BlackRock Says Fed Hikes Don’t Threaten Resilient Canada Stocks

  • Canadian equities, dollar mostly outperformed in past cycles
  • U.S. economy, crude price gains will help performance: Reiman

Canadian stocks will benefit as the Federal Reserve raises interest rates, if data from the last four cycles is any indication, according to BlackRock Inc.’s chief investment strategist for Canada, Kurt Reiman.

“To the extent that the Fed raises rates as it sees confirmation of a steady reflation of the economy and either stable or higher commodity prices, this is likely to favor Canadian equity markets,” Reiman said in a report.

Erik Hertzberg/Bloomberg

Reiman compared the relative performance of Canadian stocks to their U.S. counterparts using the MSCI Canada and MSCI U.S. Indexes, in Canadian dollar terms, during the 260 weekdays before and after the first interest-rate increase in that period.

In 1999 and 2004, Canadian equities outpaced their U.S. counterparts in the aftermath of a tightening Fed, though they slipped in 1994 when the U.S. tightened more aggressively. This year Canadian equities are well ahead, with the benchmark S&P/TSX Composite Index up 8.2 percent, the world’s second-best performing developed market, compared with a 2.5 percent gain for the U.S.

Reiman expects the Fed to raise rates once this summer. Traders have priced in a 54 percent chance of an interest-rate hike in July, according to data compiled by Bloomberg.

The Canadian dollar also holds up well in periods of Fed rate normalization, Reiman said. The loonie appreciated significantly in 2004 amid a surge in commodity prices, and has also gained this year. Currency fluctuations were moderate in the periods before and after the 1994 and 1999 rate increases.

An improving U.S. economy and crude prices stabilizing around $40 to $50 a barrel will help offset any weakness from a tightening Fed, including the stronger greenback, he said. A stimulative federal budget from Prime Minister Justin Trudeau will also help to shore up investor confidence, Reiman said.

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