The Canadian economy’s kind of lukewarm right now – not too hot, not too cold. It's flexed some muscles by growing a decent 2.2% compared to a year ago, but it's gearing up for a bit of a hiccup in the next couple of quarters before picking up the pace again in 2024.
But don't stash away that umbrella just yet. Inflation's playing hard to get, not dropping as fast as investors would like, and might need a bit of a bigger economic hit (through some additional rate hikes) to bring it back in line.
All in all, Canada's riding in the middle lane – not bad, but definitely keeping an eye on the rearview mirror for any twists and turns in the global economy.
The Canadian economy’s kind of lukewarm right now – not too hot, not too cold. It's flexed some muscles by growing a decent 2.2% compared to a year ago, but it's gearing up for a bit of a hiccup in the next couple of quarters before picking up the pace again in 2024.
But don't stash away that umbrella just yet. Inflation's playing hard to get, not dropping as fast as investors would like, and might need a bit of a bigger economic hit (through some additional rate hikes) to bring it back in line.
All in all, Canada's riding in the middle lane – not bad, but definitely keeping an eye on the rearview mirror for any twists and turns in the global economy.
Country Overview
Canada, one of the world's wealthiest nations, boasts a robust and diverse economy – one worth just shy of $2 trillion annually, making it the ninth-biggest in the world. With the lion's share of its economy driven by international trade, Canada's economic backbone is its strong trade relationships, notably with the US, China, and the UK. The country's economy also heavily relies on its key industries, which include real estate, manufacturing, and the extraction of natural resources such as oil and gas.
Another crucial element underpinning Canada's economic vitality is its well-developed service sector, accounting for over 70% of the economy. This includes industries like retail, healthcare, and education. The knowledge-based industries within this sector, like tech and finance, have witnessed substantial growth, and are likely to remain key drivers for the economy over the coming years. Canada’s home to e-commerce giant Shopify, after all.
However, the country's economic landscape is not without challenges, which include managing its abundant natural resources, transitioning towards a low-carbon economy, and reducing its dependence on global trade.
Economic Update
Economic growth remains lukewarm
The Canadian economy isn't saying "sorry" anymore: it's grown by a robust 2.2% since the first quarter of last year, although it did freeze up a bit in February and March. The central bank’s sharp interest rate hikes continue to weigh on shoppers and entrepreneurs alike, and exports aren't exactly snowballing due to lukewarm global demand. It's not all frosty news though: Canada's job market remains solid and the housing market shows signs of stabilization. Looking forward, the outlook appears a bit overcast, with key indicators suggesting that the pace of growth might remain sluggish over the next few quarters. That’s reflected in economists’ forecasts, which are less optimistic than they were three months ago, and are now forecasting a dip in the GDP for Q3, with a gradual recovery to follow.
Inflation is on the decline, but still too high for comfort.
With a 4.4% and 4.6% uptick from last year, Canada's headline and core price growth (the sensible ones, which skip over volatile items like food and energy) is still substantial. And while falling energy costs, improving global supply chains, and a softer demand should continue to push inflation in the right direction, a still-tight job market is throwing some weight behind prices. Let’s hope that the boffins are right, and that inflation will indeed settle down to around 2.5% by the time we're toasting to the New Year.
Interest rates are still rising, threatening the economy.
Interest rates are crucial to get right as they not only influence borrowing costs – and thereby consumer and business spending, themselves driving economic growth – but also act as a thermostat for inflation. With the 10-year government bond yield hovering above 3% and the 3-month yield on its way towards 5%, interest rates are hopefully high enough to put the brakes on demand and deflate inflation, but not too steep to send the economy spiralling into recession. But we’re walking a tightrope, and with the yield curve doing a headstand (short-term rates dancing higher than long-term ones), it's clear investors are bracing for a potential economic tumble.
Stock Market Overview
The S&P/TSX index is an “old economy” market-cap-weighted index mostly exposed to financials, energy, industrials, and materials, in that order of importance.
The index’s closest proxy is the JPMorgan BetaBuilders Canada ETF (ticker: BBCA, expense ratio: 0.19%), although there are other options available, like the iShares MSCI Canada ETF (EWC, 0.50%), or Franklin FTSE Canada ETF (FLCA, 0.09%).
JPMorgan BetaBuilders Canada ETF’s top ten holdings include tech company Shopify, banks Royal Bank of Canada, Toronto Dominion Bank, Bank Of Montreal, and Bank of Nova Scotia, as well as oil and gas Canadian Natural Resources, railway leader Canadian National Railway and asset manager Brookfield Corporation.
In terms of sectors, it has a large exposure to financials, as well as to energy, materials, and industrials. Relative to the US’s S&P 500, the S&P/TSX holds a lot more of the sectors mentioned above, and much less tech and healthcare.
Fundamentals suggest Canadian shares are cheap and high-yielding, but more leveraged than US stocks.
The S&P/TSX boasts an attractive dividend yield of 3.5%, almost double that of the S&P 500
It’s currently trading at reasonable valuation multiples, with a price-to-earnings (P/E) of 12.5, a price-to-cash-flows (P/CF) of 11.5, and a price-to-book (P/B) of 1.88.
Canadian companies are relatively highly indebted, however, and while the return on common equity is decent, it’s lower than that of US companies.
After outperforming US stocks last year, Canadian stocks haven’t matched the rally in US stocks this year. This year, the S&P/TSX index is up 6% while the S&P 500 is up 12%, with most of the underperformance explained by the fact that the index is less exposed to tech stocks, which have rallied strongly this year. In terms of individual stocks, Shopify and Constellation Software have been the biggest contributors so far this year.
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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.
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