December 13th, 2010 
Category: 
Not long ago, I was looking at my investment options for 2011 as I plan to contribute to my RRSP account early next year. GICs were the first to be removed from the list because of the dismal rates that were offered. With a 5 year GIC paying a meager 2.75% at best, Canadians who expect to reach their dream retirement will be moving past it as well. After all, the perfect retirement we are constantly bombarded with on TV by our financial institutions will just not be possible with such low rates of return.
In 2011, those who are brave enough to get back into the stock market after the beating they got in 2008 and those who decided to refocus on yield because they got sick of losing to inflation and getting punished for saving will certainly not be looking for the highest risks out there. They are risk averse, yet they are looking for something that pays more than a GIC or a High Savings Account; they are yield hungry. Where will the average person be injecting his money next year to get a decent yield without carrying excessive risk?
The interest rate variable
The decisive variable that will be directing the flow of money into the market in 2011 will be the interest rate, and for us Canadians, we will have to look to our southern neighbor for guidance. When it comes to forecasting, everyone stands on the same ground. Neither the number of titles you hold nor their length will give you any edge in this art since no one knows what’s coming next. Having said that, allow me to share my prediction for 2011.
Just last week, the bank of Canada left the benchmark interest rate at 1% citing increased threats to the global recovery. Between European sovereign debt issues, a stubborn unemployment in the US and slowing growth in key emerging markets, the central bank does not have much of a choice really. The risk remains on the downside; the Bank of Canada cannot afford to increase the gap between Canadian and US rates. The Canadian dollar is close to overtaking the US dollar. Further appreciation will certainly jeopardize whatever manufacturing jobs we have left and strain our exports further. Since QE2 has just launched, the US economy will take its time to stabilize in 2011 and return to growth mode slowly. The Federal Reserve will not be capable of raising rates any time soon in the US. Based on all of the above, I do not expect any significant interest rate hikes in 2011 by our central bank. If any, it will be small and well into 2011.
Canadian Stock Market: 3 Sectors that could benefit
You can still find decent yields out there if you look for high quality dividend paying stocks not to forget the potential for capital gains. Here are 3 sectors that I expect will be attracting money in 2011 by order of risk:
Low Risk
Canadian Banks: The Canadian banking sector survived the liquidity crunch in 2008, so chances are it will survive a volatile 2011 while the recovery is trying to gain traction. Investors can count on yields between 3.00% and 4.50%.
Medium Risk
Canadian REITS: Real Estate Investment Trusts have been a top performer in 2010. I believe there is still room for growth in 2011 as many of these REITs still have attractive yields reaching 8% in some cases. For those who prefer ETFs, the iShares S&P/TSX Capped REIT (TSE:XRE) currently yields 5.7%.
Above-average Risk
Energy Corporations: Oil prices have hit $90 a barrel recently. In 2011, analysts expect oil prices to remain strong backed by growing demand from the developing world. Many income trusts recently converted to corporations in the energy sector and kept generous monthly distributions. Take Crescent Point (TSE:CPG) for example, it is a heavy weight light oil focused Canadian producer which currently yields 6.4%.
Final Thoughts
I mentioned only 3 sectors above that could be attracting a lot of money as we transition into 2011. There are other sectors that stand to benefit as well such as Utilities and Pipelines. I chose to ignore precious metals as the level of risk is higher and because the sector is lacking in dividends. As for me, I will definitely be positioned into light oil in 2011 as I expect prices to remain strong well into the year unless we hit a second recession.
My DIY stock portfolio is overweight in Canadian oil producers for a reason. I believe Oil consumption is on the path of growth for the next decade and I intend to take every advantage possible of it:
I like your sectors and the idea of using high dividend stocks as sort of bond substitutes. Unfortunately, for many of many clients that isn’t possible – if they have 30% allocated to bonds I have to go with it. For these clients I’m am putting a decent chunk around the 2 to 5 year part of the curve. I’ve got some in junk bonds and some in mortgage backed securities. I also have to put a bit at the long end = you never know. This is a bit easier with the recent runup in rates.
I like preferred stock ETFs like PFF as well.
I think life insurance will get some wind behind them. They are part financial and part life insurance and were hit hard. Namely Manulife.
Utilities are consistent in my book. I buy those in my slow and boring DRIP with Computershare and CIBC Mellon.
Mich, I have only have two REIT equities left in the 401k portfolio, so a couple or three more REITs on the Canadian front might not be a bad idea at all.
Good thoughts on what’s coming up for 2011.
Solid points.
I used to invest quite a bit, but now my wife and I have focused our attention toward paying off all of our debts.
It’s been great. So far, we’ve save ourselves over $2,500 in interest by paying off some student loans early. We should be out of debt by April and it’s a great feeling!
@DIY, I don’t expect those who tick to their % allocation to move out of bonds. On the other hand those who were overweight in bonds are most likely going to “catch up” by chasing yield in 2011. I like the PFF ETF you mentioned, I found the Canadian one XPF.
@PIE, you can’t go wrong with utilities over the long run, I agree!
@101, I am looking to add 1 more REIT in my HELOC, watching one of them carefully and praying for a dip to my target price
@Life, The market isn’t going anywhere. when you debt is out you can step right back in
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Mark Carney recently made some statements on how we should not expect “low rates to stick around” and how he is concerned at the high indebtedness of Canadians — probably some scare words to perhaps dampen excessive leveraging at these low interest rates, but until he actually does raise rates, I don’t think mere words are going to be enough to change the current dynamic.
I don’t know about banks, and while REITs may be OK I’m not too happy that prices in Canada are at peaks. Overall, I would place my bets on energy, as that’s going to be a solid driver especially as the “developing” nations scream forward.
@IIW, I will be in energy as well in 2011 but I would like to add 1 more REIT to my portfolio for the divvies. MArk Carney cannot afford to tell people otherwise, low rates in my opinion should be around well into 2011.
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Ooh la la, banks, REITs, and oil!
I sold the REIT in my TFSA but I’m tempted to go back at it. I like that they are unscathed in the Income Trust change in 2011.
I just bought some BMO but I agree with Invest it Wisely- not too happy about things being at their peak…
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