MARKET OUTLOOK FOR SIA CHARTS

August 2015

Commodity Prices Retreat 

The Canadian economy has been blessed with an abundance of natural resources which have provided direct jobs for industry workers, indirect jobs for spillover industry workers, and a steady supply of tax revenue for the government. A land full of bountiful resources has positively impacted the lives of Canadians, but it has also been a detriment to the stability of economic growth. The reliance on natural resources has reduced the need to develop other industries and increased the country’s dependence on commodity prices.

Global real GDP growth is expected to be a lackluster 3.1% this year in stark contrast to the 3.9% average for the period 2000-2013. A cyclical downturn in many nations is providing ammunition, but so is a structural change occurring in the world’s second largest economy (Scotiabank Economics, 2015).

Two factors matter when it comes to commodity prices: supply and demand. We’ve already seen that demand has been decreasing as global growth slows, but what about supply? When it comes to oil and gas, supply is abundant. Despite drilling rigs in North America dropping nearly 50% year over year, production has been fairly consistent with last year and OPEC has shown no signs of blinking in the oil price war. This supply-demand dynamic has led to WTI prices dropping over 50% in a year. On to base metals. That large country undergoing a structural change is China, and they just happen to account for half of the globe’s demand for base metals. Generally speaking, supply has not changed. Combined they have led to depressed prices across the base metal universe. What about precious metals? You guessed it, downward spiral. Gold has hit a 5-year low and is on a steep downward trajectory. With Greek’s woes out of headlines for now, the United States expected to raise interest rates, and selling by the Chinese Government, the prices of precious metals show no signs of recovering soon.

So stock up on water, canned goods, and heat reflective emergency blankets. Just kidding, we’ve saved the best for last. Lower commodity prices have decreased fuel prices, allowed central banks to maintain highly accommodative monetary policy, and pushed down interest rates. In the United States consumer spending grew at the fastest level since the recession this past quarter, new home sales are up 7% this year, nonfarm payrolls have been strong, and unemployment is at a post-recession low! In Canada, a low dollar has increased the attractiveness of our goods and services, unemployment has remained steady, and that housing has remained stable. So not all is terrible, but not all is well. At Morrison & Partners Wealth Solutions we remain on the sidelines when it comes to direct commodity exposure, and are increasingly interested in those sectors that will piggy-back off the success of our neighbor to the south (Scotiabank Economics, 2015).

Bibliography

Scotiabank Economics. (July 2015). Global Economics: Global Forecast Update.

This newsletter was prepared solely by Bruce Morrison who is a registered representative of HollisWealth™ (a division of Scotia Capital Inc., a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada). The view and opinions, including any recommendations, expressed in newsletter are those of Bruce Morrison only and not those of HollisWealth. TM Trademark of The Bank of Nova Scotia, used under license. Morrison & Partners Wealth Strategies is a personal trade name of Bruce Morrison.