Three renowned financial industry experts took the stage at the Annual Forecast Dinner in October and offered their take on what the future holds. Gazing into their crystal balls, they presented a diverse range of topics: shareholder activism, global macroeconomic trends, and Ontario’s economic outlook.

Rising Shareholder Activism

Chris Young, J.D., CFA, Managing Director and Head of Contested Situations at Credit Suisse, made a strong case for the rise of shareholder activism as a discrete asset class. The capital allocation toward activism has been increasing since 2008, he said, reaching a high watermark of US$130 billion in assets under management, as of June 2015. This steady growth can be attributed to the consistent success of activism. In fact, over the past five years, activist hedge fund strategies outperformed other hedge fund strategies by 1.3 percent, on an annualized basis, according to data from Preqin. Young highlighted four popular activist strategies.

1. M&A activism often involves a quick capture of a takeover premium as the result of a company’s sale.
2. Breakup activism attempts to eliminate the “conglomerate discount.”
3. Balance sheet activism targets cash-rich companies and advocates the return of capital.
4. Operational activism is launched by activists who believe they can run the operational matters of the target company better than the current management. Returns are realized through management change (“alpha by decapitation”) or adjustments to the cost structure.

Young suggested shareholder activism has been gaining more traction with long-only investors, citing a recent survey in which 84 percent of investors believe shareholder activism is a positive market force. Tellingly, this was confirmed by a follow-up interactive poll in which 62 percent of forecast dinner attendees agreed that “shareholder activism creates alpha.” In stark contrast to U.S. market activities, activists seek a majority of seats in most Canadian campaigns, he said, which helps explain why Canadian campaigns are less frequent. Nonetheless, Young said Canada has seen some high-profile activist campaigns. For example, Pershing Square Capital Management made a successful push to replace the CEO and seven board members of Canadian Pacific Railway Ltd., and JANA Partners LLC made an unsuccessful attempt to spin off Agrium Inc.’s retail distribution unit.

Headwinds Ahead

John Mauldin, Chairman of Mauldin Economics LLC, an investing research provider, captivated the audience with his macroeconomic forecast for China, Europe, and the U.S.

Recent developments in the Chinese markets have investors worried about an impending economic crash. Mauldin dismissed this claim, arguing that the Chinese stock market, fuelled by speculators, is a poor indicator of general Chinese economic activity. There will be a slowdown, he said, but China will avoid the feared “hard landing” by diversifying away its export-oriented economy toward its domestic markets.

Europe, on the other hand, has a potentially difficult year ahead, Mauldin said, with ongoing economic concerns being further aggravated by the arrival of up to one million migrants. He remarked that providing humanitarian services and integrating these unexpected newcomers into host countries is expected to strain the member states’ budgets and have a negative impact on the European economy.

As for the U.S., Maudlin observed that there’s a “bull market in investor complacency,” but U.S. GDP will grow at only 1.5 percent to 2 percent. At this “stall speed,” there’s a material risk that the U.S. economy will tip into a recession, he said. If this happens, the U.S. Federal Reserve will not be effective in stabilizing the economy, he continued, adding that it expended most of its fiscal “ammunition” supporting the recovery from the last recession. Mauldin expects that the overall equity market will be flat with a few bright spots, including biotech and health care. Although his assessment of the short-term outlook was cloudy, he remained optimistic about the long term, predicting that advances in modern medicine will dramatically increase human longevity, which will bring transformational changes to the economy.

Ontario’s Bright Economic Future

Ed Clark, former President and CEO of TD Bank Group, zeroed in on our local economy and prescribed a formula that will accelerate Ontario toward a bright economic future. Clark warned that the Government of Ontario must act decisively to address the modern challenges of our dynamic economy; otherwise, he noted, we risk eroding the province’s economic competitiveness. Clark highlighted three major areas for improvement: (1) stopping the talent drain from Ontario’s workforce to the U.S.; (2) helping small businesses scale up and reach their full economic potential; and (3) leveraging educational and health care institutions as sources of economic growth.

Clark remarked that University of Waterloo graduates are sought after in Silicon Valley; in fact, more than 300,000 competitive Canadian graduates live in that region. The best talent produced by universities across Ontario ought to be retained to drive Ontario’s economy, he said, and he sees the solution in establishing Kitchener, Waterloo, and Toronto as an innovation hub. He said this can be accomplished by drawing together the essential resources of a thriving innovation ecosystem (including legal, financing, and operational support) and connecting these regions with modern transportation infrastructure.

Ontario businesses face more than 380,000 regulatory requirements, which is more than twice that of most other provinces, Clark noted. As a result, high regulatory compliance costs may dissuade business expansion while providing no better regulatory outcomes. Clark emphasized that Ontario must take a do-no-harm approach with a focus on keeping only those regulations that are beneficial to society.

Clark pointed out that Ontario is facing tough competitive headwinds in the traditional manufacturing sector and must pivot toward becoming a knowledge-based, service–export economy. The focus, he said, should be on hiring the best talent in areas of Ontario’s competitive advantage, which includes education and health services. There must be a mindset shift to viewing exports not strictly as physical goods but also as services, he said, citing the state of Massachusetts as a model to follow, where collaboration between public institutions and private enterprise is widespread, mutually beneficial, and profitable.