CHANGES AT HOME MAY SPUR CANADIANS TO INVEST ABROAD
Boom of ETFs opens opportunity amid policy uncertainty, writes Martin Pelletier.
“It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?” — Frederic Bastiat
The explosive growth of exchange-traded funds has given Canadian investors a much greater ability to invest abroad than ever before. But Canadians like to stick their household wealth close to home, and we doubt most portfolios would match Canada’s approximate weighting of three per cent of the world’s market capitalization.
Unfortunately, the home bias hasn’t yielded favourable results: the S&P/TSX Composite index is the second-worst performing market in the G20 this year, just ahead of Russia.
Indeed, Canadian stocks have only just returned above their 2014 peak and have had a mere three-per-cent annualized return in the interim.
This mediocre performance could repeat itself, especially considering the uncertainty and conflicting signals around our fiscal and monetary policies.
For example, the Bank of Canada has taken a completely different stance than many of its G7 peers by surprising the market with very hawkish signals.
Compounding matters is that the U.S. Federal Reserve has been trying to talk down its currency by signalling a tempered rate outlook as a means to counteract the impact of reducing the size of its balance sheet.
Consequently, BoC governor Stephen Poloz’s 25-point rate hike, and hints of more hikes to come, is akin to adding rocket fuel to the Canadian dollar rally without thinking about the consequences.
The Canadian dollar is up nearly 10 per cent from its May lows, and is now at a level we think will start to cause some damage to the country’s economic health.
Higher rates and a higher dollar will certainly impact our balance of trade and, more so, a real estate market that appears to be showing signs of weakness. For example, Toronto home prices have already fallen 19 per cent from their April highs.
There are also a number of one-time items in our recent quarterly GDP report that may not be repeated in the year to come. They include the impact of rebuilding Fort McMurray, Alta., which represents as much as a quarter of Alberta’s GDP growth, and the recovery in the oilpatch on higher output.
On this note, we wonder if economists have ever read the broken window fallacy above by the great French economist, Frederic Bastiat, in his piece entitled, “Ce qu’on voit et ce qu’on ne voit pas.”
The confusing part is that the federal government is about to run massive fiscal deficits to help stimulate the economy at the very same time the central bank is trying to slow it down.
The Justin Trudeau government inherited a $1.9-billion surplus in 2015, quickly turned it into a $5.4-billion deficit in 2016 and has estimates of annual $29-billion deficits in 2017 and 2018.
It isn’t surprising to see the government looking under every rock as a means to pay for its fiscal stimulus program. The changes so far include last year’s large tax hike for high-income earners, slight increases in both EI and CPP, the termination of four child tax credits, and the cancellation of income splitting for families.
Looking ahead, the government is about to impose a national carbon tax and is currently considering material changes in taxing small business owners, who contributed more than 30 per cent of total GDP in 2014.
All of this comes at a time when taxes have also been hiked at most municipal and provincial levels, especially in Alberta.
It wouldn’t come as a shock to see Canadians respond to this policy uncertainty by allocating their wealth and capital outside the country — and we can’t particularly blame them.