WHAT TO BUY, SELL AS U. S., CANADIAN ECONOMIES DIVERGE

The Canadian and U. S. economies have never been as out of synch as they are now, Macquarie Capital said in a new report, forecasting an interest- rate cut from the Bank of Canada in 2017.

Both the market and forecasters continue to price in a rather healthy outlook for Canada, one that relies heavily on convergence with the U. S., and is evident in market pricing for two rate hikes in Canada over the next 24 months.

However, Macquarie analyst David Doyle instead anticipates unprecedented divergence in monetary policy and government bond yields.

He noted that private sector non- financial debt to GDP, and residential investment’s GDP share, have been heading in completely opposite directions during the past decade.

“These present headwinds for Canada, but significant tailwinds for the U. S.,” Doyle told clients.

The analyst also pointed to the differences in household debt service ratios, housing affordability and home ownership rates, motor vehicle and auto- related spending, exports, manufacturing employment, construction employment, worker compensation and average hourly earnings growth, labour force participation, small business confidence, and R& D investment.

“These factors support our view that in the near- term and over the long run, Canada’s real GDP growth is likely to be substantially lower than in the U. S.,” Doyle said, reiterating his forecast for annualized real GDP growth in Canada of only about 0.9 per cent through 2030.

That’s roughly half of what he expects from the U.S.

Meanwhile, Doyle expects Canadian banks to underperform their U. S. peers, and favours companies with more foreign revenue.

Recent additions to the analyst’s overweighted foreign revenue stock basket include Milestone Apartments REIT, Great-West Lifeco Inc., and Shopify Inc.

At the same time, Dollarama Inc., Loblaw Cos. Ltd. and Royal Bank of Canada were among those added to his underweight- rated domestic Canadian economy basket.