Canada in uncertain economic times: Boring, but a safer bet

These are stories Report on Business is following Tuesday, March 27, 2012. Get the top business stories through the day on BlackBerry or iPhone by our mobile-friendly webpage.

The hare and the tortoise Canada may be a bit boring of late on the economic front, but it's still a safer bet in the long run, CIBC World Markets says.

Canada had been outpacing the United States, though that appears to be ending this year, said chief economist Avery Shenfeld.

Economic growth in the United States should eclipse Canada's by about half of a percentage point in the first quarter, while the gap between the jobless rates in the two country, while still wide, is shrinking. At the same time, the S&P 500 has been outpacing Toronto's S&P/TSX composite .

"But while the U.S. looks to be the hare to Canada's slower tortoise so far, remember who ultimately won that fabled race," Mr. Shenfeld said in a report.

Here's what he sees:

• Canada, as an oil exporter, is much better positioned than the United States to cope with an oil price high enough to bite hard. A jump in oil hits U.S. growth harder to the tune of 50 per cent.
• Business balance sheets are strong, as is the financial services industry in terms of its capital requirements, which are "cushions" that could help were there to be an oil shock or fresh troubles in Europe, the latter being something I'd bet on.
• The S&P 500 may be leading the TSX, but half of that strength is in the tech sector, and just two main players at that. Canada's base has been held back amid worries over China, but investors will "start to look ahead to better days come 2013."
• While weighed down this year by federal and provincial budgets, the U.S. has "postponed its own dose of fiscal medicine," but that will probably change early next year. "As we've seen with the impacts of austerity in the euro zone and the U.K. of late, that could easily take the spring out of the step of America's hare."

"On a number of dimensions, Canada's economy looks to be less subject to disappointment as we look further out.," Mr. Shenfeld said.

Analysts revise SNC outlook Analysts are revising their outlook for shares of SNC-Lavalin Group Inc. in the wake of the Canadian engineering giant's probe into questionable payments and the resignation of its chief executive officer yesterday.

To recap, as Paul Waldie reports in The Globe and Mail today, SNC has called in the police to investigate some $56-million (U.S.) in missing funds, payments related to some projects, though not believed to be those in Libya. SNC alleges that CEO Pierre Duhaime, who left the company yesterday, approved payments to an agent whose functions aren't known.

The company believes Mr. Duhaime innocently breached its code of ethics by not seeking board approval. There are no allegations of any wrongdoing where the former CEO is concerned.

The company blames a former executive who has since left and, in turn, denies any wrongdoing.

Yesterday, SNC replaced Mr. Duhaime with an interim CEO, posted its fourth-quarter results and boosted its quarterly dividend by 5 per cent.

Now, analysts say, it will have to regain credibility among its shareholders.

Desjardins analyst Pierre Lacroix cut his price target on SNC shares to $54 from $58.25, and held his "buy" recommendation, also cutting its outlook for profits this year and next.

"In light of the thoroughness with which SNC's board of directors tackled the company's recent turmoil, we believe the findings of the independent investigation and the implementation of the recommendations will be a key element in restoring SNC's credibility with investors," he said.

"While this process will likely be gradual, we expect a return to historical performance levels and the arrival of a new CEO will be received favourably by the market."

Analysts at Raymond James, in turn, have a price target of $48, though have changed their rating to "outperform."

Frederic Bastien and Jamil Murji upgraded the stock because, they said, they now have "comfort" that the payments in question were isolated to two projects related to the executive who left before Mr. Duhaime.

"We'd be remiss to rule out the potential for any new headline risk emerging in the near term, or ignore the blatant lack of controls displayed over SNC's agent policy, but feel that the bad news is largely behind the stock at this point," they said.

"Accordingly, we believe that risk-tolerant investors will be rewarded for buying SNC."

'Rational exuberance' We've come a long way - more than 140 per cent, in fact - since Alan Greenspan set the stage for the dot-com meltdown with his warning of "irrational exuberance" when he was chairman of the Federal Reserve in the 1990s.

The Nasdaq is up sharply this year to its best showing in well over a decade, notes deputy chief economist Douglas Porter of BMO Nesbitt Burns.

"Of all the equity markets parading higher in 2012, few can hold a candle to the Nasdaq, which is now up almost 20 per cent so far this year (with just four sessions left in the first quarter," Mr. Porter said.

"The titan gains have lifted the tech-heavy index to its highest level since late 2000," he said in a research note titled "Rational exuberance?"

"Note that the index has more than doubled since Alan Greenspan first uttered the phrase 'irrational exuberance' in December 1996 (up 142 per cent, but who's counting?). That works out to almost a 6-per-cent annualized return since that point. And that's before dividends ... of which there have been almost none for Nasdaq shares, until very recently."

The Nasdaq is, of course, home to Apple Inc. , whose shares have surged as it makes inroad after inroad into all things electronic.

Annualized gains of 6 per cent are within the ballpark of what investors expect, Mr. Porter told me, calling the 15-year performance unremarkable.

"I would say the market as a whole doesn't seem to be wildly exuberant," he added.

For a view of the Nasdaq's performance, or see the accompanying infographic.

Centerra cuts forecast Shares of Canada's Centerra Gold Inc. sank today after the miner slashed its forecast for output at ts Kumtor mine in Kyrgyzstan, blaming a labour dispute that slowed down getting through ice and waste to access higher grade ore in the southeast part of the project.

Centerra said in a statement today it now expects production of between 390,000 and 410,000 ounces at Kumtor this year, well down from its earlier projection of 575,000 to 625,000.

The company hopes to partially offset this by speeding up mining in the southwest part of the project to get to new reserves.

"The company is undertaking further technical analysis of the impact of the ice movement on its life of mine plan and expects to provide further information on production, capital costs and operating costs in due course," it added.

Centerra also warned that further unrest in the region could hurt iproduction further, as could a work stoppage when the labour contract expires at the end of the year.