Firstly, we believe the global economy is in the midst of a late-cycle
economic slowdown, and the Canadian economy is not immune to these forces.
Our BlackRock Growth GPS projects the annual economic outlook for the
Canadian economy will be roughly 1.75% in three months’ time, down from
2.5% in the second half of 2017 (see Chart 2).
If there’s any silver lining, it’s that central bank officials, especially
the Fed and the Bank of Canada, appear to be in much less of a hurry to
normalize monetary policy with growth slowing and inflation currently at
bay. But most of this repricing of expected rate hikes has already largely
occurred, as reflected in the multiple expansion witnessed since the end of
More importantly, and this brings us to our second point, global earnings
estimates are generally at risk of being revised lower, not higher, during
an economic slowdown. Canadian estimates are particularly at risk.
In the post-financial-crisis period, we found that earnings estimates
decline in Canada by far more than in the U.S. and emerging markets on
average over the course of a calendar year (see Chart 3). What is
noteworthy about this period is that it coincides with the end of the
commodity super-cycle and elevated uncertainty about Canadian oil
production and distribution.
As a result, it should come as no surprise that the bulk of the earnings
downgrades in Canada have historically come from the energy and materials
sectors (see Chart 4).
At the beginning of the year, analysts had expected just over 20% growth in
energy sector earnings in Canada in 2019. That estimate has now fallen to
roughly 2%. This is healthy, but there may be more to go (see Chart 5).
Absent a geopolitical shock affecting oil supplies – which anyway is a tax
on consuming countries and would likely worsen the global economic outlook
if severe and sustained – we don’t expect a material move higher in oil
prices above current levels.
The expected economic slowdown and questions over OPEC’s ability to keep
the oil market balanced should linger throughout 2019. Canadian energy
earnings will also face pressure from the Alberta government’s ongoing
output curtailment policy, which, although helpful for stabilizing Western
Canadian oil prices, will likely weigh on producers’ revenues.
Conversely for the materials sector, our analysis finds that downward
revisions to earnings estimates more fully reflect the outlook for
For these reasons and many more (elevated trade tensions, structurally low
return on equity, high consumer debt burdens, a weakening housing market in
key metro regions), we’re not prepared to chase the rally in Canadian
stocks nor place too much emphasis on what would otherwise appear as
compelling valuation signals.
Amid an economic slowdown, we prefer to focus on markets where earnings
estimates are more resilient (U.S. and quality factor exposures), in
sectors and geographies with secular growth opportunities (emerging markets
and healthcare), and on assets that provide ballast and diversification in
the event risk-aversion returns (government bonds, short-duration fixed
Kurt Reiman, Managing
Director, is BlackRock’s Chief Investment Strategist for Canada and is
a member of the BlackRock Investment Institute (BII).
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