What a difference a year makes.
At the beginning of 2022, prices were spiking higher in Canada thanks to pandemic supply chain breakdowns and consumer bank accounts stuffed with cash. Remote work seemed here to stay and unemployment was near all-time lows. For many, there was a real sense that the pandemic economic crisis was behind us.
Not every observer was so sanguine, however, and it didn’t take long for runaway inflation to become a major headache for markets and regular Canadians.
After some hesitation (remember transient inflation) the Bank of Canada (BoC) pledged to crush rising prices by hiking interest rates. The stock market tanked, taking bonds along for the ride, making it a miserable year for investors.
With 2022 drawing to a close, the S&P 500 has clawed its way out of bear market territory but remains down 17% as of this writing. As we look ahead to 2023, here are nine investing trends that can help parse the cautionary tales from the opportunities.
1. Canada Remains an Inflation Nation
Inflation was the economic glitter of 2022—it stuck to everything. From the gas pump to the grocery store to your RRSP, investors have higher costs and less valuable dollars to invest in the future.
The big question for 2023 is whether inflation will drop toward the BoC ’s 2% target rate. Many experts suggest that’s unlikely, although it’s worth noting that the BoC’s seven 2022 rate hikes will take a while to work their way through the economy.
The International Monetary Fund (IMF) predicts that the BoC will need to keep interest rates roughly at or above 4% by the end of 2023. If that happens, it won’t help the inflation fight. That suggests that Real Return Bonds (RRBs), Canadian Government bonds that protect against inflation, should remain popular inflation-fighting investments.
2. The Bear Market Could Stick Around
The Covid-19 stock market rocketship crashed and burned. June 2022 ushered in the second bear market since 2020, sending investors scrambling for cover.
While stocks have officially emerged from the bear market in the second half of 2022, stock markets remain down by double-digits.
Ordinarily, bonds would take the edge off a bear market. However, aggressive interest rate hikes have bond yields falling along with stock prices. In the third quarter of 2022, the venerable 60/40 portfolio suffered greater losses than its stocks-only counterpart, causing questions about whether the O.G. portfolio needs to go.
Improving investor sentiment will likely be tied to easing inflation, so the year ahead could prove tricky for traditional asset allocation models.
While putting a “buy low” mantra into heavy rotation on your morning meditation playlist is never a bad idea, 2023 may prove that buy-and-hold investors need more than equities and fixed income to hedge against unpredictable markets.
3. Consider Alternative Investments
Speaking of broader diversification, 2023 holds promise for alternative investments finally earning a place in everyday investor portfolios.
The portfolio for 2023—no matter your net worth, risk tolerance, or time horizon—should include an increased allocation to alternatives. With their low correlation to traditional asset classes like stocks and bonds, alternatives could blunt inflation- and recession-induced volatility and buoy returns more than dividend stocks alone.
Previously reserved for accredited investors and seasoned traders, everyday investors can easily access alternative asset strategies like commodities and managed futures through a decent selection of low-cost exchange-traded funds (ETFs) and mutual funds.
While expense ratios trend higher than the average fund, the performance of alternative assets may outweigh the higher costs.
4. The Return of Canada Savings Bonds?
In this new economic environment, some are calling for the temporary return of Canada Savings Bonds. This was the formerly esteemed 71-year-old program that was ended in 2017 and was designed to offer a competitive interest rate by featuring a guaranteed minimum interest rate for one year and then fluctuating with the market rate for nine years before reaching maturity.
With the return of the Canada Savings Bond, the Canadian Federal Government could encourage a mindset of saving money among Canadians, especially if they could guarantee a higher-than-average interest rate.
Now may also be the right moment to bring back the classic investment vehicle with GIC rates so lacklustre and many banks halting the sale of third-party investment products. Plus, bringing back Canadian Savings Bonds tax-free with short-term investment windows of 18 months or less would incentivize Canadians to save in the short-term, but also give them an opportunity to reassess their options once interest rates go down again and the market returns to normal.
It would give Canadians an opportunity to soften the blow of inflation on their wallets and would provide a nice revenue stream for the federal government.
The hashtag of the year on social media could be #layoff. Since mid-November, tens of thousands of employees have been laid off from tech behemoths like Meta, Amazon, Lyft, Shopify and Twitter.
While boldface tech names have seen very high-profile waves of labor force reductions, other industries have seen their own losses. Real estate startups like Better, Redfin and Opendoor have slashed headcounts as rising rates and home prices dried-up mortgage applications, closed sales and corporate revenues.
As cash-strapped public companies try to shore up their balance sheets ahead of a potential recession, the year ahead could see the undoing of the historically strong U.S. labor market that could then see its impact reverberate through Canada. While experts predict that new college grads won’t be at a loss for job offers, entry-level positions have less impact on corporate bottom lines.
That mid-career—especially in tech-centric specialties—could weigh on unemployment figures. Companies seeking to whittle payroll may pursue leaner staffing protocols, leaving plenty of talent on the sidelines to appease shareholders.
It is pretty easy to argue that 2023 has to be a better year for crypto than 2022 since it could hardly be worse.
Multiple stablecoins slipped their pegs in 2022—including TerraUSD and Tether, fueling a midyear crypto crash that wiped out hundreds of billions in value. Crypto exchanges, meanwhile, were hobbled by growing pains and layoffs (Coinbase)—not to mention the sudden implosion of FTX.
Moving into 2023, look for cryptocurrency businesses to woo investors with stories of cash reserves instead of trendy coins and celebrity endorsements. And look for big developments in cryptocurrency regulation from Washington, D.C.
The Fed launched its 12-week central bank digital currency (CBDC) proof-of-concept project in mid-November, and legislators remain excited to advance crypto regulation legislation. Meanwhile, the Canadian Government is still tabling the concept of CBDCs by launching a consultation on them in November 2022.
Unfortunately, many blockchain conversations will likely be coloured by the debacle at FTX instead of the technology’s long-term, untapped potential.
7. New Interest in Renewables
While supply chain issues stymied clean energy developments from electric vehicles (EVs) to solar panels over the last two years, 2023 could be a very good year for renewables.
With battery storage and EV adoption inextricably intertwined, BDO Global predicts a banner year for renewable energy storage systems. Increased competition in the EV market from newcomers like Rivian, Lucid, Ford and Chevy could put mainstays like Toyota and Tesla on their heels.
And natural gas shortages stemming from European Union conflicts have increased policy momentum for clean and renewable sources.
8. Hybrid Robo-Advisors May Have a Moment
Recent data from Parameter Insights show that investors exited self-directed investment tools like robo-advisors and brokerage accounts at a staggering pace in 2022. Theories on the exodus abound, but two lead the charge: Wealthier investors may be flocking to traditional financial advisors, and DIYers may be content to wait out a market recovery with cash in hand.
No matter the reason, hybrid robo-advisors—those that offer algorithm-driven investing plus access to traditional advisors—may be teed up for a lot of interest in 2023.
With consumers demanding more value for their money during inflationary times, the low-cost/expert advice behind hybrid robos hits the zeitgeist. By offering a combination of services like automatic rebalancing and tax-loss harvesting with financial advisor access, and at a fee typically lower than traditional advisors—
Price-sensitive economies make investors more value-driven than ever, which positions hybrid robos as the best of both worlds for investors eager for guidance but anxious about costs.
According to a poll from Angus Reid, only about 50% of Canadians have a will and a quarter of those who don’t, say they’re too young to worry about it yet
But with stock market returns lagging and inflation muddying 2023’s outlook, what could inspire investors to spark an estate planning upward trajectory? It has never been easier to create a will, especially in B.C. where the Covid-19 pandemic inspired it to become the first province to allow for online filling in December of 2021. It’s also one of the few ways Canadians can take control of their lives at a time where a lot seems out of our control.
Holly Geerdes, an estate planning attorney at the Estate Law Center, says that estate planning isn’t so much about death or assets. Instead, it’s about taking control and having your say on what your wishes, wants and concerns are today to live on in the years ahead.
While new year’s resolutions overwhelmingly focus on health, self-care, or family time, it’s also a good time for Canadians to take a closer look at their finances, according to one financial professional.
“There are a lot of planning opportunities that have opened as of January 1,” says Ludmila Paciora, CFP, an investment advisor and financial planner at the Waterfront Group with Wellington Altus Private Wealth. “As a rule, I reach out to most of my clients at the beginning of each year to explore the different possibilities that may be available to them.”
One new development in 2023, Paciora says, is an increase in yearly contributions for TFSAs. Because of record inflation, the Canada Revenue Agency says Canadians can top up their TFSAs by $6,500 in 2023. For those who haven’t used their TFSAs since their introduction in 2009, they may now have a total contribution room up to $88,000.
Apart from the 2023 TFSA contribution bump, the CRA has announced inflation-linked adjustments to the federal income tax brackets. The lowest rate of 15% now applies to income up to $53,359, while the top marginal tax rate of 33% now applies to income over $235,675.
“I encourage clients to look at their total income for 2022, and together we review how much it would make sense for them to contribute to their RRSP,” she adds. “We want to assess it not just from a tax-optimization perspective, but also through the lens of their retirement plans.”
For Canadian couples, Paciora says it’s a good time to consider income-splitting opportunities, whether through a spousal RRSP or a prescribed loan.
“These and other tax-planning strategies should be tied to the client’s personal financial plan,” she says.
Parents can also look at their new grant eligibility for registered education savings plans (RESPs) for their children. Every year, the government will provide a grant of up to $500 per beneficiary for each $2500 contributed into a RESP. Those who weren’t able to add to an RESP in previous years may “catch up” by doubling their contributions.
“The earlier the contribution is made in a year, the more time the funds can grow tax-free within the RESP, which is why I make it part of my new-year review process for clients,” Paciora says.
A new year is also a great time for Canadians to look at their estate planning, taking stock of both recent events and upcoming milestones. That includes any plans by clients to get married, sell their business, or retire in the near future.
“If there’s a wedding coming up, it’s a good time to think about how that will impact the family, and whether they’ve considered the possibility of drafting a prenuptial agreement,” she says. “That’s a very exciting time for clients, and it can be difficult for them to think about the implications. So this is when they actually need an independent set of eyes.”
Looking further ahead, Paciora says clients should review their wills as well as beneficiaries they have assigned across their various financial documents. Changes within the family over the past 12 months – such as the birth of new children or grandchildren or shifts in family dynamics – could dramatically impact a client’s wishes.
“Recently, we saw an update to Ontario estate law through Bill 245 which brought significant changes. For example, previously, when someone gets married in the province, the marriage would automatically nullify any wills that they drafted prior to that,” Paciora explains. “Now whatever will they had prior to the marriage will stay in place, so someone who just got married must make sure it still reflects what they want.”
For Canadians who don’t hear from their advisor right away, Paciora encourages them to proactively reach out and schedule a conversation to discuss their goals, priorities, and plans for the future.
“Depending on where they are in life, they may need something more than just a one-on-one meeting,” she says. “For matters involving big life decisions, I’d recommend a meeting with different stakeholders, including family members, executors, POAs and accountants.”
Many Canadians are approaching the new year with extreme uncertainty and concern. In a recent poll of Canadians, the Angus Reid Institute found half perceive their financial situation as worse than before. A December survey by CIBC also found 65% of Canadians are concerned about inflation, while 30% cited interest rates and 24% were worried about a possible recession.
“By taking proactive steps with their advisor and maximizing all of the available planning opportunities, Canadians can be better prepared for the challenges ahead,” she says. “Instead of worries, it will be a year of excitement and new possibilities.”
Staying on top of investment trends and making sense of them can be challenging, to say the least. Having someone you can trust when it comes to employing strategies can turn stresses into high hopes. Contact one of our experts at Crossgrove & Company and let us do what we do best, for you.
Reference: Forbes, Wealth Professional