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Capital Markets' Transformation Signals Change in Investment Strategy for Pension Plans and Endowments
By: PR Newswire
Jan. 16, 2013 08:01 AM
Towers Watson Survey of Economic Expectations predicts moderate growth for Canada and convergence with key U.S. economic indicators
TORONTO, Jan. 16, 2013 /CNW/ - According to Towers Watson's Annual Survey of Economic Expectations, Canada's top economists, strategists, and portfolio managers predict modest growth for Canada, continuing below trend interest rates, modest inflation and average equity market returns over the next few years.
Growth expectations for Canada are muted in the near term; however, respondents are more positive over the longer term, expecting above average growth at 2.5%. Long-term growth expectations for the U.S. are also 2.5% - well below their historical average of 3.25%, reflecting continuing concerns over the magnitude of the U.S. deficit.
In early 2012, survey respondents predicted that the Bank of Canada overnight rate would increase to 2.5% between 2013 and 2016. This year's predictions are much less optimistic, with respondents expecting the overnight rate to rise to only 2.0% between 2014 and 2017. Inflation is expected to remain controlled at 2%. Respondents also forecast a Canadian dollar near parity with the U.S. dollar over the next 15 years. Twenty five percent of respondents predict that the Canadian dollar could reach $1.05 U.S. over the long term. The convergence of key Canadian and U.S. economic indicators is also mirrored in predictions for unemployment rates.
"We were initially surprised to see a convergence of expectations for Canadian and U.S. economic indicators," said Janet Rabovsky, Director of Investment Consulting Services at Towers Watson. "Growth predictions may reflect recent studies that suggest the output gap between Canada and the U.S. has been overstated in the past, but could simply be a reaction to the relative magnitude of government deficits"
Re-thinking Response to Risk
"With expectations of continued low returns," said David Service, Director of Investment Consulting Services at Towers Watson, "Plan sponsors have started to assess more critically the investment tools they've historically used to boost returns and reduce risk. Led by some of the larger, more sophisticated plans, Canadian pension funds are accelerating a trend toward alternative assets such as real estate, infrastructure and agriculture." As Service observes, "Based on respondents forecasts and our own capital market assumptions, it appears we are likely to be stuck with low interest rates and modest equity returns for the next few years, so plan sponsors need to explore all alternatives for managing risk."
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