U.S. dollar should remain mostly unchanged relative to the Canadian dollar. The trade flows between Canada and the United States provide an anchor with respect to the exchange rate between the two currencies. Other than that, it is the prices of the resources that Canada exports that have the potential to disrupt the exchange rate over the next year. However, with a projected slow global economic recovery, resource prices should remain relatively stable over the next year.
The U. S dollar has the potential to gain against the other major world currencies in 2010. Although there are concerns with respect to runaway government spending in the U.S., the bottom line is, politically and economically, the U.S. is the best of a sorry bunch around the world. Once the Federal Reserve begins to raise rates, the U.S. dollar will begin to rise.
For the reasons discussed above, the Canadian dollar should remain in a relatively tight range relative to the U.S. dollar.
This is the least risky forecast in a generation. We know the next move will be upward, but when and how much? Will rates rise in 2010? Yes. And, assuming that the U.S. does not see a fiscal crisis during the year (there is enormous political will to contain any problems during a mid-term election year), a rate increase of half a percentage point should be in order.
CARBON CREDITS/CAP & TRADE
Any "green" legislation will be a tough sell in the current global economic and financial context. However, the financial world is more realistic than the political world is with such issues, and carbon credits or cap-and-trade systems will have an impact only when the technologies and initiatives make sound economic sense. As long as they don't, it will be difficult to maintain a system of carbon credits or a cap-and-trade regime, especially if politicians want to be re-elected. We are still years away from technology that will provide attractive, low-cost solutions.
A muted global economic recovery will take a lot of the catnip out of the oil market. Minor issues like supply bottlenecks and seasonal demand will have the most effect. However, this will not be enough to push oil out of its recent trading range of between $60 and $85 US.
Because of the difficulty of exporting natural gas to other continents, North American supply and demand issues dominate its price. North American winter weather is important. The current trend of declining sunspot activity usually signals a colder winter and could add as much as 15 per cent to the price over the winter but will give back those gains once spring arrives.
This is another area affected by sunspots. Colder weather reduces crop yields. Also, food security for large emerging economies is becoming a hot-button issue and should contribute to a slow and steady rise in grain prices as well as other food commodities.
The number one performing asset class over the last decade is still relatively unloved. The potential for fiscal and monetary crises can only help. Also, its limited supply usually does not get much attention. The currently market value of all the gold ever mined would only pay half of the debt that the U.S. expects to accumulate over the next decade. The price may climb to $1,500 before the end of 2010.
CANADIAN REAL ESTATE
The recent dose of government liquidity injected into the economy had the side effect of boosting real estate prices. Prices have returned to the affordability ceiling. Also, Canada is one of the few countries (Australia is another) to avoid a sustained decline in real-estate prices. Government-provided liquidity will probably end in 2010. When it stops, expect the gains of the last year to evaporate, leading to a decline of 10 to 20 per cent nationally.
Mark Jasayko is portfolio manager, and Neil McIver, first vice-president, at Mciver Capital Management of Richardson GMP Ltd.