Key Takeaways
- Canada’s retail sales growth remains narrow, with recent gains largely driven by higher prices rather than increased consumer spending.
- Elevated food inflation is intensifying affordability pressures and raising concerns about stagflation as economic growth remains weak.
- Consumer strain is most acute among younger Canadians, while higher-income households continue to fare better in a divided economy.
- Small-cap stocks are beginning to outperform after more than a decade of lagging large caps, supported by lower rates and domestic exposure.
- Investors are showing renewed interest in precious metals, with lower-risk royalty structures favored amid volatility and fiscal concerns.
Introduction to the Canadian Economy
The Canadian economy has shown a 1.3% increase in retail sales for the month of November, primarily driven by the resolution of a labor dispute in British Columbia that had disrupted liquor distribution. However, according to Norman Levine, portfolio manager at Brook Wagman Private Wealth Management at Raymond James, this increase is deceptive as it is largely attributed to higher prices of alcohol and food rather than an actual increase in consumer spending. Levine notes that Canada has the highest food inflation in the G7, which is a significant concern for the average Canadian consumer.
Stagflation Concerns
Levine expresses concerns about the possibility of stagflation, given the high food inflation rate of over 7% year-over-year and flat retail sales when excluding booze sales. He believes that this indicates the economy is not growing for the consumer, and the prices consumers are paying are higher. Levine also notes that the US economy is performing better and is expected to continue doing so, which is not the case for Canada. The prediction for December retail sales is that they will be down, which further supports Levine’s concerns about the state of the Canadian economy.
Consumer Strain
Levine highlights that the Canadian economy is experiencing a K-shaped recovery, where higher-income households are doing well, while younger Canadians are struggling to make ends meet. The strain on consumers is most acute among younger people who are finding it difficult to get jobs, pay rent, and afford basic necessities like food. This division in the economy is a significant concern and does not bode well for the overall health of the economy.
Investment Strategies
Levine discusses his investment strategies, including his exposure to precious metals. He notes that while gold and silver have seen significant increases, he prefers to play it safe by investing in royalty companies like Franco-Nevada, which gets royalties from other companies’ production in gold and silver. This approach allows him to gain exposure to the precious metals market without taking on the risks associated with individual mining companies. Levine also mentions that he is starting to turn towards small-cap stocks, which are beginning to outperform large caps after more than a decade of underperformance.
Small-Cap Stocks
Levine believes that small-cap stocks are poised for growth, driven by lower interest rates, lower energy prices, and the fact that most of these companies are domestic rather than multinational. He recommends owning small-cap indexes like IWM, which represents the Russell 2000 in the US, rather than individual companies. Levine notes that valuations on small caps are much lower than large caps, and they are now starting to outperform for the first time in 14 years. He expects the US economy to do well, especially for individuals and smaller companies, and believes that small-cap stocks will benefit from this trend.
Conclusion
In conclusion, the Canadian economy is facing significant challenges, including high food inflation, stagnant economic growth, and a divided economy. Levine’s investment strategies, including his exposure to precious metals and small-cap stocks, are designed to navigate these challenges and take advantage of emerging trends. As the economy continues to evolve, it is essential for investors to stay informed and adapt their strategies to changing market conditions. By understanding the key takeaways and insights from Levine’s interview, investors can make more informed decisions and position themselves for success in a rapidly changing economic landscape.
