Canada’s economy looking up

Tal’s forecast was based on improving global economic growth and a relatively stable outlook for interest rates. He said the U.S. Federal Reserve was shocked by the strong selloff in bonds and corresponding rise in yields as a result of its talk on tapering last spring, and will tread cautiously when it comes to raising rates.

Interest rates will stabilize or go down in the next three to five months as the U.S. economy and rate of job creation hit a bit of “soft zone,” he predicted. However, a year or year and half from now he expects rates will be higher by 40 to 50 basis points.

“The issue is that monetary policy or money printing is running out of ammunition,” Tal said. “Lower interest rates don’t lift the economy they way they used to. But if rates start to rise, there is an extremely high level of sensitivity.”

The slow and slight rise in interest rates accompanied by stronger global growth will be good for cyclical, economically sensitive stocks such as industrials, energy, base metals, information technology, banks and media, he said, but less so for the interest rate sensitive stocks and defensive companies such as utilities that have done well for the past several years.

Historically, Canada’s stock markets tend to hit sweet spots in periods after the U.S. 10-year bond yield hits a trough, as it did this past spring, he said. Since 1987, in 80% of such periods, the Toronto Stock Exchange has gained ground in the following six months. The TSX’s median advance of 13.8% is triple the long-term trend, and significantly stronger than the S&P 500’s 8.7% gain.

Tal said countries in emerging markets such as China are moving from infrastructure and export dominated economies to ones fuelled by domestic consumer spending, and this portends the end of the “commodity supercycle” that formerly benefitted Canadian resource companies.

“This doesn’t mean commodity prices will fall tomorrow, they will rise in 2014 due to the global recovery,” he said.

But he doesn’t see a huge “leg up” for commodity prices akin to the gains they experienced in prior years when the resource boom was in full force. Instead, there will be opportunities for North American manufacturers to export finished goods and known brands to an increasingly affluent emerging market consumer.

“The model is turning upside down,” he said. “North American companies are restructuring to meet demand from sophisticated consumers in Brazil, Mexico and China. Competition will no longer be based on cost, but on quality. In Canada, the trick will be to find companies able to get themselves into this renaissance.”

He is confident that China, because of its “command economy” will be able to engineer a soft landing and continue to enjoy annual economic growth in the 7% to 8% range — down from the highs of 11% to 12%, but still healthy.

“China is the promised land of the soft economy because it has the monetary might and political might to make it happen,” he said.

Suzann Pennington, managing director and chief investment officer, CIBC Global Asset Management Inc., echoed Tal’s growth forecast for China, but was optimistic that it would still be a strong consumer of the commodities that Canada exports, such as iron, copper, steel and energy. She pointed out that although the annual rate of economic growth may be declining in percentage terms, due to the fact that the base level is rising, the rate of growth in absolute dollar terms is the same as during the boom years of 2006 and 2007.

“A consumer-led economy in China is still supportive for oil and copper, and it’s more sustainable,” Pennington said.