Federal Budget Impact on our Strategy View
The Canadian economy has been sideswiped by the severity of the fallout in global economic growth in the last quarter of 2008 and this year's recession will have a dramatic impact on the Federal government's finances for years to come. In yesterday's budget, the Federal government proposed $40B of additional spending to help the economy weather the storm over the next two years. On the federal revenue side, the collapse in commodity prices (back to 2002 levels), rising unemployment, and a broad retrenchment in corporate profits (we estimate a 32% decline in TSX profits in 2009) will challenge the budgeting process well after this year.
Moreover, the fiscal response announced in today's budget will take spending up by approximately 23% over the next five years. The deficits could total C$85B over the next five years. Much like it is the case in the United States, Europe, and Asia, Canada's drastic fiscal and monetary response is meant to halt the slide in economic activity, not restore growth in the near term.Hence, the unprecedented global stimulus measures will not magically turn the market's nightmare into a fairytale. But just waking up and working our way back to more normalized conditions would tremendously help raise the confidence level. By comparison, the Canadian stimulus plan will equate to about 1.9% of GDP vs. 8.3% for the U.S. plan.
Finding Direction in Uncharted Territory – Outlook 2009 2008 was simply a remarkable year, but unfortunately for the wrong reasons as we have been through 12 months of extreme circumstances and a roller coaster ride which most investors would have rather avoided. What made the performance of the TSX Index and other global indices all the more shocking was the speed and magnitude of declines witnessed in the second half of the year. Traditional fundamental analysis took a back seat to irrational thought as equity markets found themselves facing a financial and economic crisis not seen since the Great Depression. The severity of the problems faced by economies and markets worldwide was not apparent at first, but became all too clear as capital flows disappeared, investment declined, consumption slowed and wealth was destroyed. Simply put, 2008 was the worst year of performance for many equity markets in over 65 years.
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