It was as recently as seven weeks ago that all of the headlines about Canada’s economy seemed to be celebrating strong GDP growth. Canada was looking increasingly favourable to other developed markets on the world stage, but data from recent weeks hasn’t been so positive.
On Friday, Statistics Canada reported an unexpected retail sales decline and little change in inflation. The Canadian dollar fell after the report as did the odds of a rate increase being announced after the Bank of Canada’s meeting this week.
“We are a little bit more cautious on Canada at the moment,” says Kathrin Forrest, Portfolio Manager at Sun Life Global Investments
. “Historically, consumption was one of the key drivers of Canadian GDP growth and the question is how much room does that has to run. If it doesn’t have much, what other pieces are there to take over? Exports haven’t looked very favourable over the past few months and the trade deficit is widening, which is not great for supporting GDP growth and domestic consumption.”
The ongoing Nafta negotiations continue to bring uncertainty to the Canadian market and are only adding to Forrest’s cautious outlook on Canada. Looking abroad, Forrest sees good opportunity due to improving economic fundamentals in the US, continental Europe and, to some extent, emerging markets.
“In the US, looking at the broader political framework, both in terms of fiscal regulation and monetary policy, there is potentially some tailwind for sectors like financials,” Forrest says. “But, the question is to what extent has that been priced in and are those favourable expectations actually realistic.”
Forrest sees more of a deeper value play as being the best strategy for Europe at the moment. The momentum has been broad-based and although it has been driven by core markets, like Germany, the underlying fundamentals have broadened out into some of the more periphery markets, which is something to consider when repositioning portfolios.
Many investors are keeping a close eye on President Trump’s attempts to get tax reform plans pushed through. Although the stock market may act favourably if and when something is pushed through, Forrest is skeptical about the long-term implications for the US economy
“The US economy has extremely low unemployment, and I’m not sure to what extent fiscal stimulus is needed on top of that,” Forrest says. “There is a risk that tax reform will trigger inflation and add to the overall public debt, which will have implications on bond markets. If it actually goes through, I do think there are some risks associated with Trump’s fiscal stimulus.”
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