Are Canadian investors right to ignore macro concerns?

Are Canadian investors right to ignore macro concerns?

Are Canadian investors right to ignore macro concerns? The recent signs for the Canadian are mostly positive. The second half of 2016 saw one of the best economic performances since the recession of the last decade which is helping to alleviate some of the concerns surrounding Donald Trump’s controversial policy moves. And, judging by the markets, many Canadian investors don’t think the Trump administration’s policies will have any negative impact on our economy.

Does the data back-up that belief? Well, in 2016 Canada added 229,000 new jobs (almost 75% of that figure was added in the second half of the year), which was the most since 2012 and the best half-year gain since 2010. Exports in the second-half of the year were growing at the fastest rate since 2014, and current estimates track fourth quarter growth at close to 2%. Canada’s year-end trade data and January jobs numbers are released this week and will provide a further insight into how strong the recovery really is.

One person who is feeling the effects of the uncertainty of Trump’s policies is Bank of Canada Governor Stephen Poloz. The unpredictability south of the border is preventing Canada from making any definitive policy moves and fiscal planning remains a problem. Waves of government officials have traveled to Washington since the inauguration to get a clearer idea on how U.S. trade plans may impact Canada, but have been unable to shed much light. And, as the uncertainty spreads, Finance Minister Bill Morneau is also under increasing pressure to add protectionist measures into the federal budget.

With Canada’s economy being so intrinsically linked to that of the U.S., there is a strong possibility that government officials refrain from releasing a complete fiscal plan until Trump’s impact becomes clearer. The same strategy was previously used by Joe Oliver, Morneau’s Conservative predecessor, who held back on delivering his 2015 fiscal plan until April in the wake of the oil-price collapse.

Independent not-for-profit research institute, the C.D. Howe Institute, recently released a report on the possible impacts of Trump’s policies. The results weren’t very positive. The study found that if the U.S. were to implement a 10% tariff on all imports, that would reduce the Canada’s gross domestic product by 0.9% - a figure which could double if Canada responds with tariffs of its own. National Bank Financial estimates that a 10% tariff would knock 9% off the value of Canada’s U.S exports.

Canada is in the holding blocks, staring into the unknown as the unpredictable giant next door snarls and marks it territory. Predicting what moves Morneau and Poloz will make is getting increasingly difficult and although interest rates here in Canada are expected to go lower – if any direction at all – is it possible that Canada could follow the U.S. and raise rates this year?

“We’re still quite some ways behind the U.S. economy so divergence in our policies is exactly what we would expect to see. We would not expect to see Canada following the U.S. at this stage in terms of monetary policy,” Poloz said last week. “A whole year ago I gave a speech in January and it was about the coming policy divergence, and that still holds.” But Canadian investors aren’t convinced by what they hear. The loonie is up 3.2% this year and swaps traders are giving 26% odds of a rate increase this year.

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