It actually started out as a piece on how to profit from the current demographics….where to invest, etc. Since only a small snippet of the correspondence was actually included in the piece, I thought I might share a bit more of my thoughts, taken directly from one of our email exchanges:
“With regards to the asset allocation of the typical near-retiree, it is still overweighted towards stocks when compared to historic averages. This may well reflect the tendency to ‘reach for yield’ in this low interest rate environment. As you suggest below, it’s normal for people to reduce stock exposure over time as they approach retirement.
However, in today’s interest rate environment, many stocks still offer generous tax advantaged yields when compared to government bonds. My concern, which I’ve expressed numerous times on my website, is that low interest rate environments cause retirees, near retirees, and pension funds to have to embrace more risk to achieve moderate growth. Having a generation of retirees with unusually high-beta portfolios is certainly a concern.
The other important thing to remember is that real estate makes up the better part of half the net worth of the typical Canadian household, the highest it’s been in 20 years according to a Vanier Institute report from earlier this year. Canadians have a love affair with real estate, evidenced in the all-time high homeownership rates. This is true of the boomer demographic as well. Given the reported net worth of the typical near-retiree, there’s a strong likelihood that there will be a tendency to downsize over the next decade as real estate assets must be turned into income producing assets.
The net result of this will be a price compression in Canadian real estate markets, with large houses coming under selling pressure and condominiums and small bungalows having a relative price floor put under them. A report released earlier this year by CMHC indicated that the largest proportion of condominum purchasers,by age, were those aged 65 and older. In 2009, 43 per cent of all purchasers in this age group bought a condominium. This is a trend that is unlikely to change. The era of the McMansion is over.
The million dollar question is how many households are planning on downsizing out of necessity to free up capital. Should home prices weaken as most economists suggest, will there be an orderly liquidation of these assets in the Canadian marketplace, or will it result in significant price pressure on the top end of the market? Demographics will make it exceptionally difficult for large swaths of near-retirees to downsize without significant price pressure as the pool of buyers looking for large homes simply will not absorb that much supply, particularly with new home constructions still running above net household formation.
All that being said, income will absolutely be the trend for the next few years. I believe the Bank of Canada will not embark on a serious round of rate hiking for several years. Yesterday’s GDP report highlighted the very structural weakness in the Canadian economy that I’ve been harping on for some time. If interest rates do not rise, as I expect, large cap dividend paying stocks should continue to see a sustained bid.
Well capitalized utilities, income trusts and REITs will also be a good bet. Bonds will also continue to be well bid, particularly at the long end of the curve. Long bonds offer the most upside should the Bank of Canada hold the line on interest rates for some time. High quality corporate bonds are also often overlooked, but should be redicovered as people increasingly search for yield. Preferred shares will also do very well. Anything that offers an attractive income stream that is relatively stable and financed with as little debt as possible will excel.
In terms of sectors that will benefit, healthcare is an obvious one. The TSX is very underweighted in healthcare stocks. It’s best to look south of the border at some health care ETFs down there. Health care is one industry that has lagged the broader market this year and looks like an attractive long-term opportunity. I also like the prospects for small asset management and financial services firms. I’m not bullish on the big banks though, an important distinction.”