Rising Rates & Oil Prices – Threat or Opportunity?
Length 3:19

Avery Shenfeld, Chief Economist, CIBC

“We're watching interest rates and obviously the fear is, are interest rates are going to rise so quickly that even Canadians have trouble coping, or that financial markets have trouble coping? Because sharply rising interest rates are usually bad for the stock market. In this case, we're pretty comforted by the fact that we have a Governor at The Central Bank in Canada who understands the risks associated with a very indebted household sector. The plan seems to be to raise interest rates slowly so that we might get a quarter point hike in the next couple of months. I would suspect that we're going to sit another six months after that before we see a follow up move. So a gentle hand at the Bank of Canada is quite reassuring right now.”

Weaker loonie?

“We could see the Canadian dollar a shade weaker, a cent or two weaker, relative to the U.S., we’re raising interest rates more slowly. That tends to attract a flow into the higher interest rate currency which will be the U.S. dollar, and for the Canadian economy that's not a bad thing right now. Our exports haven't been growing that quickly. We might use the help of a slightly weaker exchange rate to give us that slight competitive edge.”

Impact of high oil prices on Canada

“Typically higher oil prices are a friend to the Canadian economy because we all pay a little more at the gas pumps. That drains consumer spending. But we usually see a bigger gain from the oil and gas sector spending a lot more on new developments, new projects. Unfortunately right now the oil and gas sector is facing weak natural gas prices and there is a big concern still about whether there is enough pipeline access down the road to expand in Canada. So unfortunately, we're getting the hit to consumers a bit right now and perhaps not the follow through, at least not this year, on the energy sector capital plans. We're watching the Iran situation very closely of course, but it's more than Iran, it's a disruption in Venezuela that's also helped lift prices this year and that's a more lasting story.”

Canadian equities poised to rebound?

“We've certainly been riding the back of the bus in terms of the Canadian market versus the U.S. market over the last year or year and a half. The higher energy prices might help a bit. The financial sector looks a bit undervalued in Canada but I think the bigger concern for financial markets generally is not 2018, it's what's the follow up story in 2019. We’re getting a lot of juice to the North American economy from U.S. tax cuts. That’s a ‘this year’ story, and I think the reason we're seeing this volatility and why it might continue is it's not clear that 2019, with higher interest rates and no fresh tax cuts, is going to be as good a year for corporate profits.”

Portfolio positioning with current uncertainty

“We always are reminded to tell investors that a diversified portfolio is a much safer portfolio. And in these sorts of situations where we've got issues with Iran, we've got issues on trade with the U.S., we have interest rates on the move; that's amplifying the uncertainty and certainly raising the value of having a well-diversified portfolio with not only exposure to different equity markets but also some fixed income holdings as well just for safety.”

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