Here’s why a reputed bear has turned bullish on Canada
Published Mar 14, 2023 • Last updated 10 hours ago • 4 minute read
Economist David Rosenberg at an event in Toronto, in January. Photo by Peter J. Thompson/National Post David Rosenberg, one of the most widely followed economists on Bay Street, advised his clients and followers to take advantage of “future periods of weakness” to buy Canadian stocks and bonds, as the country represents a good bet for longer-term investors.
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Access articles from across Canada with one account Share your thoughts and join the conversation in the comments Enjoy additional articles per month Get email updates from your favourite authors Rosenberg, who made his name on Wall Street and now runs Rosenberg Research & Associates Inc. from Toronto, is known for bearish takes on markets and the economy. He’s been especially negative on how the United States Federal Reserve has handled surging inflation, arguing that the central bank raised interest rates too fast and probably will trigger a recession.
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So, a positive take on his home country stood out. Rosenberg and strategist Brendan Livingstone said Canada should fair relatively well because inflation is falling, the central bank has stopped raising interest rates, a weaker dollar will help exporters and high levels of immigration will boost domestic demand.
“While our expectation continues to be that equities are likely to see continued selling pressure (on tighter financial conditions/rising recession odds), we believe long-term investors could use future periods of weakness to add to Canadian stocks given their attractive valuations — especially exporters/companies with high international exposure that stand to benefit from a weak currency,” they said in the Breakfast with Dave newsletter on March 14.
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Article content Here’s a closer look at why a reputed bear has turned bullish on Canada:
Canada’s problems are short term “The principal risk for the Canadian economy stems from just how vulnerable it is to higher interest rates,” they said.
Those risks are being felt on a number of fronts, from indebted Canadian consumers to an overpriced real estate market that is still correcting.
After taking a break during the pandemic, Canadians continued to add to their debt and now carry a debt-to-disposable-income ratio of 168.1 per cent, near an all-time high. By comparison, U.S. consumers are considerably less in the hole with a debt-to-disposable-income ratio of 96.4 per cent, well off a peak of 129.4 per cent during the Great Recession.
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Article content They also noted that the Canadian household debt-servicing ratio currently sits at 14.3 per cent after falling to 12.5 per cent during the pandemic. That’s going to slow consumer spending until borrowing costs come back down.
“With debt payments making up an increasingly large chunk of income, this means less available for consumer spending (especially discretionary expenditures),” they said.
On the real estate front, “there is lots of scope for the housing market to continue to act as a headwind for growth.” The sector represents the part of the economy most reactive to changes in interest rates. Housing prices remain extremely elevated compared to where they would be in a normal market. They also said that the full effect of mortgage rate resets in Canada — five-year terms vs. 30-year terms in the U.S. “have yet to be felt.”
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Article content On the trade front, exports accounted for 34 per cent of Canada’s GDP exposing the economy to the rising risks of a global slowdown.
Taking the long view All this might sound alarming, but there are several upsides percolating for investors looking to take advantage of lower Canadian stock prices.
“Despite the clear negatives facing the Canadian economy, there are also some reasons to be positive. Perhaps most encouragingly, inflation is showing clear signs of rolling over,” Rosenberg and Livingstone said.
For example, the Canadian consumer price index excluding food and energy for the last three months came in at 3.1 per cent annualized from 7.7 per cent in May.
Meanwhile, U.S. core inflation is at around 4.6 per cent. They said the sharp drop in Canadian inflation validates the Bank of Canada’s recent pause on rate hikes. Further, it sets it on a diverging path from the U.S. Federal Reserve, whose chairman has indicated that more rate hikes are on the way.
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Article content Widening interest rate differentials have pushed the loonie down against the greenback with the pair predicting that “a weaker currency will improve Canada’s international competitiveness, and serve as a key source of support for the country’s manufacturers/exporters.”
Immigrants to the rescue Rosenberg and Livingstone said they believed Canada’s ambitious immigration targets will boost economic growth.
Ottawa recently announced it wants to bring in 465,000 permanent residents in 2023, 485,000 in 2024 and 500,000 in 2025 to tackle labour shortages. Canada is one of the few rich countries experiencing population growth and is growing at the fastest rate among G7 countries, according to data from the 2021 census.
What comes after a peak yield curve inversion? Nothing good Rosenberg: Fed should have followed Bank of Canada’s lead David Rosenberg: The earnings recession is underway They projected that Canada will likely experience stronger growth of its labour force than the U.S., although they noted that Ottawa’s immigration plan isn’t without its challenges, among them adequate housing.
“There are good reasons to be negative on the Canadian economy at the current time,” they said. “But it isn’t all bad news.”
• Email: gmvsuhanic@postmedia.com | Twitter: gsuhanic