Managed Money Reporter Newsletter — Issue 119, December 1996

Editors: Carl Spiess & Allan McGlade

Seasons Greetings and Happy New Year, The Future Looks Promising!!

Economic Overview

The current positive Canadian economic environment has led to a dramatic increase in foreign participation in the Canadian financial markets. Their are several reasons which have led to this change: low interest rates; low inflation due to decreasing government deficits; and an undervalued Canadian dollar. Based on these fundamentals, and despite the recent 4% correction our market has been experiencing, analysts are still bullish about the Canadian market, and believe that relative to other major markets it will outperform over the next several years. Fred Ketchen, ScotiaMcLeod's Managing Director of Equity Trading believes that the market will continue to post record highs, despite minor corrections along the way and that the TSE will reach a level of 6600 in 1997 or an increase of 16%.

The Great Boom is Coming - Your Best Investment Bet - Equities!

According to several authors such as Harry Dent Jr. author of the "Great Boom Ahead" and David Cork author of "The Pig and the Python", an exciting new era of expanding wealth and prosperity is just around the corner. According to them, we are moving toward the greatest economic boom in history. This trend is not due to economic fundamentals, but rather the trends set in motion by the baby boomer generation.

This generation within the next decade will be shifting toward what Dent calls the Spending Wave. That is to say that this generation (the largest in history) is moving into a period, where they have increased disposable income, which analysts and authors alike believe will be spent in the stock market, particularly mutual funds. Therefore household assets in mutual funds are predicted to triple and quadruple in value over the next ten years. We believe these demographics, coupled with the optimistic economic outlook presents excellent investment and growth opportunities for our clients. And one of the best asset classes to invest in is Equities.

Strip Bonds and GICs in Today's Interest Rate Climate

With interest rates being at an all time low, many conservative and retired investors are wondering what their investment alternatives are. No need to panic yet. In a recent study done by the Royal Bank, economists have done some number crunching, and the results indicate that investors are still earning more today on fixed income products than they did in the hey day of the 70's and 80's.

The report shows that due to a continuing trend of low inflation in Canada, investors are getting higher real returns after tax on guaranteed investments paying more than 4.5% today, than they did in the 1970's when a 5 year guaranteed investments paid 9.1% or the 1980s' when it paid 11.4%. According to one Royal Bank analyst "we are actually better off on a real, after tax basis with today's low interest rates, low inflation combination because the tax burden is higher when inflation and interest rates are higher."

Decade70s80s90sNov 96
5 Year guaranteed rates9.07%11.42%7.72%4.50%
50% marginal tax rate50%50%50%50%
After tax 5 year rates4.54%5.71%3.86%2.25%
Average inflation rate7.66%6.60%2.65%1.47%
After tax real interest rate-3.13%-.89%1.21%.78%
Return inside an RSP1.41%4.82%5.07%3.03%

The above chart reflects the real returns based on a 50% marginal tax rate over the three decades: Keep in mind that these real return rates apply to non-RSP investments, and therefore people paying taxes, which includes a large percentage of retirees. For those investors investing in guaranteed products inside an RSP, where the interest earned is not taxed, the rate of return is the posted guaranteed rate minus the rate of inflation.

Strip Bonds the better Alternative

Strip Bonds are an excellent alternative to GICs. Government Guaranteed Strip Bonds are one of the most popular guaranteed investments today. They originate from large issues of Government of Canada or provincial bonds that are purchased by a financial institution and are subsequently stripped of all the semi-annual interest payments. Each interest payment is sold as a separate investment. Coupons also have the same level of safety to that of the underlying bond; that is they are 100% government guaranteed by their issuer. Strip bonds are sold with maturities anywhere from 1 to 30 years, and the rate of return is usually considerably higher than GICs. In addition, the strip bonds are very flexible and liquid in that they can be sold on any given day (subject to market conditions). Therefore, for investors still wanting to place portions of their portfolios in fixed income we recommend strip bonds over GICs.

Mutual Funds Perform

From our recommended list of funds for the period ending November 30, 1996, our top performing equity fund was AIC Advantage Fund at 74% for one year. The top performing balanced fund was Trimark Select Balanced Fund at 21.8%; the top performing bond fund was Industrial Bond Fund at 15.7%; and the top performing international fund was Fidelity Far East Fund at 25.7%.

Seasons Greetings

All of us at the ScotiaMcLeod Head Office, the HEPCOE Satellite Branch, and the Mutual Fund Reporter would like to wish you and your loved ones a safe and happy holidays. We look forward to a continuing relationship and servicing you in the new year.

For a complete list of our recommended investments for this RSP season, please call us at (416) 862-3035 or 1-800-387-9273 or e-mail us.


Contact Us

T.  416.863.RRSP (7777)
F.  416.863.7479

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