Positive Fundamentals Despite Lackluster Quarter

July 14, 2017

This quarter saw equities remaining in a holding pattern on both sides of the border. The S&P/TSX Composite Total Return Index registered a 1.6% drop in Q2 compared with a 0.7% drop in the S&P 500 Total Return Index, adjusted to Canadian dollars. On a year-to-date basis, the Canadian equity market is up a paltry 0.7%, underperforming its American counterpart by 4.7% in Canadian dollars.

UNDERPERFORMANCE IN CANADIAN MARKETS DESPITE STRONG ECONOMY

Perhaps the most surprising thing so far in 2017 has been the strong performance of the Canadian economy and, as a result, the Canadian dollar. The Canadian economy has grown at roughly twice the rate of the US and has added jobs in a similarly impressive fashion over the last six months. Optimists would point to the lagged effects of domestic fiscal stimulus, a lower Canadian dollar (relative to a few years ago), spillover from a growing US economy and the recovery in oil prices as solid fundamental reasons for Canadian economic outperformance. Pessimists, however, would point to an overheated housing market and highly levered consumers as the primary drivers of Canadian growth. As usual the truth is somewhere in-between, but we see far more positives than negatives when looking at the current state of the Canadian economy. While it’s true that elevated Canadian consumer leverage has fueled some of the growth in both the housing market and the general economy, it is not enough to create the kind of statistics we have seen so far this year. Employment is the key to keeping credit issues in check and recent job growth has been broad when measured both by industry and geography. Canadian mortgages do not have the same kind of teaser rates that were prevalent prior to the financial crisis in the United States. In fact, the bulk of Canadian mortgages are 5-year fixed rate, which means interest rates are continuing to drop by 10-20% relative to where they were 5 years ago. Begrudgingly, the currency market came to a more positive fundamental view of Canada over the past six weeks, as the Canadian dollar increased more than 6% against the US dollar. News that the Bank of Canada is considering their first interest rate increase since the financial crisis served as the catalyst for the rally.

Read full Q2-2017 Quarterly Review.

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