Can top Canadian stocks keep growing?

Drivers of Canadian growth today (real estate and consumer debt) may be tomorrow’s burst bubble. Solid blue chip stocks like Canadian banks or Canadian oil and gas stocks are safe but much uncertainty lies ahead. Investor’s Digest columnist Ted Gardiner says: Hoard cash, buy some gold and hold stocks that pay good dividends.

Canadian_StocksThe Canadian economy is booming. We’re expected to have the highest GDP growth rate in the G7. Unemployment is down. The Canadian stock market is up. Corporate investment is up. Canadian bank stocks are up after the interest rate hikes. Life is wonderful. Or is it?

The fact is a major driver of Canadian growth is the local real estate market—particularly in Toronto and Vancouver. Yet the real estate markets are based on debt. They are a disaster just waiting to happen. Even the politicians realize this, and they are trying to damp down some of the market enthusiasm. Politicians are also, finally, starting to raise interest rates. But I’m afraid it may be too little, too late since consumer debt in general—not just mortgages—is another major factor in Canada’s stellar economic performance.

When interest rates get higher—say another one or two percentage points—most people won’t be able to carry their debt.

I’ve commented before on the rise in credit counselling services. I expect to see a lot more of this in the future. When the crunch does finally come, it’s going to hurt. First the banks, then retailers and then manufacturers are all going to feel the pain.

Another economic driver is the oil and gas sector. Prices and volumes are finally starting to recover. The low Canadian dollar is helping here as well. But I’m not sure there’s a lot more expansion likely in the near term.

Yes, I know that optimistic producers are investing in this sector, but how much of this is new investment and how much is buying up existing facilities? And, if the US economy stalls, this sector will be in trouble again.

Pipelines don’t look as promising as they once did, either. While Donald Trump has approved the Keystone XL pipeline, the US president also wants the country to use ‘American’ pipes. I use quotation marks here because it may turn out to be Chinese pipe sold in the US by an American firm (perhaps part of the Donald’s own portfolio?).
Meanwhile, here in Canada, Prime Minister Justin Trudeau seems to have given up on the Energy East pipeline due to the pressures of the Trump-effect. The Trump-effect on Canadian stocks could be a proponent of Trudeau’s hard stance. Many citizens don’t want Trudeau approving a pipeline in order to please Trump. As of now, the expanded hearings by the National Energy Board (NEB) will, at the very least, delay the project and make it more expensive.

At worst, they could very well kill the project altogether. These hearings are the result of demonstrators disrupting earlier hearings. Caving in to them weakens Canada’s reputation as a desirable place to do business. That doesn’t bode well for future foreign investment, nor Canadian energy stocks.

While blue chip Canadian oil and gas companies such as TransCanada Corp. (TSX—TRP; NYSE—TRP) and Enbridge Inc. (TSX—ENB; NYSE—ENB), have been and remain major contributors to our economy, they are no longer as attractive as they used to be. There’s no need to sell these energy stocks yet, but I wouldn’t buy them as a Canadian short-term investment either.

As for the stock market, ask the investors in Home Capital Group Inc. (TSX—HCG) and Sears Canada Inc. how they feel about it. Actually, the rest of the market may be catching on, too. The TSX seemed to have stalled in early August.

Maybe investors were just worried about Trump’s effect on NAFTA, or maybe they’re finally starting to wake up. Or maybe not, since the market seems to have recovered again. This blip lasted longer than previous ones, (more than a week), so it might be a sign of greater instability to come.

Short-term versus long-term

Meanwhile, the Canadian government can’t think of anything else to do but spend money and run up piles of debt. While that may make the numbers look good in the short term, in the long run it’s bad for investors and worse for the country. And it’s positively disastrous for taxpayers.

Prime Minister Trudeau may be pretending to tax the rich and help the middle class but in reality, the rich are us—i.e. everyone who has saved a little for old age.

There are even rumours that he plans to increase the inclusion rate for capital gains tax for Canadians to 75 per cent from the current 50 per cent. That should cause a noticeable drop in stock market prices.

The truth about the Canadian economy is NAFTA plays a major role on the TSX and the nation’s economy. Canada’s official wish list for the process seems to be something that’s good for the environment, women and indigenous people.

Trump unpredictable

Excuse me! While these are all laudable goals, they have nothing to do with international trade. Some pundits have gone so far as to suggest that Mr. Trudeau hopes the talks will fail, which might leave the existing agreement in place by default.

Personally, I don’t think Mr. Trudeau is that reckless. I suspect that by making his public statements so wishy-washy, he is simply relying on the negotiators and lobbyists he has put in place to run with the process.

This may or may not be a good strategy. If it doesn’t work though, there is a real risk that President Trump will blow up the whole thing. He is, after all, something of an isolationist.  

Some pundits are suggesting that his early, and repeated, threats are a mistake. While I don’t claim to be able to read his mind, I get the feeling that he has already decided to cancel the agreement and is just going through the motions of negotiating. He’s not making idle threats; he’s telling everyone what he’s going to do.

If he follows through, that will be a disaster for the US, but an even bigger disaster for Canada and Mexico. It will also hurt the rest of the world. Donald Trump may very well go down in history as the man who destroyed the world economy. Far from making America great again, he may instead ruin everything else.

What can ordinary investors do to protect themselves? I don’t really know. Hoard cash, buy some gold and hold stocks that pay good dividends and have the strength to continue to do so. Expect a frothy market with lots of swings and fluctuations before we hit a really serious correction. The next couple of years will not be pretty for investors.

T. Edward Gardiner, a Bell Canada retiree, is a keen observer of the markets who lives in Ottawa.

This is an edited version of an article that was originally published for subscribers in the September 22, 2017, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

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