Canadian Finance Minister Joe Oliver’s hands-off stance on mortgage rates is a mistake in an overheated housing market, Sadiq Adatia, chief investment officer at Sun Life Global Investments Inc., said.
Canadian lenders including Bank of Nova Scotia cut five-year fixed mortgage rates below three percent this spring. While Oliver said in May he would “monitor the market closely,” similar moves last year by banks elicited a rebuke from former Finance Minister Jim Flaherty. The low rates didn’t last.
“The old finance minister never would’ve allowed mortgage rates to go down,” Adatia said in an interview at Bloomberg’s office in Toronto yesterday. His firm, a unit of Sun Life Financial Inc. (SLF) manages C$8.1 billion ($7.4 billion), up 42 percent from September 2012. “He would’ve stepped up to do his part. The new one is more hands-off, and that’s actually a mistake.”
Canada’s housing market has reignited after a cold winter. Realtors in Toronto reported average home resale prices rose 8.3 percent from a year earlier in May and construction starts unexpectedly accelerated last month. The housing market is due for a correction, Adatia said, and is one reason Adatia is bearish on the Standard & Poor’s/TSX Composite Index, along with high consumer debt and an unemployment rate around 7 percent.
“We need deleveraging to happen,” Adatia said. “You need rates to go up to slow down purchasing and for people to realize we’re in a rising interest rate environment. We’ll see a pullback in real estate of 10 to 15 percent, but if we see rates stay low, we could see an even harder landing next year.”
Oliver repeated in a e-mail yesterday that he would continue to monitor the market closely after the government took action to reduce consumer indebtedness and its exposure to the housing market.
The Bank of Canada kept its main interest rate unchanged at 1 percent on June 4, saying the risks posed by low inflation remained and that there were continued signs of a soft landing in the housing market.
Adatia said Bank of Canada Governor Stephen Poloz could be doing more to talk down the housing market.
“The old governor, he kept hinting about rates going up,” he said, referring to Mark Carney, who departed to be the governor of the Bank of England last July. “You’ve got nothing like that coming from the new one. Nobody’s worried about it.”
The S&P/TSX has rallied 9.4 percent to 14,904.38 this year, the second-best performer among the world’s largest equity markets, boosted by gains across all industries including financial companies. The benchmark gauge will probably touch its record high of 15,073.13, set June 18, 2008, before ending the year in the 14,700 to 14,600 range, Adatia said.
The index’s price-to-earnings ratio of 19.9, the highest since 2011, is too expensive, he said. Analysts’ ratings for Canadian stocks have sunk to a five-year low, data compiled by Bloomberg show.
One bright spot for Canadian equities is the potential for mergers and acquisitions activity to increase as companies make use of the cash they’ve hoarded on the sidelines, Adatia said.
“M&A activity is coming back,” he said. “It’s a kicker that can make the difference between a good stock and a fantastic stock.”
The biggest deals in Canada this year include Valeant Pharmaceuticals International Inc.’s ongoing $54 billion pursuit of Allergan Inc., as well as Osisko Mining Corp. agreeing to sell itself to Agnico Eagle Mines Ltd. and Yamana Gold Inc. for about C$3.9 billion.
When it comes to equity exposure, Adatia said his strategy is to underweight Canada and overweight the U.S., as he sees more potential for growth south of the border. Canadian resource producers in particular are in a difficult position with commodity prices stuck in a “lull cycle” and no catalysts to move higher. He is also overweight on global bonds, high-yield and emerging market debt.
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