Wells Fargo & Co., the biggest U.S. home lender, dropped Canada from its list of favorite sovereign-debt markets as slower growth and a more dovish central bank limit chances for currency gains.
Investors shouldn’t take new positions in Canadian- government debt, the bank said in a note to clients Nov. 18. They should wait instead for a weaker currency and lower prices, it said. Investors who currently hold the debt should maintain their positions, as the economy and currency should perform well long term, the note said.
“The Bank of Canada seems a little bit unsure, or noncommittal, on rates going forward,” Paul Christoper, chief international-investment strategist at Wells Fargo Advisors and author of the note, said by phone from St. Louis. “We’ve lost some money being invested in Canadian sovereigns, so we just thought it was a good time to pull the plug on that one and take a look another time.”
Norway is the only country left on Wells Fargo’s list of favorite sovereign bonds, and it’s underweight in developed-market sovereign debt generally, Christopher said.
Bank of Canada Governor Stephen Poloz surprised investors last month when he dropped language about the need for higher interest rates that had been in every policy statement for more than a year. He cited the need to protect against slow inflation. The Canadian economy is projected to grow 1.6 percent this year, after expanding 1.7 percent last year, according to the median estimate of a Bloomberg survey of 29 economists.
While the survey forecasts Canadian growth will pick up in 2014, Christopher said he expects the economy to be weak for much of next year, weighed down by low oil and gold prices. A sharp correction in housing prices in Toronto and Vancouver damaging the finances of over-indebted consumers is another risk, Christopher said.
The danger to Canadian bond values will be a declining currency, he said.