IMF and commoditiesBodes well for commodities. I would like to officially declare a bottom today for AUN, lol. Over at TIM most of the day - wow, that stock moves once sentiment is reversed.
Is Canada Recession-Proof?
Gordon Pape, The Canada Report
04.21.08, 12:17 PM ET
The U.S. economy is headed into recession this year, if in fact it isn't there already. But Canada is going to escape, albeit with slower growth. That's the conclusion of the International Monetary
Fund, and it has significant implications for investors.
This month, the IMF published a new World Economic and Financial Survey in which it warns that :the global expansion is losing momentum in the face of the recent financial disturbances." "The Regional Economic Outlook for the Western Hemisphere" states that between the fourth quarter of 2007 and the fourth quarter of this year, the U.S. economy will contract by 0.7%. That will reduce the growth rate for calendar 2008 in the U.S. to 0.5%, down from 2.2% in 2007.
There are only a few paragraphs about Canada in the 55-page document, which focuses almost exclusively on the U.S., Latin America and the Caribbean. But even though Canada is almost an IMF afterthought, the comments about the outlook for the country are encouraging.
"Canada's growth is expected to slow this year as the downdraft from the U.S. economy outweighs solid domestic demand supported by strong commodity prices," the report says, but the country will fare a lot better than the U.S. "Overall, growth is projected to decelerate to 1.3% in 2008 and pick up only slowly to 1.9% in 2009,” the IMF concludes.
I found this sentence to be particularly revealing: "One element supporting Canada's growth, despite the U.S. weakness, is the continued strength in global commodity markets, driven in part by still relatively robust demand forecast for emerging markets."
Think about that. The IMF is saying that the much-debated decoupling of Canada from the U.S. economy has in fact happened, at least to some extent. Canada's ability to outperform its southern neighbor this year is going to come down to what happens in countries like China, India and Brazil. As long as they remain in a strong growth mode, Canada will do all right.
The report describes domestic demand as "a key uncertainty" in the Canadian outlook. It credits the easing policy of the Bank of Canada and the tax relief measures announced in last fall's federal government economic statement for boosting 2008 gross domestic product projections by 0.75%.
"However, domestic demand could be undermined if financial conditions or global commodity prices weaken without an offsetting depreciation in the exchange rate. At the same time, given its strong policy framework, flexible labor markets, and the authorities' focus on structural reform--including developing measures to boost competition--the economy should be well poised to ride through these cyclical challenges," the IMF concludes.
In other times, growth projections of 1.3% and 1.9% would be regarded as gloomy. But the bar has been lowered to the point where any growth at all in 2008 will be seen as good news. However, the IMF makes clear that the impetus will come primarily from the commodities sector, and that suggests investors should continue to maintain their focus there for now.
Most people may not have noticed, but last week the S&P/TSX Composite Index moved back into positive territory for 2008 for the first time since early January. At that point, Canada had recovered completely from the mid-January meltdown that spooked many investors. For the record, the TSX finished 2007 at 13,833. It closed on April 10 at 13,910 for a year-to-date gain at that stage of 77 points.
The rejoicing was short-lived, however, with the Composite Index falling back 227 points on April 11. But it helps to keep matters in perspective. Despite all the turbulence and doom-and-gloom forecasts, Canada has managed to hold its own so far in 2008. It has done that even while one of the pillars of its stock market, the financial sector, was under extreme pressure, down 10% for the year as of April 11's close.
Why is Canada doing so well, relatively speaking? In a word, commodities. The S&P/TSX Capped Energy Index was up 7.2% as of April 11's close, while the Gold index had gained 8.2% and the Capped Materials Index was ahead 12.4%.
The Materials Index is an excellent indicator of what's happening with commodities as it covers the whole range of non-petroleum resources, including gold, silver, fertilizer, iron ore, base metals, coal, diamonds, uranium, platinum and forest products. This sector has been on a terrific run, up 133% in the past three years.
So continue to look closely at Canadian resource stocks, despite the recession fears in the U.S. If the IMF forecast is correct, their day in the sun is not over yet.