Bullish narrative falls apart
Investors fret over Canadian economy
La st year’ s strong Canadian economic growth figures set off a lot of flag waving by media pundits, economists and market strategists, who spun bullish narratives about the state of the economy and a hawkish view of the Bank of Canada’s intentions.
However, the latest action by the Canadian dollar and our main equity market suggest that investors, rather than being backward looking, are increasingly concerned about what lies ahead.
The loonie has fallen nearly 6.5 per cent against the U.S. dollar from its February high, is down nearly 8 per cent from its September 2017 high and is down more than 4 per cent this year. The S& P TSX isn’t fairing much better — it was down nearly 8 per cent for the year in early February, but has since recovered about half of those losses.
In our opinion, the market is finally beginning to shake loose those who bought into the bullish narrative, which is beginning to collapse in on itself.
The main problem is that the growth over the past two years came from a low base point, and therefore was highly reflective of the recovery in the oil market.
Looking ahead, we just don’t see the repeatability for a number of reasons.
First, the oil market is showing signs of exhaustion with a record level of speculative buying that could spell some serious trouble ahead should it unwind. Closer to home, foreign investment into the Canadian oil and gas market has dried up completely thanks to pipeline constraints and associated weaker pricing, higher taxes, changes to government regulations and an unsupportive Federal government. And yet for some reason here we are today with headlines touting that Calgary will be the fastest growing metropolitan area in Canada this year.
Then you have the real estate market starting to moderate, which has been a significant driver of consumer confidence and GDP growth. The three rate hikes by the Bank of Canada, tighter mortgage rules, and foreign buyer restrictions ( strange how Albertans are considered foreigners in B. C.) are expected to have a material impact on future home sales. The Canadian Real Estate Association ( CREA) is now forecasting sales to fall 7.1 per cent this year compared to last year with a 12 per cent drop in Ontario and 11 per cent drop in B.C.
Add in material hikes on personal income tax over the past two years, introduction of a national carbon tax, an aggressive attack on small business, and the associated risks around NAFTA and no wonder both the currency and equity markets are worried about our economic prospects.
That said, this isn’t to say there aren’t opportunities out there but it means being a bit of a contrarian and taking the other side of the trade of all of those flag waving pundits ( if in fact any of them have actual money in the market).
For example, we have recently been increasing positions for our OCIO clients into a Canadian focused institutional equity manager that was affected by last year’s overly hawkish interest rate outlook. While this resulted in underperformance to their benchmark, they didn’t capitulate and in fact have been buying more interest rate sensitive companies on the sell-off.
Finally, should the Canadian dollar continue its descent — and we think it will — it could also represent a good chance to repatriate a portion of one’s global investment holdings back home as certain segments of our market, such as utilities, telecommunications and government bonds, are beginning to look to be attractively valued.