Consistent Canada’s GDP Is Strong

By David Dittman • June 29, 2012 • Canadian Edge Weekly

In a piece for members of the Investing Daily Wealth Society published Thursday, Jun. 28, 2012, I wrote that “nothing…dramatic…will come from the two-day meeting now underway at the Justus Lipsius Building in Brussels, Belgium…”

And that statement stands, despite the fact that equity indices all over the world are partying like it’s 1999.

Things got rolling overnight in the US with the S&P/Australian Securities Exchange 200 Index bouncing from negative territory in the morning in Sydney to a 1.23 percent gain. The Australian dollar also surged on expectations of new fiscal and monetary endeavors on the Continent as well as continuing easy policy in the US and elsewhere.

Europe’s stock indexes posted substantial gains, as Italy’s bourse posted a 6.59 percent rally and Spain’s IBEX posted its biggest single-day increase in more than two years, 5.66 percent. The Euro Stoxx 50 Index of blue-chip European stocks was up 4.96 percent, while the Paris bourse (4.75 percent) and Germany’s DAX (4.33 percent) also posted notable performances.

The Netherlands and Sweden also got in on the act, rising 3.39 percent and 4.04 percent, respectively, while gains in Switzerland (1.34 percent) and London (1.42 percent) were more in line with the relatively modest rally Down Under.

The perception that Europe is committing to inflation had a salutary effect on currencies thought to be backed by harder assets, such as the Australian dollar. The aussie was up more than 2 percent from its intraday low at last check, bouncing from a low of USD1.0019 before the early morning announcement of progress–finally–in Europe toward immediate solutions to USD1.0242 as of this writing.

That’s a long way from saying Europe is out of the woods or that the worries it’s causing observers of the global economy will be easily set aside. For one thing, Spanish banks still need bailing out, and Italian banks may soon follow. There are ample details yet to be resolved, and these types of negotiations have so often in the past proven the rocky shore upon which ebullient ships sailing from previous EU summits have foundered.

There are still only halting steps toward a true fiscal, monetary and economic union. No progress, for instance, was made on establishing a mechanism for redeeming bonds, nor was there any discussion of Eurobonds, which would unite all constituents in obligation for each other’s public debt, or a plan to guarantee bank deposits.

And the European Financial Stability Fund (EFSF), in place since 2010, and the European Stability Mechanism (ESM), which will be implemented this year, still lack funds sufficient to cover what remain substantial liabilities.

But Germany has conceded on several fronts, including the general need to back away from austerity in the interest of long-term growth. Primarily, capital injections to Spanish banks will now be allowed to proceed without first going through the Spanish government, which means that entity won’t run up its debt-to-GDP ratio to levels so alarming to the bond market. And there is no longer a demand that taxpayers be made whole before any other creditors in the event of a Spanish default on its bailout-induced obligations.

So, this is more concrete progress than has come from such meetings in the recent past, but again there remains much work ahead.

Meanwhile, consistent Canada continues to post upside surprises, this time, again, with its gross domestic product (GDP) growth for the month of April.

Growth in the Great White North accelerated in April, as oil and gas producers rebounded from shutdowns and miners boosted output. According to Statistics Canada, GDP grew by 0.3 percent, bettering the 0.1 percent posted for March.

The oil and gas sector grew by 2.4 percent in April, while drilling and rigging services expanded by 5.1 percent. Mining excluding oil and gas rose 3.1 percent. Wholesale output was up by 1.2 percent–a fifth consecutive month of expansion–and transportation services grew by 0.7 percent. Manufacturers posted a 0.3 percent decline in production, and construction output was down by 0.1 percent.

The Canadian economy, which shrank by 0.2 percent in February, has now posted two consecutive months of better-than-expected GDP expansion, suggesting second-quarter growth will outpace first-quarter growth of 1.9 percent.

The Bank of Canada, in its April Monetary Policy Report, forecast that growth in the first half of 2012 would be 2.5 percent. BoC Governor Mark Carney has recently noted that an interest-rate increase “may become appropriate” as the Canadian economy approaches its capacity. Traders seem to be increasing their bets on such an outcome, as the Canadian dollar has surged by 1.49 percent intraday today. They may also be recognizing the fundamental strength of the Canadian economy relative to the US and the rest of the world, as the loonie has risen from a 2012 low of USD0.9606 to USD0.9823 at last check.

Canadian stocks do not at all reflect the broader relative strengths of the domestic economy and financial system, although some of the loonie’s ability to maintain more value during this mini-crisis versus the 2008 scare must be attributed to its G-7 low debt-to-GDP ratio.

At any rate, the S&P/Toronto Stock Exchange Composite Index (SPTSX) is down 1.96 percent in US dollar terms approaching the very end of the second quarter today. The S&P 500 Index, meanwhile, is up 9.15 percent, and even the MSCI World Index had posted a gain of 3.18 percent through Jun. 28. The S&P/Australian Securities Exchange 200 Index is nearly flat in US dollar terms in 2012, though it, too, is heavily focused on commodities.

Perhaps oil, which is in official bear-market territory for the year, is exerting an excessive drag on the SPTSX. But StatsCan’s April GDP report suggests things aren’t as bad on the ground as the volatile commodity-price action might suggest. And the recently renewed vigor of policymakers outside the US to deal realistically with economic growth problems suggest the second half of the year will be better for the sticky stuff.

The post-Brussels party has the look and feel of something lasting, but we’ve experienced vicious hangovers from similar emotional outbursts before, and very recently. These lessons, coupled with the solid evidence of Canada’s continuing relative strength, suggest that investors focused on building wealth over the long term might best begin establishing positions in Canadian stocks.

The Roundup

Here’s where to find analysis of recent earnings reports issued by Canadian Edge Portfolio Holdings along with dates (estimated in most cases, confirmed in some) for the next release of quarterly numbers.

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