While economic and financial problems persist in the United States and Europe, Canadians are positive and upbeat about the domestic economy and financial markets should perform moderately well this year.
According to a recent BMO Harris Private Baking study, while Canadians have tremendous pride in and optimism for strong economic performance and the country's financial outlook, they are concerned about how the rest of the world's financial challenges could affect their portfolios during the second half of the year.
"Though the most recent recession is a few years behind us, the tentative economic recovery in the United States still troubles Canadian investors," says Paul Taylor, chief investment officer, fundamental equities, with BMO Asset Management. "Those concerns are warranted because Canada is the United States' largest trading partner and it's only natural that we will be affected by what happens south of the border. We are not the masters of our own destiny."
The annual value of Canada's bilateral goods and services trade with the United States is about $600 billion. The U.S. is the largest foreign investor in Canada and the most popular destination for Canadian investment abroad. In 2009, American direct investment in Canada was close to $288.3 billion while Canadian direct-investment holdings in the U.S. reached $261.3 billion.
Topping the list of worries on the minds of Canadian investors is the possibility of the United States slipping into another recession followed by the sovereign debt crisis in Europe, slowing economic growth in China and India, and tensions in the Middle East.
Some recent favourable developments in the Euro zone such as the election of a pro-Euro Greek government and stabilization of the Spanish banking system have greatly reduced the possibility of a breakup of the region, but many economic sectors remain weak. "Public policy and other developments are moving the Eurozone in the right direction," says Eoin Fahy, chief economist with Kleinwort Benson Investors in Dublin. "Life goes on. People continue to eat and travel but businesses are nervous and the consumer and investor sectors of the economy remain weak. The Eurozone has the resources to fix its problems. The question is whether it has the will."
Economic weakness in Europe and China are impacting the U.S. economy, which is slowing job growth. "The global economy plays an important role in the local economy," says Jack Ablin, chief investment officer with Harris Private Bank in Chicago. "There's a lot of risk associated with the upcoming election and there's a lot corporate and personal cash that's sitting on the sideline right now. Investors need a lot more clarity."
In spite of outside problems, the majority of Canadians are proud of Canada's overall economic performance relative to the economies of the U.S., Europe and other parts of the world. Seventy-four per cent are optimistic about Canadian financial markets and half anticipate that their current investments will grow in value over the next year.
"Canada's economy remains strong compared to those of our global peers," Taylor says. "While American equity markets have performed fairly well recently, there have been some mixed economic signals coming out of the U.S. When combined with the ongoing sovereign debt crisis in the Eurozone and other trouble spots around the world, the time is right for Canadian investors to ensure they balance risk in their portfolios and avoid being over weighted in one specific (geographic area.)"
Taylor believes the Canadian equities market will grow in the high single digits this year, led by the telecommunications, industrials and financial sectors. Energy and materials are most likely to be affected by the current uncertainty and follow a downward trend and the Bank of Canada is likely to hold the line on interest rate increases in spite of some indications that rates might rise in the future. "It's a decent but not a stellar outlook for Canadian equities," Taylor says.
"The Bank of Canada has signalled an intent that rates will go up at some point but I think this is a way to get consumers to be cautious about making big expenditures and perhaps avoiding a housing bubble," Taylor adds. "It shows some confidence in the economy but most people would be shocked to actually see an increase until the recovery is more firmly rooted."
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.
