E What Should Influence Canadian Investors In 2019

As the new year rolls in, Canadian investors are going to be inundated with numerical forecasts for GDP, interest rates, stock exchange indices and host of individual industries. For an individual investor, such specific numbers do not provide any meaningful backdrop to what the future may hold. Rather than getting swept up in the annual forecast derby, let's just look at the forces currently in effect that will have a significant bearing on the economy over the next 12 months. Not a prediction, but rather an array factors that we need to incorporate into investment decisions:

  • The impact of recent rate hikes. It generally takes anywhere from 9-12 months for a rate hike to take full effect on consumer borrowing, business investment decisions, and employment growth. So, after the two most recent rate hikes starting in July, we can expect a reduction in economic activity by the second half of 2019.
  • The impact of new mortgage rules on housing. During the latter part of 2018, mortgage lending declined dramatically as the government tightened up on lending criteria, especially affecting first-time buyers. With mortgage lending already off by 20% from a year ago, the housing market is starting to see the impact of these rules, as developers pull back, especially in the construction of single-family homes, and borrowers scramble to find alternative lenders, albeit at higher rates than those offered by conventional lenders. As yet, the government has shown no interest in relaxing these rules and demand could be again adversely affected into 2019.
  • The regional impact of low commodity prices. As the U.S. shale industry continues to operate at record levels, the North American oil industry contends with excess supply in the face of softening demand. Canadian producers face additional problems of getting the product to market because of transportation bottlenecks.  Neither demand or supply conditions are likely to change dramatically in 2019 such that we should not expect a return to higher prices any time soon. Other basic industrial commodities show no signs of recovering as worldwide demand slows.
  • The affects fundamental changes in the automotive industry. GM’s pullout from one of its largest plants in Canada is a possible harbinger for other automakers throughout North America. Changes in consumer preferences and new technologies are going to continue to affect the industry sales next year and we could expect additional layoffs.
  • A worldwide reduction in liquidity. It comes as no surprise that stock markets in North America are selling off, as the Federal Reserve withdraws liquidity that affects investors. As the money supply shrinks under quantitative tightening, financial markets will continue to be under pressure and highly volatile.
  • A continuation of U.S. trade restrictions and tariffs.  It would be naïve to think that the U.S will relent in its tariff policies. The signing of the revised NAFTA treaty, for example, has done nothing to reduce U.S. tariffs on Canadian steel and aluminum exports.
  • Inflation is nowhere to be found. Japanese and European long-term bond yields hover at less than 1%. U.S. long rates are down 40 bps from the October highs. Domestically, inflation is absence judging by the bond market’s recent drop in yields. The 5-year yield broke through the 2 % rate earlier this month and the 30-year bond sits at 2.15 %, signaling that bond investors anticipate inflation rates below the Bank of Canada’s target rate over the longer haul.
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