Canada’s trade deficit rose to a disappointing $3.4 billion in August, one of the highest ever recorded. Economists had predicted $2.6 billion, lol. They were way off. Both imports and exports were down, which suggests the entire economy may be in trouble.
It doesn’t help either that Canada’s currency has advanced 7% over the past 6 months, largely due to the 2 interest rate hikes earlier this year. According to insolvency firm MNP, 40% of Canadians fear they will be in financial trouble if rates increase again. And 42% say they are only “$200 or less away from financial insolvency, with little cushion to pay unexpected bills or expenses at the end of the month.” This is troubling news. 😔 Consumers will have to be more careful about how they spend their money going into 2018.
With domestic spending expected to fall, and an extended period of large trade deficits, a slowdown in our growth domestic product (GDP) is inevitable. Canada is essentially buying more stuff than we’re selling, which basically means we’re spending beyond our means and going into debt. Due to these factors, we can expect negative repercussions in the financial markets as well. Slower domestic spending means lower sales for domestic producers and their stock prices.
“Given enough time, investors will realize fewer investment opportunities domestically and begin to invest in foreign stock markets, as prospects in these markets will be much better. This will lower demand in the domestic stock market and cause that market to decline.” ~Investopedia
Economists are anticipating annualized GDP growth of about 2.5% for the third quarter. That sounds too optimistic to me. Given the numbers we have today I would expect a more modest growth rate of 1.6% annualized for Q3, 2017. I guess we shall wait and find out later this year.
It can be difficult to find investments in a slow growing environment. But we can always look for opportunities outside of Canada. 🙂 Afterall, if we search globally, we will likely find more bargains, and probably better bargains, than in any single country. This is why I invested in Germany through Dream Global (DRG.UN) a couple of years ago. Canada’s real estate prices were too expensive, so I looked elsewhere for a bargain, and I found one! Dream Global is a Canadian REIT but conducts most of its business in Germany. Hurra! 😀 If we use the iShares S&P/TSX Capped REIT Index ETF (XRE) as a benchmark for Canadian REITs, then since my purchase in 2015, DRG.UN has outperformed XRE by over 30%. Yay! Property prices in developed countries around the world, including in Germany, have risen a lot over the past 2 year and are no longer cheap. But I believe there are still other undervalued sectors around the world today. 🙂
Random Useless Fact
Muhammad Ali reportedly went 2 months without sex before a big fight, claiming it made him stronger in the ring.
You said you “believe there are still other undervalued sectors around the world today.” Do you mind sharing what sectors you think are still undervalued?
Personally, I’ve been looking at a few European banks. I’m currently most interested in DB. I’m also starting to watch Canadian pipeline companies again.
I agree that Canadian pipelines are starting to look good again. They are not cheap from an earnings perspective but their stock prices have come down far enough to make their yields attractive for income investing purposes. The overall energy sector in Europe is relatively cheap compared to other places. For example, Electricite de France and Royal Dutch Shell could perform well going into 2018 if commodity prices stay stable. Figuring out how to get into the European market while limiting taxes can sometimes be difficult though.
The European companies I own are all ADRs on US exchanges so I try to buy them in my RRSP account so there are no withholding tax or income tax.
I’m curious how they are defining financial insolvency. I’m assuming it’s similar to the studies/surveys here in the US meaning they don’t have enough cash in the bank to cover a $200 unexpected expense which is terrible, although that’s about par for the course with the US studies. Hopefully this will be a wake up call for your fellow Canadians to start using what little bit of savings they can muster up each month to build up an emergency fund and then start paying down debt.
It’s easy to get stuck with their debts if people can’t budget properly. Consumers used to have high savings rates in North America a few decades ago. Hopefully our countries can get back to doing that again some day.
Liquid, Interesting info. I have always been a bit of a macro and micro economics junkie. Just guessing the balance of trade graph follows commodity and specifically oil prices for Canada? Were the big negatives starting in 2015 driven by the drop in global oil prices? And if so, what accounted for the positive blip in late 2016. Sorry for more questions than answers here. Thanks for the post. Tom
Hi Tom. Those are great questions. I’m afraid I don’t have the answers. It would make sense that trade is correlated to currency exchange so I think the higher our dollar is worth the less we will export. That’s why some countries lower their currency value on purpose to be more competitive and increase their trade surplus such as China, Germany, and Russia. Since the price of oil affects the Loonie I believe a change to commodity prices does affect the balance of trade for Canada.
Is it best to invest the likes of Dream Global in registered account?
Yes, an RRSP or RRIF would be a good place to hold Dream Global. For other REITs that only operate in Canada you can put them in either RRSP or TFSA. Further info here. https://www.freedomthirtyfiveblog.com/2015/07/best-investment-vehicles-different-investments.html