After worrying for months that confidence would never return, we now are concerned that we are dealing with an overabundance. For the last few weeks, experts and authorities have been doing their best to dampen optimism, and step on a few of the celebrated “green shoots” that have dominated the discussion on Wall Street since March. There was Mark Carney, governor of the Bank of Canada, last week warning that this recovery is still weak and fragile and the World Bank announced yesterday a weaker economic forecast predicting the economy will shrink by 2.9% this year, compared to its original 1.7%. This news sent the TSX 453 points lower into the biggest day drop since December 2008.
Before last week, for us in the investment community, none of the scepticism mattered much as long as momentum remained in our favour. Consumer confidence is up. Stocks have rallied for four months. Long-term bond prices have begun to fall. Commodity prices have substantially recovered . And all of this happened despite the fact that economic activity is still weak.
Rising confidence is essential for the economy to recover, however, too much optimism too soon may be the biggest threat to a sustainable rebound. That is largely what worries the authorities. The higher the market climbs, the more extended stock valuations become and the more difficult it gets for central banks to hold down interest rates. A few days of drops like we have seen in the past few days and there goes the investor confidence again. Stepping too hard on the green shoots however, can also backfire and kill what was coming to life. That is what infuriates me the most because not all news is bad. Quite the contrary.
The story is different here in Canada. The Wall Street Journal suggested last week that Americans should think about investing in Canadian assets to take advantage of the recent interim weakness in the Loonie, as Canada’s economic outlook hinges on China and emerging markets’ demand for oil and commodities. The WSJ reported last week that while the loonie might bounce around in the next few weeks, the expected long-term trend is for Canadian vigour.
Benjamin Tal, economist at CIBC World Markets, likens Canada’s exposure to the U.S.’s woes as like a second-hand smoker. Bad but not a direct hit. China is scooping up oil and metals that Canada produces, China is taking a bigger role in Canada’s fortunes.
Though emerging markets remain far below the lofty highs they attained more than a year ago, investors are again viewing their chances of growth as better than those of the United States or Europe. As a result, India, China, Brazil and other emerging markets’ rally have been much stronger than the US and Europe.
“There was a stampede for the exits in the fourth quarter,” said Gonzalo S. Pangaro, portfolio manager of the T.Rowe Price Emerging Markets Stock Fund. “The market is starting to realize that although these markets face issues, they are manageable issues.”
It is not just China that is generating optimism. While industrial production has rebounded in China, so have car sales in India and retail sales in Brazil.
The fact of the matter we are no longer totally dependent on the US for growth. In fact, Emerging Markets will play a big part in this recovery and future growth.
For the time being, by no means, is this recession over but please, let the green shoots live.