“…the Canadian dollar and Canadian assets more generally have not reacted negatively enough to the plunge in oil prices, in my view. Markets seem to have been pretty efficient in discounting the direct effects of cheaper energy on Canadian asset prices, but are almost certainly underestimating the second- and third- order consequences, in my judgment.”
He also points to the “popular narrative” that lower oil prices will create benefits for most Canadian consumers, offsetting the hit oil to producers — and that manufacturing will benefit from the growing U.S. economy. While these views are correct Wolf believes the ultimate benefits to the Canadian economy are overstated.
The Bank of Canada’s announcement yesterday would appear to affirm Wolf’s gloomier view of Canada’s economic prospects. The surprise rate cut should serve as a stark reality to check to those investors who haven’t yet digested all the bad news and reacted by cutting their Canadian exposure (not that Canadian markets haven’t taken a hit – Wolf points out their underperformance relative to other markets in that same note).
He does point to one bright spot: global equities. Here investors also seem to be in denial, this time ignoring the upside potential. As Wolf points out, investors have not yet realized the potential gains that will come from lower oil prices.
“….global equities have not reacted positively enough to the plunge in oil prices, in my view. The MCSI All Country World Index (ACWI) of global equities is essentially flat over the past six months. But cheaper energy is good for the global economy and particularly good for the U.S., Europe and Japan, all big net oil importers
that make up more than 80% of the ACWI.”
The message for Canadian plan sponsors, many of who are still overexposed to Canadian equities? Time to head for the exits – while you can.