By Scott Ronalds

I recently attended a luncheon hosted by Connor, Clark & Lunn, the manager of our Savings Fund and Income Fund. The session focused on the economy. Larry Lunn, the firm’s chairman and co-founder, was the keynote speaker. Larry is an experienced industry veteran who has navigated through a number of economic and market cycles and always has a thoughtful and well researched view – and he doesn’t sugar-coat it.

Prior to introducing Larry, the presentation started with a quip by Phil Cotterill (Head of the Client Solutions Team at CC&L) that the session had been moved to a lower floor of the building at the last minute (read: to prevent any ‘jumpers’). After the presentation, I wished I hadn’t turned down the Heineken at lunch.

Larry and the team at CC&L didn’t exactly paint a rosy picture of the secular forces that will shape the next decade. They focused on the debt hangover that the global economy is facing and the unfavourable demographic scenario that is emerging as the boomer generation moves past its peak equity accumulation period and into a ‘dissavings’ phase. In a follow-up report, CC&L summarized their take on the next ten years as follows:

  • The structural imbalance between a savings-short, leveraged American consumer and the Chinese mercantile economic model, with an emphasis on too much savings, fixed investment and exports, will be disruptive.
  • We will face a period of anemic sub-par economic growth because of changing demographics and debt formation, which will lead to shorter and more volatile business cycles.
  • Bigger government, more regulation and higher taxes are in store.
  • Higher risk premiums (because of the aforementioned imbalances) will lead to lower P/E (price-to-earnings) multiples on stocks.

Larry concluded the presentation by suggesting that investors should expect low single-digit stock and bond returns over the next decade. As I said, no sugar-coating.

I was hoping to leave the session with some positive insights and messages to report back to our clients, but I was stumped.

After reflecting on CC&L’s message for a few days and reviewing their outlook, however, I’ve changed my stance. There were some useful takeaways worth sharing. First, the economic situation is not entirely discouraging, as they note in their report. Corporate profits have improved (substantially in some cases), growth has picked up, government spending is creating stimulus and interest rates remain very accommodative for growth. While government spending and low interest rates will eventually have to be unwound, the immediate future appears reasonably bright (notwithstanding the debt hiccup in Europe). There are certainly longer-term issues that need to be addressed, but that is not to say they can’t be resolved.

Second, economic forecasts are just that, forecasts. They are meant to paint a rough picture, not a detailed map.

Third, greater short-term volatility can play into the hands of opportunistic investors and agile managers.

Fourth, it’s motherhood stuff, but investors are well advised to make sure they have an asset mix that they’re comfortable with – one that reflects their risk tolerance and time horizon. Those who take on too much risk and/or can’t handle short-term volatility will have the most sleepless nights.

Fifth, Larry and his team are preparing their clients for low single-digit returns over the next decade, not negative returns. Given the economic headwinds they foresee, they still believe the capital markets will provide positive, albeit volatile, returns.

And finally, Europe and the U.S. are on sale for Canadian investors. Our dollar goes a long way these days in buying foreign assets. In fact, if the Vancouver real estate market holds up and southern Europe goes bankrupt, I’m thinking of selling my place and buying Greece as a ‘fixer-upper’.