Market volatility is here for
the short term but North American indices will improve in 2009,
predicts TD Waterhouse
- Large caps will outperform small caps in challenging economic
- Typical Canadian bond returns will be in 4.0 - 4.5% range, same
- Emerging markets will again require caution in 2009
TORONTO, Nov. 27 /CNW/ - TD
Waterhouse today released its 2009 Investment Outlook, offering
insight into future market trends and their impact on investment
portfolios. It predicts that while market volatility will continue
in the very near term, it will begin to decline from recent record
levels and market indices will rise in 2009.
"Looking ahead to 2009, the key questions
on the minds of investors are when the heavy volatility will end,
what the 'floor level' of the current bear market will be, and when
will stocks begin to recover," says Bob Gorman, Chief
Portfolio Strategist, TD Waterhouse.
Gorman predicts the following six themes will
dominate the markets in 2009:
U.S. Market Outlook
1. The U.S. stock market, after experiencing
continuing pressure in the year term due to tax loss selling, and
hedge fund and mutual fund redemptions, will rise in 2009. Factors
contributing to this outlook include:
- Valuations are now depressed, with the &SP 500 trading at
perhaps 11.5 - 12 times forecast 2009 earnings.
- The bond market is supportive, with a wide gap between the U.S.
10-year Treasury yield and stocks' earnings yield.
- Credit is beginning to loosen as LIBOR rates retreat and the
TED Spread (i.e. the difference between the interest rates on
interbank loans and short-term U.S. government debt) shrinks.
- Monetary and fiscal policies are accommodative and designed to
stimulate the economy.
- There are high levels of cash on the sidelines relative to
- There are strong purchases by company officers and directors of
their own company's shares. (This is often a positive indicator
that shares have reached attractive valuations and represent good
2. Large cap stocks are once again recommended in
2009: "Given their greater financial stability and low
valuations, we feel that large caps offer the best prospective
risk/reward relationship in 2009," says Gorman.
"Small caps are more economically sensitive and respond
more acutely to the ups and downs of the economy,"
continues Gorman. He points out that historically, they outperform
large caps coming out of a recession, but the extremely low
valuations attached to the highest quality large cap companies
gives them the best potential returns relative to risk in 2009.
Canadian Stock Market
3. After a decline of about 49% from its peak,
Gorman says the TSX is bottoming in this range and will advance in
2009. "Factors contributing to this outlook are largely the
same as those cited for the U.S. stock market. As in the U.S.,
large cap stocks will represent the best risk/reward
Canadian Bond Market
4. Typical bond returns are expected to be in the
same 4.0 - 4.5% range in 2009 as in 2008. Investment grade
corporate bonds will outperform government issues in 2009. This
will reflect three factors:
- Corporate spreads will stop widening as credit markets
- Corporate issues will offer a higher stream of income compared
with government bonds.
- There will be some reversal of the flight to quality as
government bond yields increase modestly.
The Outlook also predicts a rally in high yield
bonds in 2009. "High yield debt performed poorly in 2008,
reflecting a dramatic widening of spreads due to concerns about
rising default rates and forced liquidation by fund
managers," says Gorman. "These same issues will
weigh on high yield debt in the near term. However, high yield
bonds are highly correlated with equities, and thus an equity rally
in 2009 will lift high yield bonds as well."
Major Foreign Stock Markets
5. European and Japanese equities will record positive returns in
2009. While current economic weakness and its impact on corporate
earnings is the major headwind for both markets, valuations are
very low, especially in Europe where P/E multiples are in the 10-11
range and dividend yields approximate 4%.
Emerging Stock Markets
6. Caution regarding this asset class is warranted in 2009. While
there will likely be a superb buying opportunity for emerging
markets in the not-too-distant future, caution is recommended for
the present and avoidance of direct exposure. Factors contributing
to this outlook include:
- While economic growth rates will remain well above those in the
developed countries, adaptation to lower growth will likely prove
difficult for many of these countries and their companies.
- There is over $110 billion in emerging market corporate debt
which will have to be re-financed in a difficult environment in
- There may be some difficulties in Chinese real estate, which
could spill over into their banking system.
2008 Predictions and Results
The Outlook also examines its 2008 predictions and
finds that four out of seven were accurate.
"A year ago, we predicted that strong
fundamentals would outweigh the impact of the sub-prime lending
crisis, the economy would stay out of recession, and markets would
stay out of bear territory," says Gorman. "This
prediction was overturned by the unprecedented decline in global
financial markets and commodity prices."
Here is how TD Waterhouse's themes
2008 played out:
|Prediction No. 1:
||The U.S. stock market would rise for the sixth consecutive
||This has proven incorrect. A year ago, the Outlook forecast
that a declining Canadian dollar would boost the value of U.S.
holdings for Canadian investors, thereby producing positive
single-digit returns in U.S. equities. While the Loonie has fallen
about 21% year-to-date and has indeed cushioned the decline in the
U.S. market for Canadians, total returns have still been
|Prediction No. 2:
||U.S. large cap companies would outperform their smaller
counterparts in 2008.
||This forecast has proved accurate to date. The DJ30 has
outperformed the &SP 100, which has outperformed the &SP
500, which has narrowly outperformed the Russell 2000.
|Prediction No. 3:
||The Canadian stock market would rise for a sixth consecutive
year in 2008, recording a single-digit advance.
||This has proven incorrect.
|Prediction No. 4:
||A rotation would begin to be seen from the cyclical sectors
(focussed on commodities) to the less cyclical sectors as commodity
prices fell in response to a slowing global economy.
||This has occurred in the second half of 2008; however, there
were no offsetting gains in the more defensive sectors due to the
worsening credit crisis.
|Prediction No. 5:
||Bond investors would earn total returns of between 4.0 - 4.5%
||This has proven correct, especially in the short- and mid-term
segments of the market.
|Prediction No. 6:
||Europe would out-perform Japan in 2008 generating positive,
||While this has been true to date in terms of local currency, it
has not been the case when expressed in Canadian dollars given the
strengthening of the yen and the weakening of the euro due to
declining interest rates and economic weakness. The Outlook's
forecast of modest but positive European equity returns in 2008 was
|Prediction No. 7:
||We recommended caution for emerging markets in 2008.
||This has proven accurate. The Shanghai Composite Index has
fallen over 60% in the year to date, with other BRIC countries
recording similar losses.
About TD Bank Financial
The Toronto-Dominion Bank and its subsidiaries are collectively
known as TD Bank Financial Group. TD Bank Financial Group is the
seventh largest bank in North America by branches and serves
approximately 17 million customers in four key businesses operating
in a number of locations in key financial centres around the globe:
Canadian Personal and Commercial Banking, including TD Canada Trust
and TD Insurance; Wealth Management, including TD Waterhouse and an
investment in TD Ameritrade; U.S. Personal and Commercial Banking
through TD Banknorth and TD Bank, America's Most Convenient Bank;
and Wholesale Banking, including TD Securities. TD Bank Financial
Group also ranks among the world's leading on-line financial
services firms, with more than 5.5 million on-line customers. TD
Bank Financial Group had CDN$509 billion in assets as of July 31,
2008. The Toronto-Dominion Bank trades under the symbol
"TD" on the Toronto Stock Exchange and New York
For further information: to receive a copy
of the 2009 Investment Outlook, or to schedule an interview with
Bob Gorman, please contact: