This article is exclusively about t...

This article is exclusively about the bane of my forecasting existence a.k.a. "Our household and Native Land"--Canada. Were it not for the continuing dismal performance of the Canadian equities, I would be feeling moderately beautiful good about my forecasting skills right now. Recall my prediction of couple issues ago that 5,000 was do-able.

My forecasts for Canada, however, have been les stellar. Indeed, for many month now I have continued to be of the belief that Canadian equity markets were destined to outperform their U counterparts. This observation was based upon excellent market fundamentals--a subject for which I am paid (though not much) to be an expert

We all know the sad story of Canada's equity market performance. Year to date, our market is ahead by way of about 9% (through the finis of November) while the Dow is up by the agency of 30%. For those who view this as a temporary phenomenon, check without the box scores since pre-crash highs in October 1987

At that time, Canadian market values were more than 50% above the U whereas we now trail by dint of nearly 10%. In terms of price flushs (that is excluding dividends), U markets are up at about 80% to a paltry 12% for us--and that's 12% from one side of to the other 10 years. In assessing the view for Canadian equities, it is important to begin with a discussion of the obvious which is that the behaviour of our markets is driven by dint of external conditions. For the tyro external translates into U.S. "macro" conditions. Canadian financial markets do not exist in a vacuum. My tonic assumption is that the external economic backdrop will continue to be united of sustained low inflation, stable interest rates and continued economic extension with healthy corporate profitability. These conditions, at the way, are ideal re-election conditions for Bill and Hilary.

Here in Canada, economic fundamentals continue to direct the eye great: lower inflation than the U falling interest rates, growing corporate profits. In addition, the public sector policy mix--at each single level of government--is aggressively focused forward slashing spending and avoidance of tax increases. controls everywhere have signalled the hegemony of the private sector as the legitimate engine of economic revival. Political uncertainty (i.e. Quebec), is the simply negative which stacks up against this optimistic scenario. moreover let's not forget a man and wife of key points: First, the Nos did win. next to the first the bond market vigilantes (i.e. the credit rating agencies and owners of Quebec paper) will descry to it that Mr. Bouchard marches to the same fit disposition as all leaders. He too will have to chop spending, control deficits and avoid tax increases. As I papal court it, a political negative may well revolve out to be an economic positive.

If you are getting the reason that this harangue is leading to an optimistic assessment you're right] However, the reason for my bullishness has far les to do with getting the message across to Canadians than it does to foreign investors. At the margin, it is foreign investors who drive Canada's financial markets. For obvious reasons, foreign investors have disentangleed a horrible perception of Canada as a place to invest. That fact is ruminateed in the under-performance of Canada's equity markets, in the sky-high real rates of interest, and in interest rate differentials--both protracted and short term--that remain substantially higher than historic averages. It is these negative perceptions that describe the source of opportunity.

In the month to take rise foreign investors will remind us, one time again, that their memories are short and that gre ultimately vanquishs fear. In short, Canada will again be onward the map. Having pushed U interest rates down and stretched valuation parameters beyond reason, foreign investors will station their sights on Canada. Interest rate differentials will shrink, short and lengthy term rates will continue to fall and investors will again pursue out Canadian stocks. Mark my words-interest rates will fall further, the Canadian dollar will strengthen and equity markets will outperform U 5000+ in succession the TSE.

EARL BEDERMAN IS PRESIDENT OF INVESTOR ECONOMICS INC., A CONSULTING FIRM SPECIALIZING IN APPLIED RESEARCH IN FINANCIAL SERVICES, ECONOMICS AND circulating medium MANAGEMENT.

Copyright Canadian Shareowner Magazine Inc. Jan/Feb 1996

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