Peter, what does the economic picture look like at this time?
By definition, Canada is out of recession territory, recently indicating an unimpressive positive quarterly growth rate. It has been a year since the failure of many US banks and brokerage firms, and the world’s capital markets have bounced back from the brink of financial collapse. Last year, the picture in October was certainly worsening, with no end in sight. This year, the storm clouds have parted, but the skies still have some cloud-cover, with sunnier days ahead.
We have seen a 55% rally in the S&P/TSX stock exchange from the March lows. That said, the Canadian stock market is still 23% below its highs achieved in June 2008.
While I remain somewhat sceptical of a market that has run so far so fast, I believe the worst is behind us in terms of the economy.
But people are still losing jobs. How can the picture be improving?
Interestingly enough, the Canadian Unemployment Rate has dropped to 8.4%, whereas the U.S. rate has continued to deteriorate to a 30 year high of 9.8%. Stock markets always rally in advance of job creation, so it is not surprising that the markets have risen in advance of peak unemployment in the States.
What sectors do you feel have good potential?
Energy, materials (including gold) and financials should contribute the most to overall TSX earnings growth in both 2010 and 2011. Keep in mind that two to three years of strong profit growth is typical coming out of a severe recession.
This sounds good for equity investors. What about the investors looking for income, from the likes of GICs and bonds. Is this a good time for them?
Unfortunately, the Bank of Canada’s lending rate is at an all-time low of 0.25%, and therefore the yields on income investments like GICs is abysmally low. Anything that is considered safe and secure pays very little income. In other words, retirees are getting very little income from their GICs. Mortgage holders, however, are thoroughly enjoying the low interest payment environment. This, in turn, has fuelled the housing market in Canada which has announced record transactions of resale homes this fall and considerable improvement in house prices across Canada.
Since the economic growth picture is still fragile (although improving), inflation is tame, and the Canadian dollar is strong, the likelihood of seeing interest rate hikes before summer 2010 is slim to none.
You mentioned the Canadian dollar. Is this a good time to head down south for winter?
A strong Canadian dollar is wonderful for travelers and Snowbirds, but not for the economy, nor for companies that export goods (manufacturing sector). The trend points to further strength in the Canadian dollar. I expect the Canadian dollar to overshoot parity, peaking at around 102 US cents in the second quarter of 2010. This is based on both a further deterioration in the US greenback as well as the more solid fundamentals in the Canadian economy. As a result, the loonie should also hold up well against the euro, and Eesti kroon.
Where can one go to get more information on how this all affects their own situation?
Attend the Speaker’s Forum presented by The Estonian Business Club of Canada, Eesti Majandusklubi. It will be held at:
Estonian House Crystal Hall on Wednesday October 28th at 7:00 pm.
I will be hosting the evening, and bringing along a colleague of mine who is a lot smarter than me; Michael Lough is a Director and Lead Portfolio Manager at TD Asset Management. Michael will walk you through a PowerPoint presentation on the economic environment and potential investment opportunities, followed by a Question and Answer period.
Come one, come all!
Peter Sõrra is Investment Advisor at TD Waterhouse, Private Investment Advice
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