After stalling in mid-2011, the Canadian economy gained surprising strength and momentum in the second half of the year. Unfortunately, this momentum may not continue in 2012. Canada only represents three per cent of the global economy and is heavily influenced by global events. The global economic and financial environments remain key challenges for Canada’s economy. Given that more time is required to implement a credible resolution to Europe’s debt problems, the region’s financial crisis is expected to worsen before it improves. It is difficult to predict the effects of politics on fiscal policy, but given the heavy borrowing requirement in early 2012 by several European countries, a weakening of financial conditions and a European recession in the first half of next year is a possibility. This may lead to a weaker global economy and a decrease in demand for Canadian exports. TD Bank predicts that the second half of 2012 may bring increased demand for Canadian exports which would stimulate the economy. TD Bank also predicts, however, that real growth is likely to slow to 1.7 per cent for the year as a whole and that the unemployment rate may increase to 7.5-8 per cent. Canada’s economic prospects are expected to improve in 2013, with real GDP growing by 2.2 per cent.
Scotia Bank forecasts for more investors to move their funds into safe investments in the first half of 2012. Canada is one of only 16 countries left that have retained their coveted triple “A” rating by the Standard and Poor’s credit rating agency. As global investors look for alternatives to Euro denominated assets, Canada becomes a natural choice. Scotia Bank expects that the Canadian dollar will drop as low as 90 U.S. cents in the first half of the year. They also predict that this decline will be reversed later in the year as uncertainty with the European debt crises dissipates. However, it is expect the Canadian dollar will not regain parity with the U.S. dollar until 2013, when it is expected that the Bank of Canada will increase rates to manage inflation.
RBC’s forecast is for the Canadian economy to grow 2.5 per cent in 2012, which is higher than the Bank of Canada’s forecast of 1.9 per cent. This forecast is based on the assumption that the U.S. economy will get a lift from additional fiscal stimulus via the extension of the payroll tax holiday. As there are also continued threats to Canadian economic growth from abroad, the Bank of Canada is likely to remain cautious in raising interest rates over the next several years. The overnight rate is expected to remain at one per cent until early 2013. The rate is expected to move up slowly from there, reaching three per cent by the end of 2014 and 3.5 per cent by the end of 2015.
“Even though there is so much uncertainty in the global economy at the moment, Canada’s economy we think still remains in relatively good stead,” said Dawn Desjardins, assistant chief economist at Royal Bank of Canada. “In an environment where our economy is growing at a decent clip, not over the top but at a decent clip, the U.S. economy is back on its feet … some of the external risks that are concerning the bank right now will abate and they will be in position to start to very, very, very gradually remove some of the stimulus.”
Housing Prices and Construction
In 2012, the housing resale market is forecasted by the Canada Mortgage and Housing Corporation to move from current market conditions which favour buyers, to more balanced market conditions that equally favour buyers and sellers. The number of MLS sales in the Greater Victoria Area is expected to increase by seven per cent in 2012, following a four per cent decline in 2011. This projected increase in sales will coincide with a one per cent increase in the projected average sale price of homes. The modest rebound in resale activity forecasted for 2012, combined with fewer listings, will push the market back into balance between demand and supply conditions. The average home price will increase to $505,000 in 2012.
Construction will be a growth driver in the Greater Victoria area in 2012. The Canada Mortgage and Housing Corporation’s new construction forecast for 2012 indicates growth stemming from new projects. This growth will stimulate the local economy, generating new jobs and income. Planned non-residential investment across Victoria includes: the construction of a new facility for the Marine Helicopter Squadron in North Saanich and of a Central Saanich Power Centre, the update of Oak Bay High School, the development of the Colwood Corners property, the expansion of the Vancouver Island Technology Park, the creation of a new Sobey’s Distribution Centre, and the replacement of the Johnson Street bridge.
Top investment mistakes to avoid in 2012
1. Not staying invested in the market.
There is tendency for investors to try to buy low and sell high, but unfortunately it is almost impossible to successfully pull off this strategy. Even though the financial market’s overall, long-term trend has been upward, many stocks make most of their gains in short, dramatic spurts. Consequently, the price that is paid for being out of the market at the wrong time can be significant. Not only can you miss out on positive returns, but also there may be transaction costs to be paid. Overall, a buy and hold strategy outperforms strategies that try to outmaneuver the market. Peter Lynch and Warren Buffet are famous investors who have thrived by staying invested in the market, using a buy and hold strategy.
2. Ignoring Inflation.
Even though the Canadian Consumer Price Index shows that inflation is less than three per cent annual rate of increase, the effect of inflation is substantial. Inflation affects the price of everything from socks to stocks and can make it hard for investors to gauge how well they are doing as inflation creates a moving target. Just look at your gas expense. According to Statistics Canada, the cost of gasoline rose 18 per cent this year. That increase is six times the rate of general consumer inflation rate and more than eight times the rate of wage increases. With inflation, the cost of everything is constantly increasing. It is essential that your investments are growing faster than inflation; otherwise your funds are losing purchasing power.
3. Not Having an Investment Policy Statement.
An investment policy statement is a document that defines how your investment portfolio will be managed. It provides direction and guidance for all future investment decisions. The IPS is designed to focus investors on their goals during times of market volatility and when investment strategy is being reviewed and evaluated. It also provides a systematic process to evaluate the overall portfolio, as well as the performance of individual funds of the portfolio. A good IPS outlines the rules of the relationship between you and an advisor, as well as the responsibilities of each party. The IPS can be used as a reference to see whether or not your portfolio is achieving your stated goals and objectives. Any proposed changes to your investments can also be evaluated and reviewed against your overall objectives using your IPS.
A well-constructed Investment Policy Statement provides the support to follow a well-conceived, long-term investment strategy, rather than one that is based on unrealistic expectations or panic in reaction to short-term market volatility.
4. Chasing Performance
The main factor that investors use to select asset classes, strategies, managers and funds in their portfolio is strong recent performance. The fear of missing out on significant investment returns has led to more poor investment decisions than any other single factor. If a particular asset class, strategy or fund out-performed its peers for three or four years, one thing is certain: it should have invested in three or four years ago. Now, however, the particular cycle and the economic environment that led to this great performance may be nearing its end. It is better to follow your investment plan, which is the opposite of chasing performance.