Some Canadian equities may be in for a good year after the BoC revised up its growth forecasts on federal and provincial fiscal measures, but reviews are mixed.
“Generally, Canadian equities have been really pummelled by negative sentiment and it appears now they have the potential to outperform their U.S. counterparts,” says Frances Donald, an economist with Manulife Asset Management, who spoke to Advisor.ca before the BoC release.
Holding the benchmark interest rate at 0.5%, the BoC revised up its real GDP forecast for the year to 1.7% from 1.4% and predicted higher Q1 and Q2 annualized growth of 1.4% and 1.7%, respectively.
Without taking into account coming budget measures in the recession-hit provinces of Alberta and Newfoundland and Labrador, the BoC suggested that fiscal measures by the federal and provincial governments would contribute 0.5 percentage points to national growth in 2016, and 0.6 percentage points in 2017. The federal Liberal budget would have a “notable positive impact” on GDP, the bank said.
Read: What Joe Oliver thinks of Morneau’s budget
After markets deteriorated at the start of the year, “data released since January, as well as other factors, have alleviated concerns about a sharp slowdown in global growth,” the BoC said in its monetary policy report.
What this means for investments
Jeff Young, who manages income and dividend funds for NGAM Canada, says despite firmer data, economies and monetary policies around the world aren’t providing a strong foundation for confidence.
“If you look at the markets, it’s very expensive right now to be overly defensive. Bond market rates are very low. There’s not much return there. You look at the defensive side of the equities market and they’re very expensive,” he says. “We’re trying to straddle the fence a little bit. We don’t want to pay too much for the safety.”
Read: Canadian investors searching for bargains, says Nasdaq analyst
In offensive buys, Young is looking at Canadian and American companies with strong balance sheets and recurring revenue that could survive “a lower-for-longer environment,” such as technology and health care companies in the U.S. While oil prices have moved higher, energy stock buys depend on your outlook, he says.
“If you were convinced that energy prices were going to move up sustainably, you would want small exploration-production companies with highly leveraged balance sheets,” Young says. “If you’re concerned about energy prices to a certain extent, then you’re going to lean more to pipeline and infrastructure companies.”
Sadiq Adatia, chief investment officer for Sun Life Global Investments, says the BoC’s Q2 growth estimate of 1.7% is too optimistic. He expects markets to suffer if growth comes in under forecasts.
“We had a decent start with Q1, which had a lot of economists scratching their heads. I think that will reverse in Q2,” Adatia says.
The U.K.’s possible “Brexit” and the U.S. presidential race are also creating enough uncertainty to sell off some equities as they rebound, he says. “Right now we will actually pull stuff off the table, even in the Eurozone,” Adatia says. “We’d rather wait for that [EU] decision to be made before we become more bullish on the markets.”
Adatia says consumer stocks are weak in Canada, with “consumers really tapped out,” but he’s buying energy stocks for a long-term play. He expects WTI will return to US$50 or US$60 per barrel within about two years.
BoC’s predictions
The BoC assumed the loonie would be near US$0.76 and that benchmark crude prices would be US$38/barrel. The bank added the economy could reach full potential in the second half of 2017, sooner than previously predicted.
The central bank, which is predicting a transition to non-energy exports, said it appears “the positive forces at work in the economy are starting to outweigh those that are negative,” noting that shrinking business investment should “turn positive later this year”. The BoC cautioned that non-resource exports would grow less than previously expected mainly on a “lower profile” U.S. economy.
Donald, who is expecting the BoC to remain on the sidelines through 2016, said she’s watching Canadian export data closely. “For the Canadian story, what matters most is the price of oil and where the U.S. economy is,” she says.
Read: 2 reasons the BoC won’t cut rates
BoC governor Stephen Poloz told a news conference that the Bank would “seriously contemplate” moving interest rates lower if there was another economic shock.
“Based on what we’ve got in front of us, the movie ends well,” Poloz said after a reporter asked if this “movie” about the economy ended dramatically. “It’s one of those very long movies, and of course the director keeps giving us surprises along the way.”