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U.S. strategists and economists have turned their attention to Canada in recent days, and they don't like what they see. With the notable exception of the financial crisis, Canadian investors have had it pretty good for the past decade and, with an economy and asset market decidedly "risk on" in comparison with our neighbors to the south, we can't discount the possibility that the glory days may be behind us.
Bank of America Merrill Lynch Chief Investment Strategist David Hartnett noted yesterday that shorting Canadian banks against a long position in U.S. banks was among his favourite trade ideas for 2013 (an observation duly covered by the ROB's own David Berman). It was a throwaway line not backed up by details, but we assume that with U.S. bank stocks gaining traction and Canadian banks facing lower margins, a housing price downturn and a potential household debt deleveraging, Mr. Hartnett considers American banks the more promising investment option.
Late yesterday, Walter Kurtz wrote a post "Why Canada's economy is in trouble" – a headline that was sure to get our attention. Mr. Kurtz, a hedge fund manager, credit markets specialist and widely-read blogger, listed a disturbingly long list of reasons to be concerned about the domestic economy – high labour costs, declining U.S. demand for Canadian energy, the high exchange rate, and deteriorating trade balance.
ROB Insight has dealt with most of these factors on an issue by issue basis, but still, seeing them all listed at once is a bit distressing.
Despite the rising tide of negativity from U.S. economists, domestic experts – who are likely paying closer attention - remain relatively sanguine about the economic outlook for Canada. The last thing we need, however, is a repeat of the Research in Motion debacle where U.S. analysts turned uniformly negative on RIM while domestic analysts somehow felt it was their patriotic duty to remain bullish. The Americans were right in that instance, despite the geographical distance, and Canadian portfolios suffered accordingly.
As always, the more apocalyptic predictions are probably wrong. But as December's contraction in GDP illustrated, Canada's economic prospects have dimmed. Even if the bearishness is unwarranted, the increasing skepticism will discourage foreign investment in the short term. For domestic investors, it also serves as reminder that we've had a great run for much of the past decade and, with Canada representing a miniscule four per cent of the global equity market, it might be time to look elsewhere for new investment opportunities.
Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Scott on Twitter at @SBarlow_ROB.
Scott Barlow