If you're looking for economic disappointments in the world today, forget about Europe and look instead at China, where slowing growth is hanging over Canada and commodity producers like a black cloud.
Double-digit economic growth faded to 7.7 per cent in the first quarter. And now China's finance minister is saying that growth of just 6.5 per cent – the lowest since the global financial crisis and well below what was once assumed to constitute a hard landing – wouldn't be a "big problem."
For investors who have looked to China to absorb Canadian commodities, "big problem" is exactly what the slowdown looks like and gives them all the reason they need to stay clear of commodity producers.
But that's exactly why you should give these same stocks a closer look.
Indeed, anyone with a time horizon of more than a few months should see today's tumultuous climate as an ideal time to buy select commodity producers on the cheap. As the financial crisis and subsequent recovery proved, doom and gloom can be an investor's best friends.
The big picture for Canada doesn't actually look so bad, given that our exposure to China is relatively small. According to Capital Economics, China's share of Canadian exports is just 4 per cent, compared to 75 per cent for exports to the United States, where the economy is on the mend.
"Overall, while China's slowdown adds to an already uncertain outlook for Canada, the direct negative impact should be limited," David Madani, an economist at Capital Economics, said in a note.
China's impact on commodity prices is the bigger worry, of course, and some commodities have already fallen sharply, raising the prospect among some observers of an end to the commodities "supercycle," where demand is always bigger than supply.
Copper, one of the most important industrial metals, has fallen about 15 per cent this year and is down more than 30 per cent since 2011.
Canadian commodity-related share prices have also fallen on hard times. Energy stocks are no higher today than they were in September 2009. Stocks in the materials sector have fallen 50 per cent over the past two years.
As a contrarian bet, this is getting hard to ignore because there are strong reasons to suspect a rebound from these levels – but you have to be choosy.
Mr. Madani suspects that industrial metals will continue to struggle, a victim of slower Chinese economic growth. As well, it is getting hard to imagine any sustainable rebound in gold prices, given the low level of inflation and the fact that the Federal Reserve has signalled it could soon wind down its bond-buying program, known as quantitative easing or QE.
But energy is another story, with crude oil prices already shrugging off the threat from China, a recession in Europe and even rising production levels in the United States. Oil approached $106 (U.S.) a barrel on Friday, close to a two-year high, making you wonder where the price will go when the global economic outlook improves.
If Canadian energy stocks finally respond to current oil prices, the gains are going to be sweet – especially if the Canadian dollar continues to weaken. Consider that when crude oil moved above $105 a barrel in 2008, Canadian energy stocks were more than 20 per cent higher than today's levels.
The downside is limited, with the market already pricing in signs that China's economy is heading toward a hard-landing and investors looking anxiously at rising U.S. oil production levels.
As for the upside, it never hurts to look beyond near-term nervousness and instead focus on the bigger picture: China is a big economy that needs oil. A hard-landing won't change that for long.
And there is always the possibility that a hard-landing won't even occur, making today's gloomy outlook for commodities a gift for anyone who prefers to buy stocks when others are avoiding them.