Many factors are contributing to the worrying state of the Canadian economy, including concerns the increasingly big economic engine that could – China – now can’t.
“Global growth will be threatened if China has a hard landing,” said Gaelen Morphet, Empire Life Investments’ Senior Vice-President & Chief Investment Officer, in an interview for the September issue of WP magazine. “A hard landing is anything material below 7% GDP (growth for China), and it’s cause for concern for Canada, for Europe, for Japan and some of the emerging markets and it’s being felt.”
While global events are a big part of the equation, Canadian market events are having a greater effect. Low interest rates are a thorn in financial equities’ side. The real estate market is also a concern. But the price of oil has been copping the most flak.
But Morphet argues that could be misplaced.
“Oil is certainly a component of the picture and it’s a large one, but we have many other industries and sectors that make up the market that are doing well,” said Morphet. “It’s not just about oil. There are a lot of other considerations when you forecast for the market in Canada.”
Six or seven years ago, when oil was around its peak at $150 a barrel, the energy sector made up over 30 per cent of the TSX. But it now only represents roughly 20 per cent of the Canadian economy as other parts have appreciated, lessening the potential damage it can do.
“The market has much less exposure to oil than there was in the global growth scenario,” she said. “That’s one of the reasons why I say some of the pessimism has been discounted because, as a component of our market, the energy stocks, when you strip out the pipelines, have a much smaller impact.”
And while the bull market has lasted for seven years, Canadian advisors might have to fight off a bear in the short term.
“I’d say the bull market is long in the tooth for sure,” said Morphet. “We’re going through a tough period right now and whether this is the end or a short, small pullback I don’t know. But definitely we’re closer to the end than we are the beginning, given the duration and valuation of the bull market.”
Statistics Canada reported at the end of July that real GDP fell 0.2 per cent in May, signalling the fifth straight month it’s dropped, with many economists fearing the country is already mired in recession.