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The staff of Advisor.ca have been covering news for financial advisors since 1998.

Despite slowing economic momentum, Moody’s Investors Service is projecting that sustainable bond issuance will hold steady in 2024.

In a new report, the rating agency forecasts that issuance of sustainable debt will be flat at US$950 billion in 2024, comprising an estimated US$580 billion of green bonds, US$150 billion of social bonds, US$160 billion of sustainability bonds, and US$60 billion of sustainability-linked bonds.

“Growing policy support for green solutions including green hydrogen, biofuels, battery storage and carbon capture, utilization and storage is fuelling growth in private and public investment,” the firm noted.

This sort of policy support can help emerging technologies become increasingly competitive from a cost perspective, “increasing the likelihood that these projects will become a growing fixture of sustainable bond frameworks,” it said.

Additionally, the shift from voluntary standards to regulatory mandates will gain traction this year, Moody’s said.

“[The] application of the new European green bond standard in 2024 will be the cornerstone of the market’s embrace of regulatory standards,” the report said.

“Disclosure requirements and reporting standardization should also help support sustainable bond activity,” it added.

The sustainable bond market will also continue to diversify in the year ahead, Moody’s said.

“Projects addressing natural capital, gender equity and just transition will continue to blossom this year, which will … bolster its long-term growth prospects,” it said.

Conversely, a declining investor appetite for sustainability-linked bonds amid ongoing concerns about sustainability performance and other issues “has discouraged some would-be issuers from entering the market,” it said.

“With waning appetite for sustainability-linked bonds, we expect volumes to decline both in absolute terms and as a share of total sustainable bond issuance,” Moody’s noted.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.

The troubled U.S. office real estate sector will weigh on Canadian banks’ earnings and credit quality, but the impact should be manageable, says Morningstar DBRS.

In a report, the rating agency examined the ailing U.S. office sector, which is struggling amid weak demand, rising vacancy levels and declining property prices.

That weakness is important for the big Canadian banks with operations in the U.S., as office real estate makes up a greater share of their U.S. commercial real estate loan portfolios compared with their loan books in other markets.

“Headwinds in U.S. commercial real estate, largely driven by the office sector, have become a main driver of credit quality deterioration,” the report said, noting that gross impaired loans have been rising since the second quarter of 2023 — accounting for 22% of impaired loans in the fourth quarter of 2023, up from 7.6% at the end of 2022.

As a result, the banks’ provisions for credit losses have also increased over the past three quarters, DBRS said.

Looking ahead, the prospects for the U.S. commercial real estate sector “remain challenging, despite anticipated interest rate cuts in 2024 and the expectations of a soft landing for the economy,” the report said.

Property prices are likely to remain under pressure in the year ahead, it noted, with growing quantities of debt maturing “at a time when vacancy rates are at decades-high levels and valuations have declined, leaving many borrowers needing to add equity to refinance.”

As a result, the banks’ earnings are expected to face pressure from higher delinquencies, provisions and losses in U.S. commercial real estate.

That said, DBRS expects the effects to prove manageable, given that the banks’ total exposure to the global office sector is “generally well diversified” and only represents approximately 10% of total commercial real estate loans, and about 1% of total loans.

Additionally, the big banks have healthy capital buffers and sufficient internal capital generation capabilities to absorb incremental losses, it said.

If losses prove larger than expected, the Office of the Superintendent of Financial Institutions could also lower the domestic stability buffer, giving the banks the ability to soak up heftier losses.

“With interest rates likely having peaked, banks may explore selling U.S. office debt in an effort to lower commercial real estate exposure. However, any office loan sales may be at a sizeable discount given valuation challenges,” the report noted.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.

Ongoing conflict in the Red Sea region is acting as a support to commodity prices, but prices shouldn’t spike unless the disruptions intensify, according to Fitch Ratings.

Oil shipments through the Red Sea region accounted for about 12% of global oil seaborne trade in 2023, Fitch noted in a report — with shipments coming to Europe mainly from Saudi Arabia and Iraq, and exports of Russian oil to China and India, comprising most of that traffic.

Several major producers, including BP, Shell and QatarEnergy, and many shippers have stopped sending ships through the Suez Canal, Fitch said, and some ships are being re-routed around Africa.

“This may marginally tighten the oil and gas markets, albeit temporarily, as supply chains need to adjust to the alternative route taking about a fortnight longer, but we do not anticipate any material impact on prices,” it said.

The growth of global oil demand is also expected to moderate in 2024 as the global economy slows and China reduces its oil consumption, the report said.

Additionally, the global oil supply is strong, Fitch noted, adding that the OPEC+ countries have more than five million barrels per day of spare capacity.

“This will cushion any impact from potentially protracted or escalated disruptions,” it said. “Without material disruptions to actual oil production, or a wider escalation of attacks to more vital oil transport routes in the region, we do not expect a strong upside to our US$80/barrel price assumption for 2024, as there is material OPEC+ spare capacity.”

However, disruption spreading to the Strait of Hormuz, which accounts for about 27% of global oil shipping, “would create more tangible repercussions for global oil and gas markets, with more sustained price increases,” it noted.

Other commodities are also impacted by the conflict, Fitch said.

About 8% of the global trade in liquefied natural gas is shipped through the Suez Canal, and about 7% of global potash and 5% of the phosphate rock trade also transits through the region, Fitch noted.

While fertilizer ships haven’t been affected by attacks so far, “shipping costs account for about 10% of fertilizer prices, and therefore rising freight rates will add pressure on profitability.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.

The outlook for global dividends remains solid, finds S&P Global Market Intelligence in a new report.

Total global dividend payments are projected to rise by 0.7% this year to US$2.2 trillion, with regular dividends maintaining their 4% growth rate and variable dividends expected to drop by 50%.

Powered by the prolonged high interest rate environment, banks will continue to be the primary driver of global dividends, S&P said.

In Canada, regular dividends are forecast to grow by 6% this year, led by the banks and the energy sector, which together account for more than half of Canadian dividends.

The banking sector, which contributes 30% of total dividends, is forecast to grow payouts by 5% year over year, the report said — with energy sector dividends projected to rise by 8% this year.

“Unlike the U.S. market, where numerous energy companies adopted a variable dividend policy, few have done so in Canada,” the report noted. “Accounting for variable dividends growth can drop below 6% compared with 2023.”

Among the remaining Canadian sectors, the retail sector is set to deliver 10% dividend growth in 2024, with basic resources and utilities predicted to grow by 4% and 7%, respectively.

Globally, developed market dividends are expected to be healthier than emerging markets, S&P noted. It predicted that North American dividends will grow by 6% this year, with European payouts rising 4% and developed Asian markets delivering 2% growth.

In developing Asian markets, aggregate dividend payouts are projected to decline by 4%, led by weakness in China and India, following strong growth over the past few years.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.

The balanced 60/40 portfolio rebounded last year after a traumatic 2022 for investors. Experts see steady returns continuing, with bonds playing a larger role.

A year ago, obituaries for the 60/40 portfolio were piling up after the negative correlation between stocks and bonds collapsed spectacularly. Balanced portfolios saw double-digit losses in 2022 as central banks hiked interest rates in an attempt to slow the highest inflation in decades. Particularly painful was the fact that a conservative asset allocation provided little to no protection.

But after a “reset” of credit and yields — with the Bank of Canada and Federal Reserve each raising their interest rates from near-zero to 5% and higher between early 2022 and mid-2023 — we’re back to a more “normal environment” where asset allocation matters again, said Craig Basinger, chief market strategist with Purpose Investments.

“When the discount rate moves that aggressively in either direction, it just causes all assets to move in the same direction,” he said.

The largest balanced ETF in Canada, the $2.52-billion Vanguard Balanced ETF Portfolio, posted a return of -11.37% in 2022. It bounced back last year, finishing up 12.49%. Over five years, the fund’s annualized return is 6.16%.

Sal D’Angelo, head of product for Vanguard Americas, said the firm forecasts returns in the 6%–7% range for balanced portfolios over the next decade. But while equity returns have driven gains for 60/40 portfolios in recent years, bonds “will do a lot more of the heavy lifting.”

That’s partly because equities are likely to see more modest returns than in the previous decade of low rates, but also because bonds are offering solid yields again. Vanguard’s market outlook for 2024 recommended a higher tilt toward bonds in asset allocations.

Philip Petursson, chief investment strategist with IG Wealth Management, said 60/40 is usually used as an approximation for a balanced portfolio, with managers adjusting based on the market environment. In the low-interest period since the global financial crisis in 2008, that’s meant overweighting equities.

But with aggregate bond funds yielding around 4%, he said, 60/40 is once again the optimal asset allocation.

“Whether you’re looking at government bonds, corporate bonds, investment-grade or high-yield bonds, they’re much more attractive than they’ve been in a long time,” Petursson said.

With a recession looking less likely and corporate balance sheets remaining healthy, “high yield continues to be one of my favourite asset classes within fixed income,” he said.

Basinger said the good news is investors won’t have to lean so heavily on equities now that return expectations for bonds have improved. However, “the bad news is we probably won’t get back to an environment where correlations are as strongly negative as they were for much of the past 12 years,” he said.

Part of the reason is Basinger doesn’t see the so-called “Fed put” — the U.S. central bank intervening with stimulus to prop up markets — being as decisive a factor going forward.

“Since the financial crisis, any time the economy or the market stumbled, the Fed [and other] central banks were pretty quick to apply stimulus in one form or another,” he said.

That backstop may still exist, but to a lesser degree, Basinger said, and with less urgency.

But while stock-bond correlation may not be negative, it will be lower than it was in 2022, D’Angelo said.

“To have diversification, you don’t have to have negative correlation,” he said. “You just need to have non-perfect correlation, which is less than one.”

A year ago, in response to the balanced portfolio’s terrible 2022, some investors were pointing to private assets to diversify portfolios if bonds were no longer providing the ballast. In the year since, several fund managers have introduced new private market products designed for wealthy retail investors.

Basinger said that while alternatives still have a place in portfolios, “I just don’t think the plain vanilla core should be thrown out and overly reduced in lieu of the alternative space.”

He pointed to real assets as a tool to help insulate portfolios from inflation, for example. But he also noted that with yields in the public market more attractive now, not everyone needs private exposure.

Petursson also said there’s a place for alts in portfolios, but that investors should understand the product and who they’re partnering with.

“I think there is a risk in these private equity or private credit funds because there’s been so much money chasing these asset classes over the last couple of years as investment shops have opened up retail products,” he said.

For D’Angelo, the focus for advisors should be keeping clients invested. Last year saw billions of dollars flow into cash products that suddenly offered 5% yield. While D’Angelo said he expects cash to remain a more prominent part of portfolios as interest rates remain higher over the next decade, “that’s not the foundation of an investment portfolio.”

Many investors missed out on last year’s rebound, he added, and advisors should encourage clients to stick to long-term plans and not be thrown by “bumps in the cycle.”

Mark Burgess

News

Mark has been the managing editor of Advisor.ca since 2017. He has been covering business and politics for more than a decade. Email him at markb@newcom.ca.

Roughly 62% of eligible Canadians had TFSAs in 2023, compared to 66% the year before and 69% in 2018, according to a Bank of Montreal survey released Wednesday.

As the Bank of Canada’s interest rate remains at 5%, nearly one in four respondents cited paying off debt as the main reason they put off saving. Respondents also said monthly living expenses increased by $397 on average in 2023, and more than half said they spent less on travel, eating out and clothing.

“The results from this survey are understandable given prevailing economic conditions,” said Robert Kavcic, senior economist at BMO, in a release. “Household debt is historically high, inflation has lifted day-to-day cost pressures, and high interest rates make paying down debt a compelling option that might be crowding out some new investment.”

He added that financial conditions are likely to ease this year with rate cuts starting in the summer.

Those with TFSAs reported higher balances, increasing 9% on average from 2022 to $41,510 in 2023. Average TFSA account balances totalled $27,053 in 2018.

The TFSA contribution limit increased to $7,000 in 2024, up from $6,500 last year and $6,000 in 2022.

While roughly one in five respondents said they planned to put more savings into their TFSAs in 2024, one in four said they planned to contribute less. Canadians aged 18 to 27 were the most likely to grow their contributions, with one in three saying they planned to do so.

The survey also showed that while 53% of TFSA owners had investments in their account, the remaining 47% saved in cash, missing out on tax-free growth.

“Among the benefits of investing in a TFSA is the ability to withdraw funds at any time should those funds be needed,” said Nicole Ow, head of retail investments at BMO, in the release. “This flexibility makes the TFSA an excellent investment vehicle, especially during times of economic uncertainty.”

The online study of 1,510 Canadian adults was conducted by Pollara Strategic Insights from Nov. 3-8, 2023.

Jonathan Got

Jonathan Got is a reporter with Advisor.ca and its sister publication, Investment Executive. Reach him at jonathan@newcom.ca.

Stock and bond markets have a bumpy year ahead of them but will end 2024 on a positive note as they navigate the last mile of inflation and tightened monetary policy, a new report from Edward Jones says. 

The investment firm’s prediction is based on three fundamentals that will favour markets this year: interest rate cuts from the Bank of Canada and U.S. Federal Reserve, continued easing inflation and growth returning in the second half of the year. 

“If we go back the last two months, we’ve seen a pretty strong rally in equities and that’s really driven by expectations that the Fed and Bank of Canada rate cuts are not too far away,” Angelo Kourkafas, senior investment strategist at Edward Jones, said in an interview. 

“We’ve seen a moderation in inflation and some rebound in corporate earnings, which support the favourable outlook even though we’re not yet out of the woods. Still there are some downside pressures, especially for the Canadian economy,” he said, although it has likely avoided a worst-case scenario in terms of a downturn.

The forecast comes after 2023 defied expectations that the economy would slip into a recession and markets outperformed many strategists’ predictions.

Investors are laser-focused on interest rate cuts this year, after the Bank of Canada lifted its benchmark rate to 5% in its most aggressive hiking campaign ever to combat inflation. 

Statistics Canada said Tuesday the annual rate of inflation rose to 3.4% in December, an acceleration from 3.1% in November, but a significant improvement from the peak of 8.1% in June 2022.

Bank of Canada governor Tiff Macklem has said repeatedly that the path back to the central bank’s inflation target of 2% wouldn’t be linear. 

Edward Jones said the core of its market outlook for stocks and bonds is the “notable shift” in monetary policy in 2024. 

Kourkafas sees three to five rate cuts from the Bank of Canada on the way this year.

Outside of an external geopolitical shock, rate cuts failing to materialize is one of the biggest risks to the market, he said, though he added that it wasn’t his base case scenario.

“The realistic estimate for the Bank of Canada is they could possibly lower their policy rate by 1%, so let’s say it goes from, you know, 5% to 4% but that depends on the path of inflation and the economy,” Kourkafas said. 

The report also predicts U.S. stocks will outperform Canadian equities.

Kourkafas said he thinks economic growth in Canada will continue to lag in the first half of the year as high borrowing costs weigh on indebted households and because the earnings outlook in the U.S. is better than in Canada. 

The report noted the U.S. presidential election later in the year will cause some volatility but it will be short-lived. 

This year will also likely see a rotation back into defensive stocks and cyclical sectors, which lagged over 2023, as megacap technology stocks dominated market gains, Kourkafas said. 

As fixed-income yields fall in tandem with interest rates, dividend stocks start to look more attractive, he said.

“So that rotation, we think, is likely in its early innings, meaning we saw that in November and December, but we think there’s a lot more to go even though there will be some volatility along the way,” he said. 

Michelle Zadikian, The Canadian Press

Michelle Zadikian is a reporter with The Canadian Press, a national news agency headquartered in Toronto and founded in 1917.

A significant proportion of Canadians over 50 are financially vulnerable, according to a survey by the Ontario Securities Commission (OSC).

The survey, intended to uncover the attitudes and expectations of retirees and those about to retire, found that while most retirees believe they are in a financially strong position, about 15% describe their financial position as “poor” and almost one in three say their monthly expenses are higher than they had expected

The survey also found that working Canadians over 50 may not retire as comfortably as those who are already retired.

“Identifying and addressing the needs of older investors is a priority for the OSC,” said Tyler Fleming, director of the investor office at the OSC. “The research results will help inform the OSC’s regulatory and operational work in support of seniors.”

About half of pre-retirees and retirees alike reported they had experienced an unexpected event that compromised their ability to save or impacted their finances.

“Not surprisingly, retirees with lower incomes were also more likely to have unexpectedly high expenses and lacked the resources to save and plan for their retirement,” the survey said.

In addition, the survey found many Canadians over 50 were not preparing financially for the possibility of physical or cognitive decline. Six in 10 retirees and four in 10 pre-retirees have not appointed power of attorney for property, 71% of retirees and 83% of retirees have not appointed a trusted contact person and 61% of pre-retirees currently saving for retirement had not considered unexpected costs of health or long-term care.

The survey of 1,500 Canadians 50 years of age or older was conducted from March 1 to April 18, 2023. Of respondents, 878 were retired and 622 were still working.

Jonathan Got

Jonathan Got is a reporter with Advisor.ca and its sister publication, Investment Executive. Reach him at jonathan@newcom.ca.

A slowdown in M&A activity weighed on investment banking fees, pushing global revenues to a five-year low in 2023, according to LSEG Data & Analytics.

The firm reported global investment banking fees dropped by 7% last year to US$106.0 billion, which represented the weakest year since 2018.

While both equity and debt underwriting fees rose in 2023, a weak market for mergers and acquisitions saw M&A advisory fees drop 25% year over year to US$29.6 billion, LESG reported.

At the same time, fees from syndicated lending activity were also down year over year, dropping by 10% to US$25.8 billion.

These declines handily offset the 2% increase in equity underwriting fees to US$14.7 billion and the 11% rise in debt underwriting fees.

LSEG noted investment banking fees were also down by 6% on a quarter over quarter basis in the fourth quarter of 2023.

In terms of the global rankings, JP Morgan remained the top firm overall, with US$7.2 billion worth of investment banking fees generated in 2023. It gained 0.3 points in market share, growing its industry-leading share of global fees to 6.8%.

Goldman Sachs continued to rank second with an estimated market share of 5.5%, down by 0.5 points compared to a year ago. The rest of the global top five also remained unchanged with BofA Securities holding third spot, followed by Morgan Stanley and Citi.

Three Canadian firms ranked in the top 25 globally, led by RBC Capital Markets in 12th place. BMO Capital Markets ranked 20th and TD Securities Inc. was 25th.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.