Value manager Charles Brandes once said that 'what growth managers pay in valuations, we pay in time" and this remains one of my favourite investment quotes. In a recent (highly recommended) podcast with FT Alphaville's Cardiff Garcia, George Mason University economics professor Tyler Cowen extended this idea of the importance of time by arguing that emphasizing the future 'is the correct moral point of view.'
"Individuals who will live in the future should be less distant from us, in moral terms, than many people believe. Their interests should have greater sway over our calculations and that means we should invest more in the future."
These are philosophical concepts but they will take on concrete reality for investor portfolios and government policy because of the rapidly approaching challenges arising from an aging population. In a report released Thursday, HSBC economists calculated that "over the next decade, the world's population is going to age at an unprecedented rate – with the numbers of over-65s in the world rising by 38 per cent as we move from having 7.5 workers per pensioner to 6.0 in the space of just 10 years."
This notion of time is psychologically difficult in the sense that delayed gratification – sacrificing now for benefits in the future – does not come naturally and indeed, becomes a hallmark of adulthood and maturity. To get a majority of the country to value future conditions over short-term comfort in policy discussions and the voting booth seems an impossible feat.
We are, I think, going to have to get accustomed to thinking along these lines because, as HSBC notes, the challenges are imminent and global. Investors approaching retirement will have to decide how much risk they're willing to accept to own income-related investments when so many others need them too, and have bid the prices higher. The costs of health care, already about $6,300 per Canadian or 11 per cent of gross domestic product (GDP) in 2016 according to the Canadian Institute for Health Information, will rise as the average age climbs.
It's difficult to envisage the next decade without a sharp increase in public debt. The potential for generational warfare in politics is high – younger generations kept lower on the career ladder by those working into their 70s will be reasonably opposed to large tax increases.
In a culture of adult colouring books and superhero movies, I'm not overly confident that Mr. Cowen's appeal for forward-looking altruism will be heeded. On the other hand, the Japanese are already going through many of these demographic challenges and standards of living in the country remain high despite a colossal increase in government debt. It will be messy, but solutions will be found.
I'll end with one more quote from an unknown writer in ancient Greece which, even though it seems a bit utopian, I hope future Canadian political combatants keep in mind,
"Society grows great when old men plant trees whose shade they know they shall never sit in."
-- Scott Barlow is Globe Investor's in-house market strategist.
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Stocks to ponder
Enbridge Inc. This company appeared on the negative price breakouts list in mid-June, with negative price momentum. The company offers its shareholders an attractive, secure 4.7 per cent dividend yield with double-digit dividend growth forecast. In addition to dividend income, analysts are anticipating a double-digit price return. In recent weeks, the chief executive officer purchased $1-million worth of shares in the public market, writes Jennifer Dowty.
Asanko Gold Inc. This stock has battled short-sellers before and survived. Investors who think the TSX-listed miner's recent travails are a buying opportunity, however, might find the risks now outweigh the potential rewards, writes David Milstead. He looks at two big red flags that will have investors thinking twice about buying the stock.
BSM Technologies Inc. This company's share price has been locked in a trading band since the start of the year, and for that reason, is neither on the positive breakouts list nor the negative breakouts list. However, analysts anticipate that the share price will regain its positive price momentum, calling for 28-per-cent price return over the next year. New York-based Crescendo Partners. L.P., an activist investment firm, has an ownership position in the company and three executives from Crescendo sit on the company's board of directors, writes Jennifer Dowty.
The Rundown
If the bond market is right, you may want to load up on these three stocks
Are you ready for the next recession? The economy continues to expand and stocks are chugging along, but there are a few good reasons to prepare for a shift at a time when safety can be bought relatively easily. The U.S. bond market is flashing an ominous signal that should raise concerns: The yield curve is flattening, which can mean that the outlook for economic growth is being revised downward. Translation: The bond market is expressing doubts about the economy. David Berman looks at three stocks that perform well during a recession.
Think you can do better than 5% annual returns? Some brilliant minds say no way
Ian McGugan's father was fond of remarking that a man who has low expectations can never be disappointed. He prefers to think that he did not mean this remark as a reflection upon his experience as a parent, but rather as an investing tip. It's a tip that has special relevance these days, with interest rates scraping along historic bottoms and stocks hovering at scary heights. Given this ugly starting point, how much can an investor reasonably expect to earn in the years ahead? Ian McGugan has some sobering thoughts.
Seeking bond ETFs that can weather rising interest rates
Worried about what rising interest rates will do to your bond holdings? Rob Carrick looks at some bond ETFs that combine a low level of vulnerability to a rate increase with cheap fees.
Hate Canada's main stock index? Check out these six funds
Good money has been made by investing in the main Canadian stock market index – close to 7.5 per cent annually on average for the past 30 years, writes Rob Carrick. But the S&P/TSX composite index is definitely flawed. It's our very own index and totally reflective of corporate Canada. But that means it's poorly diversified – there's a 34 per cent weighting in financials like banks, and another third covered off by resource stocks. Tech is barely 3.5 per cent, and health care is a laughable 0.7 per cent. If you're looking for a more diversified investing experience, take a look at these six index busters.
Others
Monday's Insider Report: Companies insiders are buying and selling
Gordon Pape: My Buy and Hold Portfolio has enjoyed 13% annual growth
The Globe's stars and dogs for last week
Number Crunchers
Momentum-driven stocks that capitalize on the upside, protect on the downside
Ask Globe Investor
Question: What is the date acceptable by the Canada Revenue Agency for reporting the receipt of U.S. dividends?
Answer: For tax purposes, you're required to convert foreign income to Canadian dollars using the Bank of Canada exchange rate on the transaction date. You can also use that exchange rate to convert any U.S. tax withheld into Canadian dollars for the purposes of claiming a foreign tax credit.
If all that number-crunching sounds onerous, there's an easier way. According to the CRA, if there were "multiple payments at different times during the year" – for instance, if you received a stream of quarterly dividends from U.S. companies – it is acceptable to use the average annual exchange rate (which the Bank of Canada publishes on its website) to convert U.S. income to Canadian dollars.
Want to make things even simpler? Consider holding your U.S. stocks in a registered retirement savings plan or registered retirement income fund. In addition to paying no Canadian tax, you will avoid U.S. withholding tax, which is waived for retirement accounts under the Canada-U.S. tax treaty. But remember: If you hold U.S. stocks in a tax-free savings account or registered education savings plan, you will still face the 15-per-cent withholding tax on U.S. dividends. And you won't be able to claim a foreign tax credit for the amounts withheld.
--John Heinzl
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What's up in the days ahead
Value investors, it's time to celebrate: Norman Rothery has developed a stock ranking system for the Report on Business magazine's Top 1000 this year. The new system is based entirely on the numbers. It puts fundamental and technical data through a series of tests to evaluate each stock. A core part of the algorithm relies on value-investing principles and techniques of the sort the pros use. Watch for the complete rankings online Wednesday at Globe Investor, and in the ROB Magazine on Friday.
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Compiled by Gillian Livingston