Bank Research Views on Inflation, Future Rates of Return and TSX Profits

Grist for the planning / expectations mill:

• Inflation - BMO Capital Markets Economic Research in the May 6 Focus on pages 5-6 weighs up likely changes to the Bank of Canada inflation targeting mechanism and 2% target and concludes that for now it will all remain the same, though in few years the BOC might move to a lower target since "CPI provides an upward biased measure of the true cost of living (because people tend to substitute lower- for higher-priced items and many new tech-type goods exhibit significant price decay)".
• Future rates of return - TD Financial Group Economics in the March 17th An Economics Perspective On Long-Term Financial Returns estimates that a long term investor with a diversified portfolio could expect 5 to 7% returns (before inflation, which they estimate at around 2%) on average, with big swings above and below that year by year as the usual result of business and market cycles. The breakdown: T-bills 3.4%, Universe (whole of market) Bonds 4.0%, Canadian/US/International Developed Equities 7.5%. Emerging markets equities get a one-line comment - "the MSCI Emerging Market Index could deliver an annual return of 11% to 12%"
• TSX profit margins - CIBC World Markets in the April 29th TSX Earnings: At the Margin figures that profit margins of companies on the TSX look strong overall in relation to the S&P 500 and their rising trend has some potential to advance yet more. Sectors differ considerably however, with a range of hot 20+% margins in metals and mining at the top of the table to woeful 2% margins in airlines and in machinery.