Cheap stocks can always get cheaper. But patient investors with an eye toward value and steady dividends will find a lot to like in Canada’s stock market.
To be sure, the country has been a tough place for US investors to make money for almost three years, largely because of the Canadian dollar’s weakness relative to a rampant Uncle Buck.
This downtrend, which has accelerated over the past year, has shaved more than 25 percent off the US dollar value of Canadian stocks and the dividends these companies pay to investors.
The Canadian dollar suffered its latest hit when the Bank of Canada cut interest rates for the second time this year to counter an estimated 0.5 percent contraction in Canada’s economy in the first half of 2015. As recently as April, the central bank’s forecast had called for gross domestic product (GDP) to grow by 1.8 percent over the first six months of the year.
Much of this downside stems from the severe downdraft in energy prices, a challenge that’s exacerbated by limited takeaway capacity, lost market share to surging US production and wide price differentials between Alberta and the Gulf Coast.
Canadian oil and gas producers have slashed their planned capital expenditures by 40 percent this year, as smaller operators struggle to remain solvent and larger companies opt to postpone or cancel projects.
The Bank of Canada’s revised forecast calls for GDP growth of 1.1 percent for the year and 1.5 percent in the second half, with the weak Canadian dollar stimulating a rebound in industrial goods and other non-commodity exports. May 2015 marked the fifth consecutive month in which Canada’s exports declined.
Whether this updated forecast plays out likely will determine whether the Bank of Canada ultimately cuts interest rates for a third time this year.
Meanwhile, the US Federal Reserve’s commitment to gradually normalizing monetary policy suggests that the Canadian dollar could suffer more downside relative to Uncle Buck.
And the prospect of another leg down for crude-oil prices because of elevated US inventories heading into a period of seasonal weakness won’t help matters, either.
Although the Canadian dollar doesn’t always track fluctuations in oil prices, the currency’s highs and lows tend to coincide with extreme volatility in commodity prices.
Slowing economic growth in China—one of Canada’s largest trading partners—will also weigh on GDP growth and exchange rates.
On the plus side, the Canadian dollar has given up only 2.5 percent of its value since late January 2015.
However, equity returns have remained lackluster, with the S&P/TSX Composite Index down almost 3 percent (19.5 percent in US dollar terms) over the past 12 months.