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Has Canada Turned the Corner?
03/23/2009 12:00 am EST
Gordon Pape, editor of The Canada Report thinks Toronto may have seen its lows, and he's cautiously optimistic on the loonie, too.
Q. Gordon, since we last spoke, global markets have lost nearly half their value, and the Toronto Stock Exchange's Composite Index has dropped from more than 15,000 to just over 8,700. Have we hit bottom?
A. We are cautiously optimistic, but the recent trillion-dollar bond purchase plan announced by the Federal Reserve is great news for Canada. The flood of cash will likely spur inflation, drive down the value of the US dollar, and raise the price of commodities. It's no surprise that gold [rose] almost $60 an ounce and oil [got] back over $50 a barrel. The Canadian stock market is heavily weighted to commodities, so we are seeing a big lift. I still expect a lot of volatility in the coming months. However, the March 6th TSE low of 7,480 may turn out to have been the bottom for this cycle.
Q. What is your forecast for the Canadian dollar, the loonie?
A. The loonie went into a steep decline when oil prices fell, which-along with the big drop in automobile exports-played an important role in pushing Canada into a trade deficit position in December and January.
But the Fed's latest move has changed the dynamics, boosting the loonie to just over US81 cents the next day. I expect it to trade between US80 cents and US85 cents for the rest of this year. But if the Fed expands its new program later, it may drive the Canadian dollar back towards the US90 cents level. This would be good news for US investors who own Canadian stocks, as they would benefit from the exchange rate gain on top of any profits on the shares themselves.
Q. What do you expect for the Canadian economy this year?
A. Economic performance will be determined largely by commodity prices, the fate of the auto industry, and US demand for Canadian exports.
The auto industry represents the heart of Ontario's manufacturing sector; if it goes down, the economic impact on central Canada could be devastating.
The advantage of high commodity prices to the Canadian economy is obvious. We are seeing a dramatic slowdown in new development projects, particularly in the oil sands, and in exploration. We need to see oil back over $100 a barrel before conditions on the ground start to pick up.
Since about 80% of our exports are sent to the US, we Canadians are rooting for the Obama administration to turn things around quickly so that demand will pick up.
Q. Are you still a fan of the Canadian energy trusts?
A. People need to be cautious with the energy trusts, for three reasons. First, many of them rely heavily on natural gas for revenue, and gas prices have been plunging. Second, Canada's income trust tax kicks in on January 1, 2011, and at this point no one is clear about what the impact will be on distributions. Third, some of the trusts have already announced they will convert to corporations before the tax takes effect. Based on the examples we have seen to date, that will probably mean a distribution cut (perhaps a large one), and a drop in the share price.
My two favorite trusts right now are Vermilion Energy Trust (TSX: VET.UN) and Crescent Point Energy Trust (TSX: CPG.UN). Both are "oily" trusts, with very little gas in their mix. Also, Vermilion has extensive offshore operations and is already paying tax on profits earned in those regions, so it will not be hit as hard when the income trust tax comes in.
Q. Which ones would you not buy right now, and why?
A. I would steer clear of the "gassy" trusts such as Advantage Energy Income Fund (TSX: AVN.UN) and Peyto Energy Trust (TSX: PEY.UN). Although the price of natural gas is showing a little strength, there is a huge oversupply in North America.
Q. Which are your favorite sectors right now?
A. I think the energy sector will lead the way back in Canada. Buy EnCana (NYSE, TSX: ECA) as a conventional oil and gas play and Suncor (NYSE, TSX: SU) for oil sands exposure. The pipeline companies, particularly Enbridge (NYSE, TSX: ENB) and TransCanada (NYSE, TSX: TRP), offer excellent yields plus good capital gains potential.
Canadian banks appear to be coming through the crisis in reasonably good shape. None have needed to be bailed out by Ottawa, and they aren't even making full use of a government offer to buy some of their mortgage holdings in order to provide liquidity. They've also been successful in raising capital in this lousy market through the issuance of new common and preferred shares.
Even though the share prices have risen sharply in recent days, dividend yields are still well above their historic averages. I think we'll see some good capital gains from the banks in the next 12-18 months.
Thank you, Gordon.
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