Tim Hext: What Canada’s stimulus exit means for Australian investors
This week Canada’s central bank become the first to signal its stimulus exit. Pendal portfolio manager Tim Hext explains what it means for Australian investors
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WE WOKE on Thursday to headline news that the COVID economic crisis was over — even as the health crisis worsened in some parts of the world.
The Bank of Canada (BoC) released its monetary policy report — becoming the first to signal its stimulus exit.
So what has Canada done? Have we moved past the economic impact? If so, what does that mean for Australian investors?
The BoC is paring back the level of bond purchases in its Quantitative Easing (QE) program from Wednesday. It’s a sign the BoC no longer thinks it needs to prop up the economy.
The numbers have been encouraging. The March 2021 CPI increased 2.2% against the COVID lows of March 2020. The February 2021 CPI print was up 1.1% against pre-COVID price levels of February 2020.
There is confidence in the Canadian recovery based on the economic data post-lockdown.
There were substantial job gains in February and March. Stronger commodity prices. Fewer business insolvencies coupled with high business confidence. And a rapid surge in house prices: 17% across Canada and 20% in capital cities such as Toronto.
It is almost a mirror image of our own recovery here in Australia.
Now the question is: will the RBA taper as well? And if so, when?
It isn’t surprising that the developments in Canada sparked a flurry of discussions. But it turns out we have forgotten to read the pesky fine print. Again!
In Australia, the RBA’s main objectives are:
- Inflation between 2% to 3%, on average, over a business cycle
- Full employment
- Stability of the Australian currency
In Canada, the BoC has a single objective to hit a 2% inflation target — not over a business cycle, but at a point in time. There are no unemployment objectives. No currency objectives.
The BoC prefers not to walk, talk and chew gum at the same time.
The similarities between Australia and Canada’s recovery may seem uncanny (although Australian housing prices have risen only a mere 6% compared to Canada’s 17%).
But there are stark differences.
The BoC has shown more willingness to tackle inflation while there is still a fair amount slack in the Canadian economy. In contrast, the RBA is reluctant to dampen growth until our unemployment numbers are into the lows 4s.
Additionally, with the AUD/USD currently range-bound between 0.75 and 0.8, it’s difficult to see the RBA charting a similar course to the BoC.
Until the pied piper of inflation plays his tune, it appears unlikely the RBA will be lured away from its current path.
Maybe keep the champagne on ice just a little longer.
Tim Hext is a portfolio manager with Pendal’s Bond, Income and Defensive Strategies (BIDS) team.
Led by Vimal Gor, Pendal’s BIDS boutique is one of the most experienced and well-regarded fixed income teams in Australia. In 2020 the team won the Australian Fixed Interest category in the Zenith awards.
The team oversees $22 billion invested across income, composite, pure alpha, global and Australian government strategies with the goal of building Australia’s most defensive line of funds.