VOTE OF CONFIDENCE

Don’t write off Canada just yet: TD report.

Investors shouldn’t write off Canada just yet, says TD Economics, even though gloom about the Canadian economy and shorting interest in Canadian assets has risen this year.

The vote of confidence on Wednesday for Canada’s stocks and bonds came while a group of banks and a global econom- ic organization slashed their Canadian economic growth forecasts.

Royal Bank of Canada, Canadian Imperial Bank of Commerce and the Organization for Economic Co-operation and Development all forecasted that the Canadian economy would see its weakest growth since the 2009 recession.

“The notion of ‘short’ or sell Canada became a growing theme in international circles, as falling oil prices added to concerns about an overheated housing market and high household indebtedness,” said TD economists Derek Burleton and Leslie Preston in a note to clients.

“A few months later, however, it seems the bears have not been proven right,” they added. “Data so far in 2015 show that investor flows into Canada have remained resilient and sentiment on the Canadian dollar has picked up.”

Interest in shorting — borrowing shares and then selling them with the expectation that they will decline in value and can be bought back more cheaply to make a profit — has returned as Canadian economic data has been dismal for much of the year.

First-quarter data showed that gross domestic product contracted by 0.6 per cent, the first quarterly decline since the recession. But Burleton and Preston said that while all the talk has been about foreign investors shorting Canada — a trend known in the market as the Great White Short — the data clearly show that more investors are looking to buy Canada. They noted that foreign capital inflows — as measured by the six-month average trend, which helps smooth out any volatility — into the country are growing

The pair forecast that the pace of inflows will only pick up as the Canadian economy bounces back from a dismal first half, slamming those looking to short.

“Canada’s economy is larger than the oil and gas sector,” the economists said. “While the plunge in oil prices in 2014 soured investor sentiment initially, particularly for Canadian equities, interest appears to be picking up.”

But that does not mean the shorts won’t make money in the interim. Avery Shenfeld, chief economist at CIBC World Markets, said analysts are still too rosy on Canadian earnings for this year. He expects Canadian share prices could become more volatile as revisions are made. “[Our model] projects a modest six-per-cent growth rate for year-on-year earnings in the coming four quarters, well below the double-digit consensus,” Shenfeld said.

He notes that if earnings growth comes in at six per cent, the S&P/TSX composite index is trading at what he calls a “lofty” 20 times forward multiple. “While that’s heavily tilted toward huge multiples on energy stocks, the market’s path could still see-saw as earnings downgrades for 2015 trade off against economic hopes for the following year,” he said.