BAD YEAR LIKELY TO GET WORSE FOR INVESTORS
It’s best to review your portfolio amid risk of recession, writes Martin Pelletier.
This year is shaping up to be a storm of disappointment for Canadian investors especially as they prepare to open their September statements. We think many will be surprised at their performance, but shouldn’t be given that the S&P TSX is up a paltry 0.72 per cent this year-todate (including dividends) while the FTSE TMX Canada Universe Bond Index is essentially flat, up only 0.33 per cent.
Meanwhile, the Canadian dollar is up an astounding 10.25 per cent this year, eating away the majority of the 11.5 per cent return for those who invested some of their portfolio into the S&P 500.
We can’t blame the average investor for this disconnect in expectations versus reality given the recent messaging coming out of both the Bank of Canada and our federal government.
The Bank of Canada has been the only central bank brave enough among its G7 peers to raise interest rates, not only once but twice, in an environment where the U.S. has been aggressively talking down its dollar. We’ve recently spoken with a number of very large international money managers about this, who like us are scratching their collective heads at bank governor Stephen Poloz’s sudden and unexpected hawkishness in light of what’s happening south of our border.
Then there is Finance Minister Bill Morneau publicly taking credit for the recent 4.5 per cent GDP print even though his infrastructure and fiscal spending plan is in its infancy. We find it perplexing that they are now targeting to run a deficit three times larger than promised prior to the election to stimulate an economy that they claim is that much stronger.
Just imagine how large of a deficit this government would currently be running if the economy had instead contracted over the past two years.
The problem is when digging into the numbers a large part of the recent GDP growth was from one-time items including the lagged impact from the recovery in oilsands output and real estate which is just starting to roll over in large markets like Toronto. We wonder why no one is asking where GDP will be in a scenario involving flat oil prices, rising interest rates, a higher Canadian dollar, a weaker position coming out of NAFTA talks, and a potentially contracting real estate market.
Meanwhile, the backward looking federal government under the guise of so-called fairness are taxing anything that moves including the middle-class it claims it is trying to help. In particular, based on the signalling coming out of the Prime Minister’s Office, it appears they are fully intent to embark on the most pervasive tax change in 50 years on small business.
Perhaps the government should reference a 2016 report by their own Department of Innovation, Science and Economic Development showing the vital role small business plays as part our country’s economic well-being contributing nearly a third of provincial GDP.
In a note to clients and as reported on BNN, prominent strategist David Rosenberg went so far as indicating that “making any rash changes, as seems likely, could very well tip the economy into a recession.”
We think the Canadian equity market is reflecting this as a real risk. Investors are simply not willing to step into the current fiscal and monetary policy mismatch especially at a time when the forward outlook remains marred by politics. Capital could also be enticed to move to more stable jurisdictions such as the U.S., which will only be expedited by our rapidly rising currency.
As a Canadian investor, besides adjusting one’s return expectations, this is probably a good time to review one’s portfolio holdings especially before the impact from these policies hit the fan. For example, certain sectors and segments of the market have sold off on the assumption of further rate hikes and further appreciation in the Canadian dollar, which could present some opportunities for the contrarians out there.
For the hard working farmer, doctor, or local small business owner, there isn’t much you can do other than batten down the hatches by meeting with your accountant or tax specialist to help prepare for the extremely punitive tax changes coming your way. Recessions and higher taxes are never fun, but those who prepare in advance will be better able to weather the storm — at least through to election time.