BRENDAN MCDERMID
Canada's benchmark stock index is on the cusp of regaining all the ground it lost since Lehman Brothers collapsed and plunged the world into a crisis.
The S&P/TSX composite index opens Thursday at its highest point of the year, having climbed steadily through September despite an increasingly uncertain recovery. The index is up 9.6 per cent so far in the third quarter, with just one trading day left, the best performance since last year's rapid rebound from the crisis.
The rise comes against a backdrop of looming uncertainty, with the U.S. recovery sputtering and debt troubles throughout Europe rearing their ugly head once again.
Canada's economy, which powered back from the depths of the recession, is struggling against headwinds from the United States. Consumer confidence is waning, and a report today from Statistics Canada is expected to show that the economy actually shrank marginally in July.
Still, economist Robert Kavcic, who covers financial markets at Bank of Montreal, said the current worries are not nearly as negative as those expressed this summer.
But he also noted that there has not been one overwhelming driver. Instead, some puzzle pieces came together to push markets higher. Record gold prices are one, considering so many gold producers are listed on the TSX, and dividend yields are another.
On Wednesday, five-year Government of Canada bonds yielded around 2 per cent. Contrarily, some Canadian corporations, such as Emera Inc., are raising their dividends, pushing investors toward equities because dividends are taxed at a lower rate than interest on debt.
Greg Peterson, a portfolio manager at Mawer Investment Management Ltd., agreed there has not been one driving force. He added that the Federal Reserve has unequivocally declared it will support measures to stabilize the American economy, which calmed investors across the continent, and there is talk that Canadian banks could raise their dividends now that an agreement on Basel III capital ratios has been reached.
Instead of looking for one leading indicator, Mr. Peterson said it is better to attribute the rally to "perhaps the absence of anything terribly negative."
Looking forward, Mr. Peterson said equities should stay positive because "economic growth is slow but continues to recover." In short, at least it isn't consistently negative. "We've been used to growth rates that are much healthier and more noticeable," he said, but he believes investors may need to dampen their expectations for a few years.
Mr. Peterson also thinks volatility will continue to play a big role going forward, which is why he thinks dividends are important. "At least you get paid a bit for the volatility that's out there," he said.
Tim Kiladze