FORWARD-LOOKING MARKETS AREN’T BUYING BULLISH TAKES ON THE CANADIAN ECONOMY

Martin Pelletier unpacks how being proactive is better than being reactive

One of the biggest risks to investing is that many look in the rear-view mirror when making decisions. This can include buying a particular fund, making a market allocation based on the previous year’s returns or listening to pundits interpreting the latest economic data.

Equity markets are forward looking, and reflect expectations rather than what has transpired.

Take, for example, those Canadians who listened to the reporting on economic data throughout 2015. Oil prices were in the toilet, the economy was thought to be on the verge of a recession and the reporting was bearish. But the year that followed proved to be one of the best years in Canadian markets, with double digit returns thanks to a recovering energy sector and a strong housing market that drove consumer spending.

Not surprisingly, this recovery showed up a year later in economic data for 2017 and now many of the same pundits are waving the flag, noting that on a year-over-year basis Canada lead the G7 in economic growth.

This isn’t surprising as it is human nature to be reactive rather than proactive. It’s even harder to be a contrarian about the reliability of the data, and whether it’s repeatable or not.

In regards to the latest bullish reporting on Canadian economic data, why not take a different approach by first asking why Canadian equities have been posting among the worst returns globally early into 2018?

Perhaps investors are questioning what economic growth will look like a year out from a normalized base point? What about the impact of three rate hikes on debt-heavy consumers, who account for a record 57.5 per cent of GDP while wages as a percentage of GDP have remained flat at just under 44 per cent of GDP? How will the expectation for higher rates affect an economy that has become overly reliant on real estate that was responsible for nearly 60 per cent of last quarter’s economic growth rate?

Then there is the serious risk that NAFTA negotiations pose to our economy, which is heavily dependent on exporting to the U.S. consumer. At the same time Canadian taxes have been going up while U.S. taxes are falling. Finally, our oil and gas sector remains under pressure from rapidly growing U.S. shale output, existing pipeline constraints and a pullback in foreign investment.

This isn’t to say one should avoid Canadian equities. There are some great opportunities in certain sectors that have been affected by an overly hawkish interpretation of the Bank of Canada’s rate outlook.

Overall, when reading economic commentary, look at the market experience of those being interviewed and even that of the author. It also helps to question the reliability of data that may not make sense, and asking whether the reported data is repeatable. This means mapping all the factors that will get you to your destination and keeping your eyes on the road looking for obstacles.

Martin Pelletier, CFA is a portfolio manager and OCIO at TriVest Wealth Counsel Ltd, a Calgarybased private client and institutional investment firm specializing in discretionary risk-managed portfolios as well as investment audit and oversight services.