After three months under lockdown, the City of Toronto will soon be allowed to reopen certain nonessential businesses, restoring a semblance of normalcy to one of Canada’s hardest hit urban areas. However, Canada still operates under strict protocols to protect against a renewed increase in infections, according to the University of Oxford’s COVID-19 Government Response Tracker database, which monitors the stringency of public measures to contain the virus across a range of countries (see the chart below). But having brought the number of new cases under control, Canada will likely follow the arc of Europe and Japan where measures have recently been relaxed. Global equity markets have risen sharply since late March when widespread uncertainty over the swift spread of lockdown measures prompted broad risk-off moves. … [Read More...]

The US Federal Reserve’s updated Summary of Economic Projections announced last week confirmed that the economy would take years to fully heal from the coronavirus shock and that policy rates would be held at virtually zero through the end of 2022 (see the chart below). The unemployment rate was also forecast to remain above 6% through the end of 2021 and the economic recovery in 2021 would fail to recoup the lost economic output in 2020. This sober assessment of the economic conditions facing the world’s largest economy – one that is also seeing a surge in cases in many southern states – took the wind out of the sails of global stock markets last week, which registered the largest weekly declines since mid-March (see the chart below). Importantly, Canadian … [Read More...]

Last Friday’s labour market report from Statistics Canada forced a double take. In May, the Canadian economy added 290K jobs, versus an expected further decline of 500K, and hours worked rose by 6.3% on a month-over-month basis. Together, these gains represent a 10% recovery of lost jobs and reduced hours since the pandemic lockdowns began. The unemployment rate edged up to a record high of 13.7%, though this was because more Canadians were actively searching for work – an encouraging sign. While the labour market is still feeling the pain from the initial shock as many workers remain underutilized, last month’s improvement moved forward the expected eventual recovery. At its policy meeting last week, the Bank of Canada (BoC) also stated it believes the worst … [Read More...]

This past week, the incoming economic data confirmed what we already know: the economy was brought to a standstill heading into the second quarter to contain the spread of the coronavirus and limit the humanitarian toll. On Friday, Statistics Canada announced that economic activity declined at an annualized rate of 8% in the first quarter, slightly better than its initial flash estimate of -10%. Unsurprisingly, a record drop in consumer spending drove the bulk of the slowdown, whereas business investment fell more modestly. But as bad as this reading was, the data are likely to worsen before they improve. The impact of widespread shutdowns is expected to weigh more heavily during the second quarter when economists expect real GDP to contract between 40%-50% on an annualized … [Read More...]

Canadian equities have partially recovered from their late March lows. As of May 22, the S&P/TSX Composite Index (TSX) had risen 34% since the March 23 trough, rising for eight of the past nine weeks. Extraordinary policy measures, the reopening of economies, optimism around an experimental vaccine, a rebound in oil prices from highly depressed levels, and strong tech sector gains are all driving the Canadian equity market higher. Although the TSX is still down 12% this year and 17% below the February highs, uncertainty over the path of the outbreak and the development of a vaccine, escalating U.S.-China tensions, and less forgiving valuations could make further gains more difficult. One reason equity valuations sit at historically elevated levels is that the gains in stocks … [Read More...]

We may commute less, socialize online more, shift some of our consumption online, and hold more cash for a rainy day than before. These behavioral changes will likely accelerate many preexisting structural trends, challenging some business models and revenues, while boosting others. One investing trend that is clearly receiving a boost as investors come to terms with the coronavirus shock is sustainable investing. Sustainability has delivered better risk-adjusted performance throughout the crisis than the broad market and, looking at indices over nearly a decade, exhibits similar, if not better, results than found in traditional equity investments in Canada, other developed markets and emerging markets (see the chart below). This has attracted inflows but the assets under management in sustainable funds remains small. In Canada, sustainability has … [Read More...]

Statistics Canada’s (StatsCan) Labour Force Survey released last week for the month of April revealed that the Canadian economy shed another 2 million jobs and the unemployment rate rose by 5.2 percentage points to 13%, the largest monthly increase on record. The cumulative impact of Covid-19-related shutdowns – when including Canadians who are either unemployed or working significantly fewer hours – is 5.5 million or 22% of the working-age population. Encouragingly, almost all (97%) of the newly unemployed in April expect to return to their jobs once the shutdowns end. While the outbreak has undoubtedly brought significant disruptions to Canadian businesses, the impact across sectors and industries has been uneven. For jobs where working from home is the norm and close physical contact is not required to … [Read More...]

This past week brought many new developments related to the future of Canadian monetary policy and its relationship with fiscal policy in the post-coronavirus era. First, Finance Minister Bill Morneau announced on Friday that Tiff Macklem would begin his seven-year term as the next Governor of the Bank of Canada (BoC) after current Governor Stephen Poloz steps down on June 1. Macklem, currently the Dean of the Rotman School of Management at the University of Toronto, was previously senior deputy governor of the Bank of Canada under Governor Mark Carney and recently chaired the government’s Expert Panel on Sustainable Finance, which published its final report in 2019. Second, the Parliamentary Budget Officer (PBO) updated its Covid-19 scenario analysis last week and now projects the federal budget deficit … [Read More...]

The principal drivers of the Canadian dollar/U.S. dollar exchange rate are changes in oil prices, changes in the difference between short-term U.S. and Canadian interest rates and stock market volatility (a proxy for risk appetites). Over the past ten years, oil price declines, shrinking premiums on short-term Canadian interest rates over U.S. ones, and rising stock market volatility have all tended to coincide with Canadian dollar weakness (see chart below). The reverse is also true. Almost as soon as 2020 began, the Canadian dollar started its descent. Falling oil prices were the principal driver of the loonie’s initial weakness in January and February. By March, stocks and heightened risk aversion joined up with an oil price rout that deepened into April, leaving … [Read More...]

Statistics Canada reported a 9.0% monthly decline in GDP for the February to March period – the worst reading since the series began in 1961. This was the reporting agency’s first attempt at a flash estimate for GDP and, given the unprecedented nature of the economic shutdown, this estimate will likely face substantial revisions over coming weeks. April readings for the Canadian economy are likely to be even bleaker, as the economic lockdown deepens and front-month U.S. crude prices decline back below U.S. $20/barrel. Given the massive shock to the economy, the Bank of Canada chose to suspend its economic forecasts and described the outlook instead in terms of scenarios. The shock to Canada’s economy today is much worse than during the financial crisis … [Read More...]

Last week’s March Labour Force Survey provided the first glimpse into the impact of widespread containment measures and materially lower oil prices on the Canadian economy. The Canadian labour market shed over two million jobs in March and the unemployment rate rose 2.2 percentage points to 7.8%, representing the largest one-month increase in more than four decades, according to Statistics Canada. Including those who kept their jobs but worked less than half of their usual hours, we can infer that around three million Canadians (almost 10% of the population) have so far been financially impaired by the containment measures. A sharp drop in economic activity is already being assumed and priced into risk assets. Based on a range of estimates from Canada’s largest banks, economists expect GDP … [Read More...]

Canada’s banking regulator, rightly sensing a pickup in loan losses and wanting to avoid a sharp tightening in credit conditions, indicated on Friday a willingness to reduce minimum capital requirements even further to keep lending from contracting during the economic downturn. Dividend yields on Canadian bank stocks reflect a grim outlook, standing at levels not seen since the financial crisis (see chart below). The banks have committed to maintaining dividends in the face of an ever-evolving health and economic crisis, and some have also pledged to avoid job cuts. While bank earnings face downside risk on increased loan loss reserves, that alone is not a reason for banks to cut dividends since they can increase the payout ratio to compensate. But unlike the financial crisis when … [Read More...]

A hypothetical C$100 investment in the S&P/TSX Composite Index would have grown to just shy of C$120 today even after the sustained market decline of the past several weeks. In contrast, the same investment in the energy sector would be worth just C$55 (see Chart 1). But for all the past woes, today’s weakness in the energy sector has come even more swiftly than during the 2015/16 energy recession. Crude oil prices have declined more than 70% in just the first quarter of this year to the low $20s per barrel in the U.S. (WTI) and to just $6 in Canada (Western Canadian Select), as of March 27. In our view, the damage from the one-two punch of the coronavirus and the Saudi Arabia-… [Read More...]

Energy was the worst performing sector in the S&P/TSX Composite Index (TSX) and slid another 19% during this past week alone as crude prices remained heavily depressed. At one point during the week, Western Canadian Select traded below $8/barrel, a record low since the data series began in 2006, according to data from Bloomberg. Canadian producers have shifted into cost-cutting mode, pulling back capex and production as oil prices likely sit well below profitable levels. Any assumption of energy being a large weight in the Canadian market cap needs a sanity check now that the sector has dwindled to 12% of the TSX from 30% in 2009. Though often perceived as a lower-beta, defensive sector, REITs were among the hardest hit segments and underperformed … [Read More...]

Fiscal, monetary and regulatory authorities are coming to the rescue with aggressive and coordinated stimulus measures: The Bank of Canada delivered an unscheduled 50 basis point rate cut to just 0.75% – the second in as many weeks – which had been fully priced in by the rates markets. The BoC also committed to purchasing short-term bankers’ acceptances in the secondary market to promote functioning financial markets. The Ministry of Finance offered C$10 billion in immediate credit support to small and medium-sized businesses to be disbursed by the Business Development Bank of Canada and the Export Development Bank, as well as a potentially multi-billion dollar package to assist businesses impaired by the sharp drop in crude oil prices and weakening demand due to a wide … [Read More...]

Canadian stocks are off to a strong start to begin 2019. Not only has the S&P/TSX Composite Index risen roughly 9% – erasing two thirds of last year’s decline – but it is also one of the world’s leading equity markets so far this year (see the chart below). Given the Canadian equity market’s procyclical behavior, it’s not surprising to see it rally stronger than other global bourses in a risk-on period like the one we’re in now. It’s also quite possible that Canadian stocks were sufficiently on sale to warrant a bounce off levels that were consistent with deeply pessimistic sentiment: Canadian stocks were, and still are, trading at one of the cheapest levels to developed market equities in the past three decades. So … [Read More...]

Slowing global economic activity and the potential for building recession fears will likely weigh on the prospects for the Canadian economy and financial markets in the year ahead. Fortunately, a lot of bad news is already priced into Canadian risk assets after a second consecutive year of underperformance versus global equity markets. Our estimate for Canada points to the economy expanding at a roughly 2.0% pace during 2019, roughly consistent with current consensus estimates and the Bank of Canada’s (BoC) own forecasts (see chart below). That said, economic activity in Canada appears to be slowing, in line with the growth slowdown theme. Investment uncertainty related to North American Free Trade Agreement (NAFTA) renegotiations may have eased given the likely legislative approval of the reworked trade deal in 2019. Yet … [Read More...]

In a well-diversified portfolio, as one asset class declines, another should rise, mitigating risk and minimizing losses. Yet that is proving to be easier said than done. As fixed income and equity markets seem to have shifted to risk-off, investors are struggling to find assets that move in the opposite direction from other assets, leaving portfolios exposed to synchronized losses even if they are diversified. Specifically, the recent performance of stocks and bonds have been moving in the same direction: down. So how to achieve better diversification in times like these? In our view, bonds are still a reliable diversifier in a market rotation, especially as we get late in the business cycle. Better balancing risk exposure in a bond portfolio is critical to realizing … [Read More...]

The Canadian economy is chugging along, even as uncertainties build up around the outlook. Strong economic activity in the U.S., coupled with potential for upside surprises to consensus, is likely to sustain a roughly 2.0% pace of growth in the Canadian economy. Our BlackRock Growth GPS for Canada now points to a steady economic outlook over the next twelve months, with only modest upside to consensus forecasts (see chart below). This is consistent with our broader view that the steady global economic expansion will keep rolling on. One of the three key themes of our Q4 Global Investment Outlook – a widening range of potential growth outcomes – is also relevant for Canada. Alarming headlines related to the renegotiation of the North American Free Trade Agreement … [Read More...]