Canada’s safe haven image has been strengthened in recent weeks after Mark Carney, the head of the country’s central bank, was named as the next Bank of Governor governor.
In praising Carney’s appointment, commentators highlighted the relative strength of the Canadian economy and noted how it managed to avoid the housing and debt bubbles that afflicted the country’s developed-market peers.
German chancellor Angela Merkel even recently claimed Canada could serve as an example to Europe in safeguarding sustainable growth, saying: “If you look at the last global economic crisis, Canada has weathered this crisis quite well.”
Andrew Ford, investment specialist with the GARS fund, on the other hand, argued that Canada’s safe haven status may not be as assured as some believe.
The long US dollar/short Canadian dollar strategy, which the fund has been running since the fourth quarter of 2011, was singled out by Ford as one of the biggest detractors from performance in September.
However, the strategy reversed during October and become one of the highest contributors to the fund’s performance over the month as the US dollar appreciated against the loonie. This suggests the market is questioning just how much of a safe haven Canada actually is, the specialist said.
Ford added that there are a number of concerns over the health of the Canadian economy.
“The Canadian dollar is pretty expensive which is making Canadian exports uncompetitive,” he explained. “We don’t like the fact that the Canadian economy is more vulnerable to external influences – it’s more plugged into the commodity cycle than the US which is more domestically oriented.”
Canada’s economy is reliant on exports of commodities such as fertilisers, wood pulp, timber, crude petroleum, natural gas and aluminum, with almost three-quarters of exports heading to the US.
The country’s banking system, which emerged from the financial crisis as among the world’s strongest thanks to conservative lending and strong capitalisation, is also cited as one of its major benefits.
However, Ford claimed that there may be too much optimism surrounding Canada’s banks.
“A key issue for us is that we think the health of the Canadian financial sector is really overstated, with the economy being highly geared to housing and its consumers now having as much debt as US consumers did right at the peak [of the crisis],” he said.