Outlook for Canada and Australia

It is widely known that both Canada and Australia avoided the banking/housing meltdown and their fiscal position is much better than in most other developed economies. However, there are no grounds for complacency in either case.

In both countries, house prices have continued to climb in recent years with the result that household debt-to-income ratios now exceed the levels reached in the U.S. before the housing market fell apart. Debt burdens are especially worrying in Canada. Both economies also have high exposure to commodities and the gloss has long disappeared from that sector. We are not predicting a collapse in either Canada or Australia in 2014, but any growth improvement over the coming year is likely to be relatively modest.

In terms of equity market performance, both markets are commodity dependent. There is a case for a cyclical bounce in commodities as global growth improves. Thus, Canadian and Australian stocks may enjoy a reversal of some of their recent severe relative underperformance. However, these markets also are vulnerable to investors downgrading their long-run commodity price expectations, even if there is a cyclical bounce. We recommend staying underweight.

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