A year ago, we wrote the following outlook: “We are in the fifth year of a steady stock market recovery from the dramatic downturn of 2008-2009… In 2013, we expect more of the same. We believe that the United States will continue its slow and steady pattern of economic growth, and that the well managed companies in that market will continue to benefit”.
Looking back over the past year, if we were guilty of anything regarding this forecast, it was vast understatement!
Indeed, the US economy continued its steady economic growth, unimpeded by political shenanigans in Washington. This past year, the S&P 500 Index generated a total return of just over 40% (in Canadian dollars) in the United States, vastly outperforming the 13% return of the Canadian market. The Canadian index continued to feel the drag of under-performing resource stocks, as energy and mining continued to fare poorly.
There is a natural tendency to believe equity markets will be weak in the year following strong returns. It is our belief, however, that this will not be the case in 2014 as markets are still in recovery mode from the depths of the 2008-2009 financial crises. Many of the building blocks for sustained market growth remain in place, albeit at a slower pace than 2013.
On the economic front, the U.S. continues to perform steadily and unemployment is falling. The U.S. housing market continues to improve, while consumers are gaining confidence and are beginning to spend. Corporate balance sheets and profit margins remain strong. In Europe, we expect modest growth in 2014, a welcome change from the recessionary environment of the past few years. In the developing markets, economic growth will begin to reaccelerate. This will be led by China, where the economic reforms introduced by its new leadership will provide the platform for sustainable growth. These factors will benefit our U.S. multinationals and Canadian resource holdings.
Equity markets will further benefit from accommodative monetary policy by central banks globally. While we expect quantitative easing to be tapered during 2014, the Federal Reserve in the U.S. will maintain flexibility in the timing and amount of tapering as long as inflation and employment are running below historic norms. That said, the end of quantitative easing is not a bad thing, as it indicates that U.S. economic growth is becoming self-sustaining.
Finally, equity valuations are compelling and there remains unutilized economic capacity. Investment spending has yet to recover to levels recorded prior to the financial crisis as corporations have maintained higher than average cash reserves. We expect business investment to pick up significantly as global uncertainties abate. Moreover, there is little threat of inflation and we expect that interest rates will not increase materially this year.
Overall, we believe the strategic direction we laid out at the beginning of 2013 will hold us in good stead for the coming year. As we wrote you a year ago, we will “continue to do what we do best: invest in well managed companies that generate increasing cash flow from operations and allocate their free cash flow wisely. We are very optimistic that such companies will continue to perform positively for our clients”.
Rempart Asset Management has now entered its fourth year of independence. Our assets under management continue to grow, as our approach to generating steady returns for our clients and our reporting transparency continue to win us new business.