Global financial markets are expected to rebound by mid-2009, with equities seen as the most attractive asset class, according to a Mercer Canada forecast released Thursday.
Incorporating the views of 48 Canadian and global investment managers, the forecast from the consulting firm predicts that equity markets will rise between 8% and 10.5% this year and return on investment from bond markets will be between 3% and 6%.
Equities in the U.S., Canada and abroad were seen as the most attractive and top performing asset classes for Canadian pension fund investments, because they're considered to be a leading indicator of the economy and traditionally precede real economic changes.
The Bank of Canada projected today that the Canadian economy is expected to shrink 4.8% in the first quarter and a further 1% in the second quarter before growing again in the second half of the year.
Real GDP growth is forecast to rise 2% in third-quarter 2009 and 3.5% in the fourth quarter. Overall, the economy is expected to fall 1.2% from 2008 levels before recording a 3.8% increase in 2010.
The central bank noted, however, that any recovery in the latter half of 2009 will depend on stabilization of global financial markets and effective monetary policy and fiscal stimulus provided by all levels of government in Canada.
On the monetary front, the Bank of Canada has already dropped its overnight rate charged to banks to a record low of 1%. Analysts expect the central bank to cut its rate a further 50 basis points at its next meeting in March. Earlier this week, the federal government invested $350 million in the Business Development Bank of Canada, which could help provide $1.5 billion in additional financing for small and medium-sized businesses.
Despite the economic and equity rebound, the majority of investment managers surveyed by Mercer said it would take years for the TSX to return to the record 15,000-point level it reached in May 2008. More than half said it would take between three to five years, while 31% said it would take five to 10 years. Only 11% predicted it would take between one and three years.