Three influential investors shared their views at CFA Society Toronto’s Annual Forecast Dinner, held in Toronto on October 1, 2014. Below, you’ll find their top predictions for what’s next, as well as their thoughts on the opportunities and risks facing investors right now.

The Case for Low Interest Rates

As Chief Investment Strategist at BlackRock, presenter Russ Koesterich, CFA, knows a thing or two about the forces at work behind fixed income markets. As such, his perspective on the root causes of today’s low bond yields and slow GDP growth was particularly instructive.

Discussing bond yields, Koesterich drew attention to three reasons why rates remained low in 2014, despite the predictions of many experts to the contrary. First, he pointed to the strong demand for bonds from pension funds, which looked to match in their liabilities after achieving outstanding equity returns in 2013. Second, significant demand continued from the world’s central banks, with the U.S. Federal Reserve Board buying massive amounts of U.S. government issues, and the Bank of Japan buying 70 percent of its government’s new issuance. Finally, he noted that it is not unreasonable to see rates this low in a world where nominal GDP growth is slower than normal.

As to why GDP growth is so low by historical standards, Koesterich pointed to three factors: unfavourable demographics, high global debt levels, and slow wage growth. Combined, these forces have created economic conditions under which “the speed limit for economies is lower than it used to be.”

Koesterich added that fixed income as an asset class is expensive and is likely to stay that way. He recommended equities over fixed income because “low yields, low wages, and low inflation” tend to be positive for equities, but also cautioned that “volatility will be closer to normal” in the year ahead.

The Return to Active Management

Renowned value investor Charles Brandes, CFA, delivered a clear message: Forecasting is a dangerous business, but over the longer term, buying for value always wins. His outlook for the year ahead focused on three main points:

1. Europe and emerging markets will outperform the U.S. and Canada over the next three years. His reasons for this prediction: valuation within North American markets appearing to be fully valued on a cyclically adjusted price-to-earnings basis, and corporations operating with elevated and unsustainably high profit margins. By contrast, valuations in Europe are at a historic low relative to the U.S., and emerging markets are “extremely cheap.”
2. There will be a gradual shift to active management in five years, said Brandes, who described the recent migration of investors to passive investing as a “tremendously large movement towards giving up.” He predicted that the market will begin to recognize some of the problems with the rise of passive strategies (e.g., correlated market movements and investor herding), and that will bring active strategies back into favour.
3. Equities will outperform bonds by the widest margin on record over the next 30 years. With a poor outlook for fixed income and the strong historic track record of equities, Brandes believes the dominance of stocks is here to stay.

As befits an adherent of value investing, Brandes ended his presentation with a quote from Ben Graham: “What happens in the future, we don’t know. If you base decisions on value, you will.”

It’s Not About to Blow

Christian Stracke, global head of credit research at PIMCO, focused on why today’s market participants are so quick to claim “This is it” in response to each new market concern. Whether the feared catalyst is the Scottish referendum, Ebola, or the crisis in Ukraine, he sees two reasons people like to forecast that “It’s all about to blow!” First, it’s “cooler and more memorable” to be the pundit that predicts the apocalypse, and second, many investors are indulging in wishful thinking, hoping to see the market drop by 20 percent so they can finally buy something cheap. In Stracke’s view, there will be no catastrophic market drop any time soon.

In particular, he gave his take on the three top investor worries right now:

1. The Fed has been too cautious in its outlook: Despite this being a common worry in the headlines, the central bank would love to get “behind the curve” of markets, and as a result, it will not raise rates above market expectations.
2. Geopolitics: Events such as the crisis in Ukraine and the Ebola outbreak are terrible from a humanitarian perspective, but the impact they will have on markets is marginal, and neither crisis will be the straw that breaks the global economy’s back.
3. China: This worry deserves the most attention. The U.S. is reasonably insulated from a China slowdown, while Europe is more exposed. Despite people’s worries, “China is not the thing that is going to make things blow.”

One final reason to refute the cries that “This is it!” is that the financial system does not have the “turbocharger of financial leverage” that existed prior to the last meltdown. Absent that amplifying force, we may see more volatility, but it is unlikely the markets will implode in the same manner witnessed in the 2007–2008 financial crisis.