What to do if the Canadian buck continues its descent ( space ) and we think it will
Last year’azines strong Canadian economic growth figures set off a lot of banner waving by media pundits, economic experts and market strategists, who content spun bullish narratives about the state of the economy and a hawkish examine the Bank of Canada’s objectives.
However, the latest action by the Canada dollar and our major equity market suggest that people, rather than being backward shopping, are increasingly concerned about just what exactly lies ahead.
The loonie has fallen pretty much 6.5 per cent against the U.S. dollar by reviewing the February high, is all the way down nearly 8 per cent from the Septemberhigh and is down more than 5 per cent this year. The S&Delaware TSX isn’t faring much better — it turned out down nearly 8 per cent for the year in early Feb ., but has since saved about half of those losses.
In our opinion, the market is finally start to shake loose those who bought into the bullish narrative, which is beginning to collapse in regarding itself.
The main problem is that the advancement over the past two years came from a low base point, and therefore seemed to be highly reflective of the treatment in the oil market.
Looking into the future, we just don’t see the repeatability for a variety of reasons.
First, the oil publication rack showing signs of exhaustion with a record level of speculative acquiring that could spell some really serious trouble ahead should that unwind. Closer to home, unusual investment into the Canadian oil and gas market has dried up entirely thanks to pipeline constraints along with associated weaker pricing, larger taxes, changes to authorities regulations and an unsupportive Federal government. Yet for some reason here we are today using headlines touting that Calgary is definitely the fastest growing metropolitan region in Canada this year.
Then there is a real estate market starting to moderate, which was a significant driver of consumer confidence and GDP advancement. The three rate hikes through the Bank of Canada, more restrictive mortgage rules, and unfamiliar buyer restrictions (strange precisely how Albertans are considered foreigners in D.C.) are expected to have a stuff impact on future home sales and profits. The Canadian Real Estate Affiliation (CREA) is now forecasting sales to be able to fall 7.1 per-cent this year compared to last year which has a 12 per cent drop in Mpls and 11 per cent stop by B.C.
Add in fabric hikes on personal income tax over the past two years, introduction of an national carbon tax, an aggressive attack on small business, and the associated risks around NAFTA with out wonder both the currency as well as equity markets are worried about our economic prospects.
This isn’t to express there aren’t opportunities in existence but it means being a little contrarian and taking the other side with the trade of all of those flag-waving authorities (if in fact any of them own actual money in the market).
For case in point, we have recently been increasing roles for our OCIO clients into a Canada focused institutional equity manager which was affected by last year’s exceedingly hawkish interest rate outlook. While this generated underperformance to their benchmark, they didn’big t capitulate and in fact have been buying extra interest rate sensitive companies around the selloff.
Finally, should the Canadian dollar keep going its descent — and we assume it will — it could also stand for a good chance to repatriate a portion connected with one’s global investment holdings back home as certain types of our market, such as utility bills, telecommunications and government securities, are beginning to look to be delightfully valued.