The headline result of our first Advisor Sentiment Index, released yesterday, was that more Canadian financial advisors are bullish about U.S. equities (78%) than are optimistic about the outlook for Canadian stocks (60%). That Canadian number isn’t bad, but clearly the professional investors we spoke to think the U.S. economy looks better in the short term.
Given that, I was surprised to see that relatively few advisors have an opinion on how the Canadian dollar will fare relative to its U.S. counterpart in the year ahead. More than half of those we surveyed (55%) are neutral on whether or not the loonie is a good investment. Another 2% don’t know or aren’t sure. The rest of the numbers broke down this way: 2% are very bullish; 24% are somewhat bullish; 15% are somewhat bearish; and 1% are very bearish.
Advisors aren’t usually known for being neutral on a key asset class. Indeed, they didn’t come close to such a middle-of-the-road result on any of the other investments we asked about.
Coincidentally, a report from Capital Economics released yesterday made a bold call on the loonie. It’s headed down, sharply over the next 18 months according to the firm. David Madani, an economist who covers Canada for them told me he expects the Canadian dollar to be at US92¢ by year-end and US86¢ a year-and-a-half from now. The loonie closed at US97.7¢ yesterday.
Madani made three points:
- Canadian interest rates are staying put. Low rates mean a lower dollar. Madani’s view is that currency traders have priced in the expectation that the Bank of Canada will raise the overnight rate in the coming months. He thinks that’s a mistake. “We see the Bank of Canada remaining on hold this year, next year and possibly the year after that,” he said. That puts us through the end of 2014, which is the same timeline on which the U.S. Federal Reserve has said it will hold rates. Once investors come to the conclusion our rates are not rising relative to U.S. rates, the value of our dollar will drop. (I’m inclined to listen when Madani talks about the Bank of Canada. He worked there until 2010.)
- The slide in oil prices is a big part of the problem. This of course is a result of a softening global economy: China is slowing down, the U.S. recovery lacks strong momentum and the eurozone has consumers and business leaders around the world spooked. Commodity prices generally have suffered as a result. “I’m surprised the dollar hasn’t fallen a bit more already because of the steep decline we’re seeing in oil prices,” said Madani. He told me he’s particularly worried about the price of Canadian oil. Western Canadian Select crude, for example, is trading at about US$52 a barrel. If prices continue to drop, we could see oil sands projects killed. “What I’ve read is that the break-even point for a lot of these oil sands projects – even the lowest-cost projects – is around $60 a barrel.”
- Meanwhile, the U.S. is turning a corner. “My colleagues see the U.S. economy proving fairly resilient to what’s happening in Europe,” he said. If we see another financial crisis coming out of the eurozone, then this could change. But otherwise, the U.S. appears ready to recover. “We see moderate growth this year and next year for the U.S.” That’ll result in a stronger U.S. dollar. Fortunately, it will also boost Canada’s export sector.
Capital Economics is forecasting 2% gross domestic product growth for Canada this year and 1.5% growth next year. They’re predicting 2% and 2.5% growth respectively for the U.S. Those aren’t great numbers, but they’re not the end of the world either. Factor another financial crisis into the equation, though, and we’re looking at a very different result in both countries.
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