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IMFs chief economist Olivier Blanchard says low growth and uncertainty in advanced economies are affecting emerging market economies.

REUTERS

The International Monetary Fund's darkening outlook for the Canadian and global economies underscores that Canada's recent stock market underperformance could persist, market strategists said Tuesday.

With China's economy slowing and European markets struggling, investors are "well aware" that the global economy remains weak, said Myles Zyblock, chief equity strategist with RBC Dominion Securities Inc. That's particularly a threat to commodity-heavy stock markets such as Canada's, as commodity demand and prices are highly sensitive to shifts in the global economic landscape.

But, he said, investors in Canadian stocks had already anticipated much of the bad economic news the IMF doled out Tuesday.

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The IMF's report "said a lot of stuff we already know," Mr. Zyblock said. "I'd say the bulk of adjustment is already in the price" of Canadian stocks.

On Tuesday, the IMF released its twice-a-year World Economic Outlook report, which lowered its projections for Canada's economic growth to 1.9 per cent in 2012 and 2 per cent in 2013. Both mark a 0.2-percentage-point drop from the IMF's previous projections, released in July. It cut its global growth forecasts to 3.3 per cent this year and 3.6 per cent next year, down 0.2 and 0.3 percentage points, respectively.

"Low growth and uncertainty in advanced economies are affecting emerging market and developing economies through both trade and financial channels, adding to homegrown weaknesses," said IMF chief economist Olivier Blanchard said in a statement.

Markets worldwide reacted with some shock to the news, posting modest declines. But the Toronto Stock Exchange took a bigger hit than most others, falling 1.2 per cent.

The Canadian stock market has been sluggish, relative to other leading global markets, as economic doubts have risen this year. The TSX has grown just 2.7 per cent to date in 2012, compared with a 14.6 per cent jump in the S&P 500 and even 6.7 per cent growth in the Euro Stoxx index.

"We've been saying for a while that the Canadian stock market would underperform," said Pierre Lapointe, the head of global strategy and research for Pavilion Global Markets Ltd. "It has. And we continue to think that it will underperform."

The IMF report focused heavily on Canada's deeply entrenched trade relationship with the United States. While Canada's recovery has been faster, "growth has been constrained by sluggish expansion in the United States," the report said.

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"A slowing economy south of the border will, of course, put pressure on the Canadian economy," Mr. Lapointe said. "That environment is going to be tough for Canadian equities to do well."

It's also tougher for corporations to squeeze out earnings growth, Mr. Lapointe said. After aggressive cost-cutting and margin-pushing to find profits after the recession, there is little left to squeeze. "The only thing they can do it is grow the top line," he said, referring to revenues. "That's going to be a tough environment for earnings."

While the IMF also lowered its growth predictions for China by 0.2 percentage points, its predicted growth rate is still significantly higher than Canada's – 7.8 per cent in 2012 and 8.2 per cent in 2013. China will still be heavily dependent on Canadian commodities, said George Vasic, chief economist and strategist with UBS Securities Canada Inc.

"Given that the [IMF] downgrades are not centred in China," Mr. Vasic said, "I wouldn't see any particular TSX impact." In fact, the IMF actually raised its price projections for both oil and non-fuel commodities over its July numbers. "That's a positive for the Canadian stock market."

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