As an investor, reading the news these days can prove to be quite a challenge when it comes to separating between what’s relevant and what’s not. This is especially difficult in Canada when you have politicians quite publicly taking ownership over certain segments of the economy, pundits flag-waving components of economic reports, and academia heavily influencing government policy like never before.
However, what many forget is that the market is fairly efficient when sorting through what is rhetoric and what it believes will ultimately have an impact. In this regard, the fact of the matter is that the S&P TSX Composite Index has been one of the worst performers globally with flat returns over the past three years, followed by a Canadian dollar below 80 cents even as oil is above US$70 per barrel.
To help determine how we got here, let’s sort through some of the key influences on the Canadian economy and the market.
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Government policy focused on increasing taxes and phasing out oil
One of the government’s most important roles is to foster an environment for both businesses and individuals to prosper and, in turn, help improve productivity enabling us to compete globally on an equal currency basis.
However, since taking office, Finance Minister Bill Morneau has been responsible for implementing some of the most pervasive tax changes in Canadian history including an aggressive attack on small business owners, a material hike to income taxes pushing rates to over 50 per cent in some provinces and a national carbon tax. Consequently, Canada now has the second highest tax rate in the G7, just behind France.
Despite what our Federal government may tell us, globally we are still viewed as a resource country when it comes to investment. That said, resource development in Western Canada, once the backbone of our nation’s growth, has been allowed to be “phased out” of competitiveness due to both a lack of government support and a level of complacency by industry.
This is now showing up in a very public interprovincial trade dispute developing between Alberta and B.C., and yet all we have is more talk and little action while the world watches on.
A real estate driven economy
While wage growth has no doubt been strong, matching an improvement in unemployment thanks in part to a recovery from the 2014 energy meltdown, Canadians are continuing to spend a lot more than they make bolstered by housing prices that are among the most inflated globally.
As a result, consumer debt levels are reaching unprecedented levels at the same time interest rates are rising. The troubling part is that the Bank of Canada appears to have lost control over the bond market with higher bond yields impacting mortgage rates.
Thankfully, oil prices have recovered but we think it won’t be enough to offset what appears to be a topping out of the real estate market. This is because increased regulatory restrictions, a lack of pipeline infrastructure, and an industry with a poor track record of rewarding foreign capital means we are, as always, unable to leverage the current momentum in the oil market.
Academia keen on getting their fair share
The benefit of having a strong and independent academia is that we get to explore innovative ways of growing our economy while protecting our environment. The problem though is whenever “our fair share” gets introduced by those touting certain areas of “unfairness” within industry, despite having a defined benefit pension plan and a tenured position themselves.
This happened in Alberta during the Ed Stelmach days with his disastrous New Royalty Framework, and it is happening today with all kinds of academic-introduced and government-supported policy including the recent focus on small businesses.
Instead of competing among ourselves, we need academia, industry and government to come together and find ways for Canada to command a greater percentage of foreign capital and become a leader for responsible economic growth. That said, this means putting the flags down and asking ourselves how we can do better.
Maybe this will finally put an end to the days of flat equity market returns and an underperforming currency.
Martin Pelletier, CFA is a portfolio manager and OCIO at TriVest Wealth Counsel Ltd, a Calgary-based private client and institutional investment firm specializing in discretionary risk-managed portfolios as well as investment audit and oversight services.