The Energy sector in Canada is again under attack

Highlights

• The summer of 2015 has turned out to be anything but relaxing for investors. Global financial markets continue to struggle in the wake of China’s August 11 surprise devaluation. Though it will take a few more weeks or months to fully assess the situation, we need to be vigilant about a regime change in China’s exchange-rate policy. In the meantime, we take solace from the fact that China is becoming more aggressive in its attempts to stimulate the domestic economy.

• After a brief upswing in Q1, the Energy sector in Canada is again under attack. Could it go lower? Perhaps, but that scenario supposes a further deterioration of the global economy. As if this were not enough, the gloom has spread to bank equities, the other heavyweight of the S&P/TSX. Current fears of a Canadian economic meltdown and surging credit losses are exaggerated. Except for the energy sector, growth resumed in Q2 and Q3 should be even better on the strength of the fiscal stimulus announced in last spring’s federal budget. Labour-market resilience in the three largest provinces continues to support household formation and home prices.

• Our asset mix is unchanged this month, with equities still overweight relative to bonds and a regional bias towards the United States. The key to avoidance of a bear market is continued U.S. growth together with a low-inflation environment that allows the path of monetary normalization to be gradual. This said, uncertainty about Chinese economic policies will remain a concern for the next few months and we will be keeping an eye out for signs of contagion in the all-important corporate bond market – the main source of external financing for U.S. corporations. We would reconsider our asset mix if China devalued its currency more than 5% from current levels.