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Slowing global growth and a stronger U.S. dollar will prove to be a ‘headwind’ for the U.S. economy over the next few quarters. In terms of overseas growth we continue to see more weakness, particularly from the Euro zone and China. While stocks markets in both regions have benefitted from central bank promises to use whatever tools they have to get growth turned around, the evidence so far doesn’t support that view. ISM surveys for November released this week showed European growth at the lowest level in 16 months while the Chinese numbers were also below expectations and just above the key ‘50’ level that indicates growth. The ‘official’ economic growth rate of 7.5% in China sounds like an overstatement of the true growth level. Further support for the ‘overseas weakness’ camp comes from the ISI Survey of Capital Goods Spending. The chart below illustrates what we are seeing in the ISI Surveys of U.S. companies; domestic capital spending in blue and foreign sales of capital goods in red. While both were recovering throughout 2013 and most of 2014, the foreign sales have clearly slowed down again recently. We expect that the major capital spending projects in China are starting to slow down as they already have excess infrastructure. The European slowdown may have more to do with Russian sanctions but it is still too early to tell. The bottom line is that, outside of technology spending, the ‘mega project’ spending seems to have peaked, which can’t be a positive for overall global growth going forward.
The biggest story in the stock market lately has been the sharp fall in the price of oil along with energy stocks. Oil lead the decline again last month, falling by another 18%, and is down 33% so far in 2014. Foreign investors have been significant net sellers of Canadian oil stocks in the past few weeks. Stock prices have plummeted, particularly the smaller companies, and many investors are clearly looking for a bottom. On that point I have included a recent chart from Canacord Capital showing the Canadian Energy Index (top) and the US$ price of Western Canadian Select Oil. The stocks have fallen much more sharply than the last few times Canadian oil moved down to these levels; and all of those periods ended up good times to buy, which suggest that longer-term investors could start buying at current levels. However, this time around, we have seen some aggressive selling/shorting by US/foreign investors which might suggest some further downside momentum first. Stocks are clearly signaling that there is further downside in crude oil prices and that prices will stay in this new, lower range longer than the consensus expects. We are still seeing too many cash flow estimates using price of US$90 in 2015 and US$85 in 2016. We need to see revisions using oil in the US$65-70 range and see how the cash flows/spending outlook comes out before we begin to add back. We reduced out weight in the energy stocks in August and remain underweight but have not sold further over the last week.
The other news this week is bank stock earnings in Canada. While we expect year/year growth in earnings, that rate is expected to have slowed down. Wealth management continues to show good growth but we expect that capital markets activities to have had some difficulties in the past quarter. With bank stock valuations near all-time highs the only positive point for bank stocks is the continued flow out of the resource sector. Banks however are large lenders to the energy patch and there are still worries about housing market and consumer debt levels. We have reduced exposure to the sector recently having switched out of Scotia Bank and reducing positions in TD and National Banks and moved the money to the insurers/non-bank financials such as Manulife, Power Financial and CI Financial.