I recently attended a financial planning conference in Kelowna, where there was surprising consensus among the participants regarding where the world economy is going, including some bearish sentiment on rates, growth, and debt. That was tempered by modest optimism on the U.S. economy and Canada’s changing fund fee landscape. Here’s a summary.
Continued period of low interest rates, which makes earning fixed income difficult. In most case when you take into account inflation and taxation, your “return” would be negative. This is very tough for retired Canadians who are heavily invested in GICs or other fixed-income assets at very low rates. You need a very large amount of capital to give you your required income, and today’s typical retirement may be 25 to 30 years.
Continued period of low growth. Europe is struggling, and it will take massive amounts of money to integrate large numbers of refugees into the economy before they see gains from this policy. China has had a slowdown after a massive infrastructure buildout. At the same time, an unprecedented number of people moved from farms to cities. This shift seems to have slowed dramatically, and so has the Chinese economy. Don’t be fooled by reported 5%-6% annual GDP growth rate. China had a decade or more with 10%-plus GDP growth per year. While that is possible with a mid-sized economy, it is impossible with the second largest economy in the world. Most developed countries are pleased with the current 2%-3% annual rates of growth.
Japan has made many important structural changes in its economy, which are a net positive for the long term. Japan still has major problems, with an aging population, a lifespan that is the longest in the world, and a very low birth rate. Most Western countries have fertility rates that don’t sustain current populations, but the shortfall is made up with immigration. Japan allows immigrants to work in Japan, but few become Japanese citizens, so population projections are negative. If, for example, a country loses a net 300,000 people a year through the imbalance in birth/death rates, this isn’t good for the economy, as logically, net consumption will decline each year.
Debt is too high everywhere. Europe, China, America, and others are guilty of ratcheting debt up to unsustainable levels. While this debt may be manageable with the current very low interest rates, any increase in interest rates by one or two percentage points it would make managing this high debt extremely difficult.
The American economy has reassumed its position as “Top Dog” in the global economy following what seemed to be a distinct challenge from China over the past few years. The fact is that the American consumer and business are in great shape. Following the financial crisis of 2008, the over-indebted consumers were able to walk away from large mortgage debt, which quickly repaired their “balance sheets.” The major challenge now facing the American economy is massive U.S. government debt.
The fact that the American economy is growing again at what appears to be a sustainable rate is very good for the world economy as a whole. It used to be said that “if America coughs, the whole world gets a cold,” a statement that reflected the importance of the U.S. economy. This still appears to be generally true for the most part.
Focus on taxation, not fees
The biggest single issue facing retirees today is taxation and how to avoid or defer it. Some pundits obsess about investment fees, and while these are important, they are but one aspect to long-term growth. The industry is moving towards increased transparency regarding fees paid to advisors, and most clients will see this when they open their annual statements for 2016, sometime in late January 2017.
However, it’s important to note that in the highly competitive financial services sector, almost every bank and investment company has already decreased management expense ratios (MERs) in the last few years as they prepare for this change. Nobody want to be the last dinosaur with 3% MER’s.
Even such companies as Investor’s Group recently announced that it is ending the practice of offering deferred sales charges (DSC) on some of its fund products in January 2017. This will create a domino effect very soon among all the other major fund companies and banks. I have lobbied quietly against DSC for a decade and was happy to see Investor’s Group leading the charge. Locking clients in to high management fees for six or seven years, with high penalties to exit, was never in client’s best interest.
Courtesy Fundata Canada Inc. © 2016. Bruce Loeppky is based in Surrey, B.C. and is registered with Portfolio Strategies Corporation as a mutual funds person. This article is not intended as personalized advice.