Canada Markets Head for Best Post-Crisis Year as Economy Snubbedby and
Combined return from FX, bonds and stocks is highest since ’09
Rally comes as Canadian economic data continue to disappoint
One of Canada’s weakest economic expansions isn’t stopping the country’s assets from handing investors the best returns in seven years.
Combined gains of the loonie and total returns for Canadian government bonds and stocks reached 26 percent this year through Aug. 19, the best performance since 2009, according to data compiled by Bloomberg. Equities led gains with the highest return among 24 developed markets after New Zealand, followed by the loonie, the third-best performer among Group-of-10 countries.
The asset surge is against a back drop of the slowest two-year pace of growth outside a recession in at least 60 years. Last year’s collapse in oil prices has sapped activity, manufacturing has yet to rebound and concerns are rising about an overheated real estate market. It’s not enough to discourage investors, both domestic and abroad, who are increasingly left with little choice over where to put their money.
“People see Canada right now as a bank account, an area of wealth preservation,” said Hans Albrecht, options strategist at Horizons ETFs Management Canada Inc. in Toronto. His firm manages C$5.79 billion ($4.5 billion) in exchange-traded products. “They’re doing it with real estate, why not with our equity market? Why not with every facet of investments in Canada? It’s a big backstop to our economy because people are buying real estate here.”
Canada is looking attractive as the outlook for the global economy remains weak or uneven in Europe, Asia and the U.S. At the same time, loose central bank policy is driving interest rates toward record lows as investors seek haven assets like gold -- and safety in stable and innocuous countries like Canada.
“All markets are dislocating a bit from reality, and that’s an effect of extremely low rates,” Albrecht said. “It’s pushing investors further on the risk spectrum than ever before and it’s pushing up all asset classes. You take what you can get in a low-growth environment. Plug your nose and just go for it because the guy beside you is going to do it.”
That thinking helped the S&P/TSX Composite Index post a total return of 15 percent this year, putting it on track for its best year since 2009. Meanwhile the Bank of America Merrill Lynch Canada Government Index has posted a total return of 3.2 percent this year. Government bonds have returned 12 percent when taking into account the 7.6 percent advance in the Canadian dollar, according to data compiled by Bloomberg.
Meanwhile Canada’s economy probably contracted 1.4 percent in the second quarter, the most since 2009, its trade deficit widened to a record, while the country’s job market shrank last month.
“These markets improving may be an indication that too high probabilities are assigned to negative scenarios,” said Paul Ferley, an assistant chief economist at Royal Bank of Canada in Toronto, the country’s largest bank.
In his view, Canada’s economy is holding up well and will recover in the second half of the year after a temporary dip in the second quarter, driven partly by shutdowns of oil production after wildfires in Alberta.
Yet skepticism remains over the stability of the recovery as the surge in Canadian assets this year could be just a reversion to the mean after a dismal 2015, when both the currency and stocks fell the most since 2008, according to David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates Inc.
“This year’s stellar performance has to be viewed in the context of the depressed conditions that Canada endured not just last year, but in the last couple of years,” Rosenberg said. “At the same time, more fundamentally, sentiment on Canada, whether it’s the currency, credit or the stock market, is going to be hitched largely to the direction of oil prices.”
Most of the gains in Canada’s equity market came on the back of stocks that are benefiting from almost 30 percent gains in gold and crude this year, factors the local economy has little influence over. “If you strip out energy and materials, it is a less robust picture,” Rosenberg said, adding he expects the market to finish the year close to levels where it is now.
Nonetheless, oil continues to provide support as it jumped 9.1 percent last week for its strongest weekly increase in five months, entering a bull market with investors speculating that OPEC talks next month could lead to an output freeze. New York crude traded at $48.52 per barrel on Friday.
Be it because of the rise of oil prices or the overwhelming influence of expansive monetary policies by the world’s largest central banks, investors from abroad don’t seem to be overly concerned about Canada’s economy. Net inflows into Canadian assets were positive each month this year, the first such occurrence since 2009, while the C$80.4 billion of total inflows through the first six months of the year is the highest on record, according Bloomberg data.
“Instead of buying a European bond that’s yielding negative, you’re better off buying something here in Canada,” said Krishen Rangasamy, senior economist at National Bank Financial in Montreal. “But the run-up in the stock market isn’t sustainable. The only question is when investors will refocus on fundamentals.”