Growth to cool down in Canada ?

I would like to take this opportunity to wish you a wonderful summer.

Towards the end of 2008, I wrote in my newsletter that we shouldn't eliminate stocks investments from our portfolios because although bad economic news kept piling up, the stock market had a habit of moving in anticipation of news expected to come 6 to 10 months later. As tradition would ensue, this is exactly what happened. In the first quarter of 2009, the markets had initiated a strong rebound and economic news started to improve a few months later, towards the end of the year.

In the past few months, we have witnessed increases in sales in the real estate sector, both in Canada and the United States. Confidence has improved dramatically for businesses, investors and consummers and retail sales have increased significantly, demonstrating that consummers had resumed part of their spending activities. Also, more than 150,000 jobs were created in the U.S. in February, an encouraging sign given that unemployment is normally the last economic factor to improve at the end of a recession.

Notwithstanding the data above, we have to remain careful when making our predictions; the Canadian economy could start to slow down. The latter has known its most rapid growth of the last decade in the beginning of this year, principally because of our real estate market. However, with interest rates expected to increase as soon as next June, it is possible that our real estate market will cool down. In a previous statement, the Bank of Canada said that they predicted the upcoming burst of the "real estate market bubble" as demand slows down. Also, let's not forget that the parity of our currency with the U.S. dollar is harmful to our exports towards the U.S., especially when the U.S. demand is already in slow motion.

On a more positive note, the strength of our dollar gives canadian investors more purchasing power when buying shares from American companies such as blue chips that pay good dividends. When taking the exchange rate into consideration, we notice that it is possible to find large companies that can be bought for the same price as in 1997.

Also, American indices have performed better than the Canadian market since the beginning of the year (6.84% for the S&P500 v.s. 2.82% for the S&PTSX). Is this the beginning of a new trend? We can't disregard this possibility, especially if our commodity prices reach a limit. Finally, let's note that many economists believe that parity between the Canadian and U.S. dollar is not probable over the long-term. If they are right, it means that a potential profit could be made on the U.S. dollar on top of the return of the U.S. stock market.

I hope you have appreciated my newsletter. Please do not hesitate to contact me if you have any questions with regards to opportunites south of the border.