Investors in Canada are financially optimistic despite an uncertain political and economic environment

Sep 11, 2019 | The Economist Intelligence Unit


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Recently, Canada has faced an unusual level of instability, yet high-net-worth investors continue to look on the bright side.

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With trade tensions looming, oil markets suffering from volatility and the global economy looking fragile, Canada remains resolutely optimistic.

“I expect uncertainty, especially around trade, is likely the new normal for Canada, while ample global commodity production is likely to perpetuate volatility in Canada’s commodity markets,” says Rachel Ziemba, founder of political and economic risk analysis firm Ziemba Insights. “The USMCA [the new NAFTA], aimed to secure Canada’s market access in the U.S. and reduce the risk of new tariffs, probably has a tough road ahead before ratification. Meanwhile, relations with China, seen as a major potential new market, have soured as Canada has been caught in the U.S.-China trade and technology battle.”

Against this backdrop, Canadians, more so than their peers in the U.S. and UK, cite uncertainty in areas such as the global economy and house prices as threats to their ability to create, preserve and manage wealth. Yet Canadians remain largely optimistic about their future financial well-being.

These are among the findings of a recent global survey by The Economist Intelligence Unit (EIU), commissioned by RBC Wealth Management. The survey included high-net-worth individuals (HNWIs; those with at least US$1MM (C$1.35MM) in investable assets), adult children of HNWIs and those who are not yet HNWIs but who have a minimum income of US$100,000 (C$134,000).1

Real estate and tax questions loom in Canada

Recently, Canada has faced an unusual level of instability, with economic uncertainty levels in 2018 spiking above those during the 2008 financial crisis, according to an index from the U.S. Federal Reserve Bank of St. Louis.2

One area of concern has been real estate, with house prices experiencing huge increases in markets like Greater Vancouver, where prices have surged 58 percent over the past five years, as well as Greater Toronto (which has seen a 56 percent increase), the Barrie area (46 percent) and Greater Montreal (22 percent).

And cracks have emerged recently, with Canada’s average prices slipping into negative territory (-0.34 percent) over the past year, according to The Canadian Real Estate Association.3 These housing concerns are most acute for younger Canadians4, with 34 percent citing housing price uncertainty as a threat to wealth, compared with 22 percent of their peers in the U.S.

Canadians, more so than peers in the UK and Asia, also say tax changes threaten their wealth goals, especially for business owners and entrepreneurs (52 percent cite this as a concern). Fifty-four percent of Canadian survey respondents at the highest wealth levels (US$5MM+ (C$6.44MM+) in investable assets) are also concerned about tax changes, as are more women than men (46 percent versus 40 percent).

FIGURE 1: Northern exposure
Which of the following external factors most concern you about your ability to create, preserve or manage your wealth? (Canadian investors, percent choosing each option - top three choices overall)

Optimism abounds on reaching financial goals

Despite these swirling doubts, 83 percent of Canadians feel confident about reaching their financial goals.

“Consumers have remained fairly resilient, continuing to have access to financing amid relatively good asset returns. Canadians have tended to be optimistic about financial returns given decent equity returns and strong property market performance, benefiting those who are already homeowners,” says Ziemba.

FIGURE 2: Upward and onward
Agree or disagree: I am confident I will reach my financial goals for creating, preserving and managing my wealth (Canadian investors, percent choosing each option) 

Part of the reason for this optimism may also be because Canada has long been a beacon of stability. Canada avoided the worst of the 2008–09 global financial crisis, with real GDP growth quickly bouncing back to more than three percent in both 2010 and 2011, above the U.S. and most of the EU.5

More directly, according to EIU analysis, Canada has the second-best risk environment globally (out of the 15 countries studied) to support sustainable wealth generation over the next five years, based on an assessment of macroeconomic, financial and political risks.6

“One main reason Canada got through the last crisis relatively unscathed is because it had stronger regulation of financial institutions, especially banks, so there wasn’t the same overheating in the sub-prime mortgage market as the U.S.,” says Bernard Simon, a Toronto-based business journalist and former Canada correspondent for the Financial Times. But he warns that looking forward, although Canada is trying to diversify its trade, the U.S. is still by far its biggest trading partner. “If the U.S. is going into recession then Canada will not be far behind.”

Keep calm and keep a close eye on your portfolio

Due to the current conditions facing Canada, investors are keeping a closer eye on their portfolios and adjusting their strategies accordingly. In particular, 68 percent of Canadian women say they are more attentive to their portfolios now than in the past, as are 77 percent of those at the highest wealth levels. 

Canadians are also looking to diversify, something 27 percent (and 30 percent of younger Canadians) plan to do more of over the next five years, compared with 21 percent in the U.S. Other groups such as business owners and entrepreneurs are focusing more on shifting to less risky investments (36 percent). 

Simon says an increased focus on diversification is a rational trend. “Canada is a relatively small economy and Canadian investors tend to concentrate on Canadian assets, such as oil producers, so there is some scope for them to look further afield and broaden their portfolios in any number of ways,” he says. 

In one example of this evolving investment approach, 46 percent of Canadian investors say it is increasingly important to consider environmental, social and governance (ESG) factors. Those at the highest wealth levels feel the strongest in this regard (72 percent). Canadians are also taking advantage of tax-free saving accounts, introduced in 2009, which can be used as a tax-efficient vehicle to save for retirement, notes Ziemba.

This pressure to diversify and innovate is also evident in their attitudes to their financial advisors, with 63 percent of Canadians expecting their financial advisors to offer unique investing opportunities.

Canada remains resilient

While not knowing what to expect can disrupt economies, Canadians are making changes as needed to try to reduce risk, and the overall picture looks bright. “Despite some weak months, the Canadian economy has remained resilient and in continued expansion mode,” says Ziemba. “The uncertainty is likely to remain, and long-term returns are likely to be more modest over the coming years, but this is not a crisis, despite some of the headlines. This, I think, constitutes some of the continued optimism.”

References
  1. The EIU survey included 614 respondents from Canada.
  2. Economic Policy Uncertainty Index for Canada. Federal Reserve Bank of St. Louis. Accessed on 2 July 2019. https://fred.stlouisfed.org/series/CANEPUINDXM
  3. MLS® Home Price Index. The Canadian Real Estate Association. Accessed on 18 July 2019. https://www.crea.ca/housing-market-stats/mls-home-price-index/hpi-tool/
  4. Younger Canadians are defined as those in Gen Z, Millennials or Gen X (18-54 years old).
  5. GDP growth (annual per cent). The World Bank. Accessed on 2 July 2019. https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?end=2014&locations=CA-US-GB-FR-ES-IT-GR&start=2009&view=chart
  6. For more information on the risk environment, see the 2019 Wealth Opportunity Index

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