Forget USMCA, oil is now our economy’s biggest headache

Portfolio manager assesses signing of new trade deal, the oil collapse and the BoC’s decision to sit tight on interest rates

Forget USMCA, oil is now our economy’s biggest headache

The oil issues plaguing Canada have overtaken trade tariffs as the number one concern to the economy.

Greg Taylor, portfolio manager at Purpose Investments, said the Bank of Canada’s reasoning behind its decision to hold the overnight interest rate at 1.75% showed that the energy sector is front of mind, nudging the newly-signed USMCA deal out of the spotlight.

He said the oil price collapse is already a major overhang and is starting to bleed into other areas of the economy. Taylor added that it’s also doing nothing to attract much-needed foreign investment.

He told WP: “We’ve had such a big collapse in the price of Western Canadian Select, we don’t really know what the consequences of that are yet.

“Certainly, we are seeing some stress in some of the companies out west and that goes back to the last time the Canadian oil prices dropped that fast when the Bank of Canada started cutting rates again.

“It would have been more surprising had the Bank maintained a hawkish stance but they had to come out more doveish and it’s more of a question of whether they are going to do something in January.

“It’s really the lack of pipelines, the widened differentiated pricing that has really affected a lot of these companies and the Western Canadian economy. We need to get that resolved - and that’s almost more of an issue than the trade dispute.”

Taylor credited the Alberta government for its decision to go ahead with oil production cuts and making sure it’s seen as a national issue. He believes the oil collapse throws into question the Bank’s rate path and the Federal government’s budget in February, and shows that the country needs to “get the pipelines going” because of its cost to the economy.

Crucially, it’s doing nothing for Canada’s rep overseas and its ability to attract vital foreign investment.

He said: “Certainly, for a number of years we have seen a flow of funds out of Canada and where you are seeing decisions being made that aren’t fixing really obvious problems, you keep hearing a lot of global investors say, why would I come to the Canadian market?

“That affects everything, not just the energy sector. It affects the value of the banks and a lot of the other parts of the economy. It was almost a worst-case scenario in the summer when you also had questions around NAFTA. How can a global investor think about allocating to Canada, no matter what is going on from a macro point of view, when you have questions around trade and something as strategic as the oil market?”

At least the new NAFTA deal – the USMCA – has been signed and is close to being ratified. Taylor believes Canada would have been heading down a “dark path” if the deal had not been agreed.

It’s a case of worst-case outcome rather than anything, he said, adding that the markets will welcome the clarity.

He said: “There’s still a lot of confusion over what actual impact there will be to companies but I think at the end of the day, getting it signed has to be looked at as a positive because the option of not getting one signed is a way worse outcome.

“More than anything, it’s just getting people to be more on the same page. We’ve got clarity, we know somewhat the goalposts we have and we know we are not going to be in the lurch with no deal.”

The portfolio manager said the uncertainty was starting to affect multiples, perception and currencies and it certainly affected the BoC when it was assessing its plans.

This clarity for investors should give them confidence that growth is solid and can cope with any rate hikes that are down the road.

He said: “There were two big overhangs, which are related to the market – the rate path for the central banks and global trade. The worse thing would be that you have got central banks hiking in the face of slowing global growth and I think the fact we are getting some clarity gives some certainty that it will help keep the global growth going.

“An awful environment of slow global growth and hiking interest rates wouldn’t work for anyone.”

 

 

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