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Canada’s economy losing ‘haven’ reputation: report

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Buildings are seen in the financial district in Toronto, January 28, 2013. REUTERS/Mark Blinch

It’s not as dramatic as last year’s calls to “short Canada,” but at least one economist warns the country is quickly losing its status as a “safe haven” for investors.

An underperforming stock market, the falling loonie and the amount of money being pulled out of the country by foreigners are reasons to believe Canada may be losing its lustre.

“Attracted by relatively low government debt, a stronger economic recovery and its healthier banks, foreign investors took a shine to Canadian assets in the aftermath of the financial crisis,” said Capital Economics analyst David Madani in a new report.

“More recently, however, those assets appears to have lost their shine a little, as Canada's safe haven appeal has waned.”

His argument comes as more investor attention is being paid to the recovery in the United States, Canada’s biggest trading partner and the world’s largest economy.

Many have pointed to the sluggish performance of the S&P/TSX Composite Index – which gained just 10 per cent in 2013 versus nearly 27 per cent for the Dow Jones Industrial Average and 30 per cent for the S&P 500.

The slumping loonie can also be viewed as a bad sign. The Canadian dollar has slipped about three cents so far this year, to around 91 cents U.S., after years of hovering at or above parity.

Also troubling is the drop in foreign purchases of Canadian assets. While there was a reported pickup in November, Madani believes that’s tied to the sliding loonie, “triggered by excessive negative sentiment towards Canada’s economic growth prospects.”

Madani believes there is “fairly limited upside potential” for the S&P/TSX index this year, predicting it will close the year around 14,000, not far from where it sat Friday at 13,888.

“We expect Canada’s economy to struggle this year,” says Madani, who is known for his more-pessimistic forecast for the Canadian economy.

While other economists are also forecasting markets to remain mostly flat this year and the loonie to stay low, there are optimists.

CIBC World Markets believes the Canadian market will shine in 2014, with double-digit earnings growth among S&P/TSX companies, versus single-digit for those on the S&P 500.

“After being trounced by New York (and Europe and Japan for that matter) in 2013, Toronto stocks entered the year with less stretched valuations, and greater potential for earnings gains that will pay off in outperformance in the year ahead,” CIBC economists Avery Shenfeld and Peter Buchanan wrote recently.

While Canada’s economy “won’t win a 2014 beauty contest against its cousin to the south,” the economists argue the economy will make marked gains.

After all, as most economists note, what’s good for the U.S. can also be good for Canada’s economy.

“The comeback in the U.S. dollar reflects an improving outlook for the U.S. economy itself,” BMO Capital Markets economist Doug Porter said recently. “Always a positive for the Canadian outlook.”

The debate over the strength of Canada’s economy heated up last year after at least one hedge fund manager went public saying he planned to “short Canada,” believing its housing and banking industries were set for a steep fall, dragging the dollar down with it.

Several Canadian economists were quick to defend their nation’s economy. While the loonie was expected to fall, many called for a gradual slowing of the housing market and pointed to the strength of the financial sector.

So far, the Canadians have been correct. The loonie is dropping and the banks have been darlings in the market, with some posting record profits in recent quarters.

Meantime, the Canadian Real Estate Association says national sales declined 1.8 per cent in December, a third-straight monthly decline.

“This further easing in activity is another healthy development for Canada’s market,” Royal Bank economist Robert Hogue said recently.