What the recession means for your portfolio

The R-word. Two consecutive quarters of negative growth mean Canada is in recession. What does that mean for portfolios? Real GDP contracted at an annual pace of 0.5% in the second quarter of the year, which followed a revised decline of 0.8% during the first three months of 2015. The last time the economy contracted over two consecutive quarters was 2009, when GDP fell 8.7% in the first quarter and 3.6% in the second. On the positive side, Canada’s economy did bounce back in June: GDP grew 0.5% for that month.

What it means

The economy’s modest contraction in the first half of the year “almost entirely reflects a dramatic cutback in investment in the energy sector,” Robert Kavcic, senior economist at BMO Capital Markets in Toronto, told Advisor.ca in an email. “Other areas of the economy such as consumer spending, residential construction and net exports were actually still growing. Also, outside of energy-producing provinces, economic activity continued to expand. So, in other words, any ‘recession’ still looks strictly confined to the energy sector and energy-producing regions.” Desjardins senior economist Benoit Durocher adds that Canada’s -0.3% growth so far in 2015 isn’t severe. “In other recessions, the cumulative decrease is [usually] -3% to -5%.” The numbers don’t meet everyone’s definition of a recession. Avery Shenfeld, chief economist of CIBC World Markets, says that while growth has stalled, our employment levels haven’t dropped. “If growth in the second half is positive, and we don’t get a drop in employment, this will just be considered a pause in expansion,” he says. “It’s simply too early to register a final verdict.” And the June numbers signal the economy could actually grow in the third quarter, Shenfeld says. Auto sales and production did well in July, and positive overall growth in June could carry into later months. He adds that the federal government’s Universal Child Care Benefit cheques, delivered in July, increased consumer spending power. Economic indicators for the third quarter will start coming in next week, when Statistics Canada reports July export numbers. Durocher says they and the July manufacturing sales and GDP levels, due out later this month, will show whether the economy is recovering. 6 mistakes investors make when markets tank »

Will the BoC cut rates again?

Kavcic says the GDP data “probably won’t sway the Bank of Canada to cut rates again—their forecast was assuming a modest decline through the first half of the year.” He adds that if the Federal Reserve raises rates later this year (or even this month), as many expect, “the Bank [of Canada] should be comfortable keeping policy steady.” Durocher agrees, but warns that if economic growth doesn’t materialize as expected in Q3 and Q4, we could be in for an end-of-year cut. In the U.S., there are signs the Federal Reserve may delay its rate rise, says Chris Currie, portfolio manager at Goodwood Funds. The Fed’s latest minutes emphasized that inflation is well below target. “Given that they’re not seeing inflation, I don’t think there will be a September rate hike,” Currie notes, though he adds the Fed has been signaling it will raise rates eventually.

Investment implications

From an investment point of view, the GDP news doesn’t change much, says Jay Nash, portfolio manager at Roberts Nash Advisory Group, National Bank Financial, in London, Ont. “This morning’s data was not surprising. If anything, the figures appear to be stronger than anticipated, and should be helpful to the currency and the Canadian markets.” The S&P/TSX composite index ended Tuesday down 377.22 points, or more than 2.7%, at 13,481.90. The Canadian dollar fell 0.38 of a U.S. cent to 75.63 cents US. “The fun part of this is going to be how each of the political leaders deals with it over the next week. Our clients are going to hear different stories about what this data meant. The political leaders will spin this in the way they would like it to be presented.” Nash’s message to clients will be straightforward: The recession was largely focused in the energy sector, with other areas of the economy performing well. Most importantly, June’s solid data—pushed along by consumer spending—was better than expected. More than the GDP data, Nash’s allocation decisions were influenced by last week’s correction. Leading up to the dip, he had been peeling back his global equity exposure and taking gains, but holding steady on domestic exposure. He saw last Monday as a buying opportunity and added to his Canadian exposure. He did this through a broad market ETF, rather than individual stocks. “So, we’re not putting ourselves in a position where the market rebounds, but the sector of the stock you selected disappoints. Once you regain comfort with the direction of the overall market,” you can start targeting specific holdings, Nash says. For investors who do target sectors, Shenfeld says exports, including manufacturing exports, are benefiting from the lower Canadian dollar, as expected. Durocher adds that as the American economy continues to grow, it should fuel demand for Canadian goods. He says a strong U.S. showing could outweigh the Canadian effects of a slowdown in China. The U.S. is Canada’s largest trading partner, importing 20 times as many Canadian goods as China. Still, the challenge for equities lies beyond Canada’s borders, Shenfeld says. “It’s not the time for Canadians to gaze at their own navels because it’s really what’s happening outside our country that has hit the first-half numbers, and will ultimately have a big say in how well we do in 2016.” He recommends sticking to sectors that are insulated from global pressures, such as consumer staples and telecommunications companies. Durocher adds the service sector makes up 70% of Canada’s GDP, and it’s been doing well since the beginning of the year: Between January and June, it’s grown 0.5%. Which political party is better for your portfolio » This article originally appeared on Advisor.ca.

What the recession means for your portfolio

What it means

Will the BoC cut rates again?

Investment implications

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