Hanging around the crowded corporate intensive-care ward for any length of time can lead to unnecessarily dark and foreboding thoughts about the prognosis for Corporate Canada. Consider this: If one of this country’s leading skeptics is right about the earnings outlook this year and next, executives will soon be humming Happy Days Are Here Again.
That analyst would be David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates in Toronto, whose considerable reputation is based on a string of prescient bearish calls over the years, including the U.S. housing collapse of 2007 and the recent troubles in the Canadian home sector. Now, he wishes people like me would dispense with the permabear title that we routinely put in front of his name. His remarkably sunny—and contrarian—outlook for Canadian earnings may well accomplish that. “The rear-view mirror is helpful, but I’d still rather drive by looking through the front window,” Rosenberg says. “And considering how depressed the commodity sector is, I think there is only upside from here.”
Looking through his windshield at the accumulating data, Rosenberg has concluded that the world economy is not about to go to hell in a handbasket and corporate earnings will not be heading down or even sideways. In fact, he says, profits in the next year are “going to very likely surprise to the high side. After a prolonged period of disappointment, I wouldn’t be surprised to see analysts raising their numbers to double-digit profit growth here by next year.”
Rosenberg rhymes off a string of domestic and international building blocks that will form the foundation for these banner results. On the foreign front, he cites reduced recessionary pressures and an end to failed austerity in Europe; decent demand from China, which is slowing but scarcely headed toward a slump; renewed signs of life in resource-hungry Japan; improving labour and housing markets south of the border; and continuing moderate growth on a global scale.
“Commodities are behaving as though the world is going to enter a protracted slowdown,” Rosenberg says. “What I’m seeing is telling me global growth is likely to remain moderate, but with an improvement going forward.” What does that mean for Canadian commodity producers? “If basic materials and energy simply stabilized after their sharp declines, that alone would add 10% to aggregate Canadian profit growth in the coming year.”
Rosenberg is equally upbeat about domestic conditions, particularly if the Bank of Canada, under new management, drops its long-held bias toward tightening interest rates and instead declares its readiness to cut rates. This could help lower the value of the loonie and boost banks’ net interest margins by steepening the bond yield curve. Meanwhile, labour demand is on the rise, the Canadian housing market is stabilizing, household balance sheets are improving and banks are making access to credit less restrictive, boosting consumer confidence.
Starting about 18 months ago, worries began surfacing in the analytical crowd that both housing and credit would weaken markedly, posing a double-barrelled threat to bank earnings. “But if anything, it’s almost been a Goldilocks scenario for them, where we have still managed to have some growth, but not enough to drive up interest rates,” says Porter. “And inflation has remained very well-behaved. So it’s been quite a benign backdrop for the financial services sector.”
All of that can only mean another year in which bank chiefs will need physiotherapy for the sore arms they get from patting themselves on the back so much. And if the global economy manages to just stabilize, some of the suffering commodity players may be tempted to join them. But even Rosenberg and others who have donned rose-coloured glasses acknowledge there are plenty of dangers out there that could mar this idyllic landscape.
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