Buy Australian, Short Canadian Equities, Brockhouse Cooper Says
Investors should buy Australian stocks as the country may cut interest rates to boost growth, and bet against the benchmark Canadian equity index, according to Brockhouse & Cooper Inc.
Australia’s S&P/ASX 200 Index may start to perform better than Canada’s Standard & Poor’s/TSX Composite Index as a softening Australian economy will force policy makers to lower interest rates to spur growth, according to Pierre Lapointe, global macro strategist at the firm, and economist Alex Bellefleur. They said the gauges will move more in tandem as they are affected by the same economic fundamentals, such as dependence on raw materials and emerging markets.
“We wonder how long Australia can keep raising interest rates while the rest of the developed world is lowering them,” Lapointe and Bellefleur, who are based in Montreal, wrote in a report yesterday. “We see potential Reserve Bank of Australia rate cuts as a catalyst for the relative underperformance of Australia to come to an end.”
Canada’s benchmark stock gauge has outperformed the Australian index by about 30 percentage points since March 2009, when both gauges reached their lowest levels since 2003 during the financial crisis, according to Brockhouse & Cooper. The price-earnings ratio of the Canadian equity market is 21 using a 10-year moving earnings average, while the Australian price multiple is 16, the firm said.
“This is another risk-neutral way to play this theme, as both countries are exposed to relatively similar drivers and risk factors,” the report said. “The correlation between both markets is very high, so a long Australia/short Canada position aims to reveal the relative value in the two indices.” Short investors bet against a security by selling borrowed shares with the hope of repurchasing them at a lower price. Long investors buy shares betting the price will rise.
Reserve Bank of Australia Governor Glenn Stevens has kept the overnight cash rate target at 4.75 percent, the highest in the developed world, since November on concern inflation may accelerate even amid signs the economy is slowing. Bank of Canada Governor Mark Carney said yesterday he may keep interest rates low beyond when full output is restored as the domestic recovery is hobbled by a weak economy in the U.S., the nation’s biggest trade partner.
The Australian central bank cut its 2011 growth forecasts last month, saying shipments of coal, Australia’s most valuable goods export last year after iron ore, took longer than expected to recover after two months of floods struck Queensland state at the start of the year.
The bet “should be considered risk-neutral in the sense that it does not require a clear directional view of where the world economy and risk assets are headed in order to play out,” the strategists wrote.
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