The economy is like my wife, it will never cease to surprise me
I’m somewhat surprised by the Canadian economy vs how the market reacts. The Canadian GDP recently escaped its “technical recession” (2 quarters of decreasing GDP in a row) during the third quarter. We can’t say the market followed this great news:
I’m not surprised the Canadian market is down this year, yet I am surprised the Canadian economy is growing regardless of the very poor performance of the resources sector.
Both the oil and mining industries lead the biggest losers in the stock market this year. In fact, I don’t think that I can recall seeing the price of any commodity in the green this year. It’s pretty much a big black hole where everything has fallen into the ocean abyss. This will end, eventually! However, there is a very interesting phenomenon happening in the meantime; the Canadian economy isn’t slowing down.
When Canadian GDP dropped for 2 quarters in a row, we all expected this. It was only normal to see an economic slowdown since the bulk of our systems revolve around resource related industries. But other factors kicked in and brought the Canadian economy back on track. The main factor I can see to explain this is the currency exchange rate with our southern neighbors:
Since 2012, the CAD is losing steam against the USD. It became quite obvious during 2014. The CAD hasn’t been that cheap over the past 10 years! Eventually, this weighs in for Americans as they are starting to see the advantage of “buying Canadian”. Manufacturing industries are slower to move their money from one place to another as compared to the oil exploration industry. However, we can clearly see that Canadian manufacturers now ship more goods to the US.
We also expected Canadian consumers (that are already indebted up to their neck) to slow down their credit cards. Roughly 60% of the Canadian economy relies on its consumers. With major budget cuts in Alberta in the oil sand industry, we expected increasing unemployment and decreasing consumer goods purchased. Well Canadian employment showed resilience and other jobs in other industries were created at the same time as many workers lost their well-paid jobs in northern Alberta. Let’s not put the rose-colored glasses on yet, a job lost in the oil industry is not replaced with the same quality in the service or manufacturing industry. Still, the point is that we expected the worst for Canada this summer and we are experiencing the best case scenario instead.
Is it Time to Get Back to Canadian Stocks, eh?
As we are now in December, I’m currently working on my “Best 2016 Dividend Stocks Book” and I think we might be surprised with Canadian stocks in 2016. There has been lots of money that have been made in the US market over the past 7 years and I think it will continue in 2016. However, I also think the Canadian market will benefit from this drop in the market in 2015 to bounce back next year. Just look at how the Big Five have reacted so far in the market:
Interesting enough, they all show negative returns besides the CIBC but they all posted stronger profits than last year. Considering their healthy dividends, Canadian banks might show a great entry price at the moment to fill-up your portfolio with a fresh high dividend yield around 4%.
The Canadian banks were penalized this year as we expected loan loss reserves to rise and the economy to slow down. Once again, banks benefited from a stronger than expected economy and were able to pull out a few more bucks in profit. I wrote a complete report on banks for Seeking Alpha earlier this summer. I think it’s time to re-read this article and find some interesting picks among banks!
There are Lots More than Banks in Canada!
As you know, I recently bought Canadian Railway (CNR.TO) and I’ve found several other great Canadian companies to buy in the upcoming months. The market being down by roughly 7-8% this year while the economy is showing resilience makes me think there are several opportunities on the stock market. It’s up to you to find them (it’s like an Easter Egg Hunt! Hahaha!).
You know I will share some of my favorite stocks for the year shortly, but I want to hear from you first; what is on your watch list these days?