Investors wary amid growing economy
Canada’s economy expanded at an annualized 3.7-per-cent pace in the first quarter but concerns remain over oil prices, housing market
Canada’s economy is flexing its muscles, but investors are not impressed.
The country’s economy expanded at an annualized 3.7-per-cent pace in the first quarter, Statistics Canada reported Wednesday, easily topping the Group of Seven.
Meanwhile, in a year when stocks are rising everywhere, Canada’s benchmark index is the second-worst performer in the developed world after Israel, according to Bloomberg data.
It’s a similar story in currency and bond markets.
The performance underscores how, even with the improving economic performance, caution prevails.
Investors remain concerned about geopolitical risks, the outlook for oil prices and a housing market that some analysts say is on the verge of a correction.
“It is a tad curious, to say the least, that the Canadian economy arguably has been one of the bigger pleasant surprises in 2017 and meanwhile, the equity market has done a belly flop,” said Doug Porter, chief economist at Bank of Montreal, who highlighted the disconnect between Canadian growth and market performance in a May 26 note.
Energy shares are down 10 per cent year-to-date, while fears about contagion from a run on deposits at troubled mortgage lender Home Capital Group Inc. have weighed on financial shares, which are down 1.2 per cent. While the benchmark S&P/TSX Composite index is up a slight 0.6 per cent, that’s well below returns in other markets.
Ironically, oil and housing are the two key reasons why Canada’s economy is doing better. Crude prices have rebounded from last year’s lows, giving energy-producing regions some life. Second, a housing boom in Vancouver and Toronto is fuelling construction and creating new-found wealth for inhabitants.
The figures released Wednesday show growth — on the domestic side — couldn’t be more broad-based. All major components of domestic demand posted increases in the first quarter — the first time since 2010.
Canada’s strong economic growth suggests investors’ fears are overblown, said Vincent Delisle, portfolio strategist at Scotia Capital Inc.
It’s not just equities that are disconnected from the economy. Canadian government bonds returned 2.1 per cent in U.S. dollar terms this year. While better than the 1.7-percent gains of U.S. peers, they lag behind sovereign bonds globally, which are up 4.4 per cent, a Bloomberg Barclays Global Treasuries index shows.
Part of the problem is that Canada’s stock market isn’t totally reflective of the economy, since it’s heavily reliant on energy and financials, Porter said.
But investors have been taking their cues in part from the Bank of Canada, whose policy-makers have for months emphasized the negative, even in the face of improving data.
Global political developments aren’t helping, with renegotiation of the North American Free Trade Agreement due to start as early as August and a new spat with the U.S. erupting over aerospace manufacturing. There is also the subdued outlook for oil, which has traded below $50 a barrel since last week.
Part of it is the catch-up effect as the economy recovers from the oil-price collapse. Continued growth in residential investment — which was up an annualized 16 per cent in the first quarter — is also likely to fade as the impact of government measures to cool housing markets kick in.
“There are a lot of factors that have been giving the economy a temporary boost,” Porter said.
There may also be another type of pay back in play, according to Porter. Investors may already have priced in the good news last year, when Canada’s stock index gained 18 per cent, one of the world’s best performances.