The Globe and Mail’s market strategist offers six thoughts on the research, analysis and ephemera that have crossed his desk this week.
1. BMO chief economist Doug Porter believes the Canadian and U.S. economies are going in opposite directions. He notes that while BMO BMO-T officially rescinded their call for a U.S. recession, they “studiously and purposely did not do the same for Canada.”
Mr. Porter is concerned that high debt levels make Canadian household balance sheets susceptible to rising interest rates, and that a shallow recession is possible for the domestic economy. BMO has reduced its forecast for 2023 Canadian GDP growth to 1.1 per cent from 1.6 per cent.
2. An early September column by Tej Parikh in the Financial Times discussed the persistent underperformance of the domestic economy in Why isn’t Canada an economic giant? The column began by highlighting the country’s resource wealth before mentioning that in terms of purchasing power parity, Canada ranks as the 15th largest economy, behind Turkey, Italy and Mexico. Mr. Parikh reported that the OECD’s forecast indicates Canada per capita GDP growth will be the lowest among G20 countries to 2060.
The author blames geography, low population density, tariffs and the regulatory environment for the economy’s poor productivity – the average Canadian worker is only 70 per cent as productive as their American counterpart. Mr. Parikh grants our country’s attractiveness as a place to live but notes that low productivity will eventually result in lower standards of living.
3. Barclays strategist Ajay Rajadhyaksha’s recently published global outlook was entitled Cash is Still King. He believes that it is unreasonable for investors to expect strong returns from risk assets when risk-free cash yields are over 5 per cent. A stagnant European economy and slower-than-expected recovery for China are reasons for investors to be comfortable in cash.
4. Lululemon Athletica LULU-Q is the winner of pandemic winners, down only 17 per cent from its 2021 peak. By comparison, Zoom Communications ZM-Q is 87 per cent lower, DocuSign DOCO-Q is down 85 per cent, Netflix NXFL-Q is off 36 per cent. Peloton Interactive PTON-Q is trading a full 97 per cent lower.
5. It’s not rare for prominent Wall Street strategists to disagree on their forecasts but it isn’t every day that two strategists have 180-degree opposing views for the exact same reason. Morgan Stanley’s Michael Wilson and BofA Securities’s Savita Subramanian both cite the market cycle as the reason for their sector selections.
Mr. Wilson recommends health care stocks because he thinks the market is in late-cycle slowdown territory. Ms. Subramanian recommends financials and industrials, and specifically advises an underweight in health care – the least economically sensitive sector – because she believes equities are in the early-cycle recovery stage.
6. Prominent economist David Rosenberg is concerned about the domestic economy. In his daily note on Tuesday, Mr. Rosenberg noted that the net rate for nominal Canadian GDP is currently zero per cent despite the inflation pressure. He further emphasized that the unemployment rate (at 5.5 per cent) and inflation – excluding the effect of higher mortgage rates – (2.4 per cent) are at January, 2020, levels.
Mr. Rosenberg made an aggressive call, predicting that the Bank of Canada will begin cutting rates before the U.S. Fed and that, unless conditions change, a full two percentage points of Bank of Canada rate cuts are in the offing: “As the data require it, the Bank will be singing like a canary and all the Bay Street economists who are adept at focusing on lagging and contemporaneous indicators will be doing a pivot on their own when it comes to reinstating the recession call.”
Scott Barlow