As we search for national equity markets that look attractive despite the sluggish tenor of global markets, we are considering the potential now offered by Canada. Recovering from the downdraft from falling oil and other commodity prices last year and early this year, Canada’s equity market has been outperforming, with the iShares MSCI Canada ETF, (NYSE:EWC), up 14.19% year-to-date. That outshines the US market, where the SPDR S&P500 ETF, (NYSE:SPY), has registered only a 1.0% gain, and the Eurozone market, where the iShares MSCI Eurozone ETF (NYSE:EZU), is still down by 3.25% year-to-date.
The Big Picture
The Canadian macroeconomic picture supports this market performance. First-quarter GDP looks likely to come in at a strong 2.5% annual rate despite weakness in February, with strength from consumers and exports. The RBC Markit Purchasing Managers Index for Canadian manufacturing reported a sustained rebound in output and new business volumes in April. The wildfires in Alberta will impact growth in the second quarter through significantly reduced oil sands production. Nevertheless, we estimate GDP growth for the year at 1.6%. The Canadian economy’s growth next year is projected to pick up to a 2.2% pace. That would likely exceed the growth in the Eurozone and Japan while matching growth in the US.
Continuation of the recent firming in the price of oil will contribute to this advance and should lead to a rebound in investment in the second half of 2016. Export growth is expected to be supportive as the US economy, which accounts for 75% of Canada’s exports, advances at an average pace close to 2%. At its April meeting, the Bank of Canada expressed guarded optimism about the economy, holding policy rates constant while adding 0.5% to its outlook for economic growth this year. Fiscal policy under the Trudeau government is set to become more stimulative. The recovery of the economy in 2016 and 2017 from last year’s 1.2% growth should continue to be positive for stocks.
Longer-term, Canada, which is the second-largest country in the world by land mass, is expected to have potential GDP growth of 2%. While the country certainly will continue to benefit from its abundant resources, its economy has become service-based, with services such as finance, real estate, communications, and retail trade accounting for some two-thirds of economic output. The economy is largely market-based, and historically economic policies have been sound. Canada’s governance is among the world’s best. Government debt as a percentage of GDP is projected to fall over time.
Bottom Line
In sum, as long as the US and global economies remain on track, the Canadian economy should provide attractive investment opportunities. The pullback this month in the Canadian ETF with the largest market capitalization, (NYSE:EWC), probably in part due to the wildfires in Alberta as well as the declines in global equities, could provide an entry opportunity. There are several other Canadian ETFs which we find interesting despite their much more limited liquidity. The IQ Canada Small Cap ETF, (NYSE:CNDA), is outperforming, with an 36.81% advance year-to-date. If one wishes to avoid the effects of changes in the exchange rate between the Canadian and US dollars, there is the iShares Currency Hedged MSCI Canada ETF, (NYSE:HEWC), which is up 5.75% year-to-date. Finally one can focus on dividend-paying energy sector stocks with the Guggenheim Canadian Energy Income ETF, (NYSE:ENY), for which the year-to-date gain is a healthy 23.13%.