The Canadian economy is caught in a global economic tug of war as emerging economies slow, limiting commodity demand, while indications of an accelerating U.S. economy are increasingly prevalent.
The dilemma for Canadian investors is that we've seen this movie before. U.S. economic growth has been allegedly on the cusp of exploding higher for at least the past three years, yet growth remains muted. This trend makes the "should I buy more U.S. assets?" decision difficult, but in 2015, the rapid decline in global trade and economic activity mean the choice might have to be made anyway – U.S. markets might be the only place to hide as the global economic backdrop deteriorates.
Global growth fears are centred in Asia where the CPB Asia Trade Activity Index has been mired in negative territory in year-over-year terms and the Nomura Asia Export Leading Index, a forward-looking index of trade activity, provides little hope for growth in the coming months. In South Korea, considered an effective indicator of global trade activity, recent export statistics confronted economists with an alarming 14.7-per-cent decline in shipments abroad.
The American economy, while not yet running at full steam, has shown recent positive signs in the form of vehicles sales and, more importantly, construction activity. Heavy truck sales, an important indicator of broad business activity, continue at grow at elevated levels far beyond the sluggish sales of 2011. Sales of cars and light trucks, admittedly helped by extremely generous financing, are currently running at a 17-per-cent annualized pace.
A surge in U.S. construction is the primary reason for economic optimism. Total private spending on construction jumped more than 16 per cent year over year in July, the fastest pace in three years.
The sheer scale of the American real estate market – commercial real estate is valued at $15-trillion (U.S.) according to Forbes magazine and online real estate database company Zillow estimates a $27.5-trillion value for residential properties – means that an industry revival will have outsized effects on economic growth.
Heightened construction activity also suggests rising business investment and possibly, at long last, the millennial generation is financially ready for home ownership.
For Canadian investors, the "Asia slides, U.S. revives" trend has numerous implications. Commodity prices, dependent on demand from China and other emerging markets, are likely to remain weak as long as current patterns remain. More positively, a U.S. economic expansion that is already visible in vehicle sales has positive implications for domestic auto stocks such as Linamar Corp. and Magna International Inc. Domestically focused U.S. stocks, including exchange-traded funds matching the performance of the Russell 2000 small cap index, should also outperform.
Forestry stocks seem like an obvious play on U.S. construction but investors should remain cautious. Chinese demand was a major driver of global lumber prices and declining imports could offset the positive effects of U.S. construction.
Follow Scott Barlow on Twitter @SBarlow_ROB.