The Bank of Canada’s Business Outlook Survey released yesterday did not provide much to smile about regarding the domestic economy. Most projections for the rest of year have stated that any growth will be of the miniscule variety, as the energy downturn continues to limit Canadian prosperity – this release was no different.
The survey identified that a considerable gap exists between Canada’s service industry, which is generally doing quite well, and the beleaguered oil & gas sector, which despite recent gains continues to struggle.
Norman Levine, managing director with Portfolio Management Corporation, believes the downcast tone in much of the survey is entirely justified. “The economy here is like almost every other country in the world – having a subdued-at-best outlook,” he says.
One of the more positive predictions stated in the survey was a boost for manufacturing, led in large part by increased exports into the US. This growth will not be anything to write home about in Levine’s view, however.
“The auto industry here is a fraction of what it used to be,” he says. “There was hope when the Canadian dollar was doing very badly that manufacturing would pick up. Companies do not decide in the short run to beef up manufacturing though, that’s a long-term decision. Also, lots of companies both here and the US already have excess capacity.”
Another factor has been the business environment in Canada’s most populated province, according to the Portfolio Management Corporation head.
“The Bank of Canada can’t get political, but I can,” he says. “Ontario is the manufacturing hub of Canada, but the provincial government has offset the advantages of a lower dollar with sky-high electricity costs and taxes.”
So as a portfolio manager with an eye on making his next investment, what opportunities are out there?
“Interest rates will not be going up anytime soon; in fact they could go down,” he says. “It makes rate reset preferred shares less attractive; economically sensitive companies are also less attractive, while good dividend-paying stocks less tied to the economy are much more attractive.”
The fact Canada experienced slight growth in April after contraction in February and March points to an economy unsure of itself. Bearing that in mind, the price of oil and the loonie is sure to play a considerable role in how the rest of 2016 pans out.
“I personally feel oil will go lower,” says Levine. “There were big supply outages recently in Western Canada, Nigeria and Kuwait, so that was why the price went up. Commodity rallies are more believable when they are pulled by demand rather than a supply constraint, but demand hasn’t really changed too much.”
He adds: “The loonie is vulnerable. I doubt it will go back to the mid-60s, but it could go back to the low-70s. I think long term, the mid-70s would be good. It would be attractive for exports, but not so low that is causes inflation like we had here earlier in the year with food. Low-to-mid 70s is the sweet spot for the Canadian dollar. ”
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