FTSE Russell's head of Canada, Paul Bowes, and Robin Marshall, our director of fixed income research, recently spoke to Canada clients and the news media about the Canada fixed income markets. In a program entitled “Looking through the apocalypse: Canadian fixed income, QE and economic recovery,” Marshall examined key drivers behind the strong recovery in Canada fixed income markets since late March and considered whether this rally is sustainable longer term. Highlights of his market assessment include:
“COVID-19 has had an extraordinary impact on the global economy and markets, including Canadian fixed income. Despite a risk rally in recent months, we still don’t know the full impact of the global economic lockdowns.”
“Of course, we have had a powerful risk recovery, but there are obvious concerns about longer term impact on trend growth from the change in work practices and the effect of social distancing. Potentially weaker long-term trend growth is important to consider given the real impact it has on factors like valuations and revenue growth.”
“The two biggest factors driving the recovery in risk assets since late March have been the aggressive central bank response and expansion of their balance sheets, including the Bank of Canada, and the substantial investor response to these moves.”
“While we still need to see validation in corporate earnings to justify the risk rally, the good news for Canadian investors is that Canadian policymakers have more room left for fiscal stimulus than most countries, due to low debt to GDP. Even after recent fiscal support programs, the Canadian debt/GDP ratio is forecast at about 50%, by Finance Minister Morneau, compared to well over 100% in more G7 countries. In extremis, if the economy and employment do not recover adequately, the government could also resort to helicopter money, whereby fiscal stimulus is financed by the Bank of Canada creating reserves.”
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