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Outlook for Canada: Just Look Everywhere Else

by: Truth or Talk August 12, 2008 | about stocks: EWC / FXC    

Truth or Talk

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Canada’s future looks just dandy relative to the U.S. with our buoyant stock market, stable property prices, trade surpluses and army of pierced coffee barristas. Surely what’s happening down there could never happen up here.

But is our success because we’re so good at what we do or is there something else going on? If we’re so special, then how come the performance of the Canadian and Australian stock markets is virtually indistinguishable? Are they special too?

If you don’t know or care to know the answer to that question then maybe you are special — only a different kind of special. The kind of special that might one day be serving me my grande-non-fat lattes after you’re laid off and your investments collapse. Otherwise, read on:

Australian and Canadian stock market perfomance is virtually indistinguishable because both countries are major global commodity exporters. OK - cool. So why do I as a Canadian investor care?

  1. As “commodity” markets, Australia and Canada’s good fortunes are a function of continued strength in commodities.
  2. More than half of the world’s incremental commodity buying is coming from China and India.
  3. Global asset allocators (the guys who control the big money flows) know this and simplistically trade the stock markets accordingly.
  4. Money flows into a country’s stock market can ultimately have a big effect on the country’s economic well-being via the wealth-effect.
  5. What that means is that your stock portfolio, your job and even the value of your house are determined in no small part by what happens in China/India.

And what does that mean? It means that if you want to understand the risks at play for your RRSP, your job, and your 387 sq ft condo, you should understand what’s happening in China/India. Now you could nod complacently when your 25-year-old property agent tells you that we’re still in a bull market or you can open your eyes. Which is why the recent performance of China and India’s stock markets scares me:

  • China: Down 65% from its peak
  • India: Down 25% from its peak

Is this a technical correction or the end of the China/India bull market? Because if they’re cooked, then what does that say for Canada’s outlook?

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This article has 1 comment:

  •  
    Aug 12 11:57 AM
    so what else is new? as we enter the last quarter of 2008 do not be surprised if we go down 40%. we'll be limping along with everyone else nursing our wounds.
    Reply
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