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Five fearless predictions for 2020, from a surge into stocks to a Canadian bank comeback

The U.S. market is set to again beat Canada in 2020. - Reuters

It is year end, and that means predictions. Usually I don’t like predictions, because, of course, no one can predict the markets. In 2018, my predictions were well off , emphasizing how difficult the exercise can be. But for 2019, I have to say I nailed it. So with a foolish dose of overconfidence, I am going to offer up five new predictions for 2020. But first, let’s review last year’s calls. My predictions, in a column the week of Dec. 27, 2018 , called for (1) A Canadian market that lagged the U.S.; (2) U.S. short sellers still attacking Canadian stocks; (3) The energy sector staying weak; (4) Interest rate moves will be good for stocks and (5) Privatizations of companies will increase.

Well, most judges would give me five for five here. The U.S. market trounced Canada; companies such as WestJet and Cineplex have been acquired; short sellers attacked the leading retailer in Canada, Canadian Tire, amongst other high-profile attacks; REITs and dividend stocks surged as rates fell; and the energy sector, frankly, sucked.

So, basking in the glow of my accurate fearless predictions for 2019, let’s move on to 2020 predictions:

The U.S. market will again beat Canada

No matter what side of the political fence you are on, most pundits will agree that the current U.S. administration is ‘pro business’ and the Canadian government, not so much (some would say anti-business). Without getting political, the market is a collection of businesses, and a pro-business environment (such as U.S. tax cuts) results in higher corporate earnings, and higher stock prices, on average. When one overlays this with recent employment numbers (great in the U.S., horrible in Canada), we would fully expect the U.S. market to beat ours again next year.

Interest rates will stay low

Granted, the Fed is helping us on this one, all-but-guaranteeing rates are not going to move up in 2020. But, since inflation remains nowhere to be seen, we are hard pressed to see interest rates rising much during 2020. All the talk about the inverted yield curve has disappeared, so we wouldn’t expect them to fall much either. As far as rates are concerned, we might be entering a ‘Goldilocks’ scenario.

Canadian financial stocks will do better

Everyone, it seemed, hated Canadian banks in 2019. U.S. short sellers were falling all over themselves saying how Canada was going to ‘collapse’ and long investors gave them a wide berth (though they still rose on the year). Recent bank earnings, which were generally horrible, certainly won’t help sentiment much. But, with the U.S. sector recently surging, and the economies of both countries still doing OK, and with high (and rising) dividends, we still don’t see why everyone hates the banks. In our career, anytime everyone hates something usually means it’s a good time to buy. Any good news might see a decent run up in bank share prices. If we offered you up a stock that paid a four per cent growing dividend, with decent growth, and priced at 10 times’ earnings, you would want to snap it up. That’s the current situation with banks, though, and yet investors are still scared of the sector.

Technology shares will continue to lead

This prediction somewhat depends on the second one, as low rates tend to be good for the technology sector. But this prediction also seems like an easier one. With huge technology developments such as artificial intelligence, robotics, virtualization, space travel, autonomous driving, data analytics, cloud migration and so on, it is really hard to see how the tech sector is going to enter a big slump. Five years from now, our lives will likely be changed from technology that is being developed today. Tech is where the growth is, and we would expect the sector to continue to run.

Equity money flows will increase

This year, despite near 30 per cent gains in the market (in the U.S.) most investors stayed very nervous and were reluctant, holding too much cash. Everyone, it seems, was expecting a market crash. Next year, though, we think some of those investors will look back and see how they missed a 30 per cent gain, and instead got less than two per cent on their ‘safe’ GIC. With the Fed comments and the thawing of the trade war, these investors may see a ‘green light’ and start plowing money back into equities. Many experts are talking the possibility of a ‘melt up’ in the market, which might be a lot of fun. This prediction actually scares us the most. When investors get exuberant, and are not scared, valuations and greed can get out of whack. A big decline is, sometimes, the result of such excesses. Thus, we are only going to give this a nine-month prediction: money will flow into equities in the first part of the year, but may not be sustainable all year.

As always, we reserve our inherent right to be wrong on these.

Peter Hodson, CFA, is Founder and Head of Research of 5i Research Inc., an independent research network providing conflict-free advice to individual investors.

Copyright Postmedia Network Inc., 2019

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1 being least likely, and 10 being most likely

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