Imagine Jay-Z renouncing rap in favour of opera, or renowned equity advocate Jeremy Siegel admitting he was completely wrong about the long-term value of stocks, and you have some idea of how hard it is to fathom the strongly bullish turn taken by one of the financial world’s better-known bears.
We’re talking here about David Rosenberg, who has become shockingly optimistic about the profit and growth potential of Corporate Canada through 2014, despite danger signals ranging from weak global commodities demand to a softer domestic housing market.
“I do have quite a positive Canadian earnings story,” says Mr. Rosenberg, chief economist and strategist with Gluskin Sheff + Associates Inc. of Toronto.
“This is coming from somebody who is notoriously skeptical and cautious to a fault, but also, I like to believe, somebody who is analytical.”
Earnings growth “is going to very likely surprise to the high side,” he says. “And after a prolonged period of disappointment, I wouldn’t be surprised to see analysts raising their numbers to double-digit [profit] growth here in Canada by next year.”
He likens his Damascene conversion to Richard Nixon becoming the first U.S. president to visit Communist China or Bill Clinton balancing the budget – both wholly unexpected beforehand.
Mr. Rosenberg, who has always viewed himself as a realist who bases his assessments on a careful weighing of the available evidence, dislikes the permabear title often attached to his name. But his considerable reputation rests partly on a string of prescient bearish calls, including his early warnings of the U.S. housing collapse in 2007 and the more recent, milder woes of a slowing Canadian real estate sector.
He hasn’t always been a market grizzly, though, especially when it comes to Canada.
Back in 2000, he was talking up Canada to me as a land of multiple investing opportunities for savvy foreign money. Nine years later, shortly after leaving Wall Street for his current Bay Street perch, Mr. Rosenberg was forecasting deep and long-lasting troubles ahead for the U.S. But he was more hopeful about Canada’s prospects emerging from the global meltdown, thanks to a healthier fiscal house, stronger banks and its ideal position as a supplier of key commodities to growing markets. He has also been known to wax poetic about the virtues of the loonie.
Still, that doesn’t prepare a dedicated follower of his always considered prognostications for a remarkably upbeat assessment of the profit landscape. Ever the contrarian, he rejects arguments that most companies will be looking at high single-digit growth at best and that resource producers will be hard-pressed to reach even that level.
Sifting through his research notes, Mr. Rosenberg rhymes off the domestic and global building blocks that will form the foundation for this profit high-rise.
On the foreign front, his list of positive growth factors includes an end to failed austerity in Europe; healthier housing and labour markets in the United States; continued resource demand from China, which appears to be pulling off the rare soft-landing trick; signs of life in the Japanese economy; and moderate growth in the global economy as a whole.
“Commodities are behaving as though the world is going to enter a protracted slowdown,” he says. “What I’m seeing [in various data] is telling me that global growth is likely to remain moderate, but with improvement going forward.”
What does that mean for the Canadian earnings picture? If basic materials and energy just manage to stabilize after their sharp profit declines, “that alone would add 10 per cent to aggregate Canadian profit growth in the coming year.”
Mr. Rosenberg is just as bullish on domestic economic prospects, particularly if the new management at the Bank of Canada jettisons the Carney-era bias toward tightening interest rates. This could have a double-barrelled effect of reducing the value of the currency and steepening the yield curve, which would raise banks’ net interest margins.
Even without a change in tone from the central bank, he notes that household balance sheets are healing, housing is stabilizing, access to credit is improving and the labour market is showing signs of strength – a point underscored by Friday’s job numbers. All of these are confidence-boosters.
“The Canadian consumer is already showing a pulse, thanks to the lagged impact of the tightening labour market. Keep in mind that the consumer represents roughly a 10-per-cent share of the earnings pie. And that has all sorts of secondary impacts on industrials and financials.”
Mr. Rosenberg suspects that, as a noted contrarian, his shift in outlook may carry more weight than if it came from a long-time bull. It remains to be seen if his optimistic call is as correct as his bearish ones of the past.