Rising rates? Big deal
Canadian corporations are better positioned to deal with rising interest rates than they were two decades ago, argues Peter Buchanan of CIBC World Markets Inc.
Ten-year yields have risen by about 80 basis points since the fall, but "that's not altogether bad news for corporations or their shareholders," he says, because the climb in yields is due in large part to "upgraded growth expectations that, in theory, also means higher profits."
He says Canadian corporations are also "better positioned to withstand the slings and arrows of rising rates" since they are net lenders. Mr. Buchanan cites Statistics Canada data that show internal funds at Canadian companies exceed their non-financial investments.
Internal funds, in this case, means undistributed profits as well as depreciation allowances, Mr. Buchanan says. Non-financial investment includes outlays for hard assets like equipment and inventories, but excludes changes in corporate financial assets.
"If they want to invest, a positive surplus means effectively that firms can tap cheaper internal sources of financing as opposed to paying more to borrow," Mr. Buchanan said.
The stock market rally and resulting higher price-to-earnings ratios also effectively imply a lower cost for equity capital, he says, "helping shield companies' overall financing costs to some degree from the rise in bond yields."
This is in contrast to the 1990 recession, when the corporate sector was a heavy net borrower. "The Bank of Canada's war on inflation sent yields skyrocketing back then, crushing profits."
Retail sales surprise
Canadians spent solidly in 2010 - yet, surprisingly, their performance pales in comparison with that of the reputedly beleaguered U.S. consumer.
Canadian retail sales were up 4.9 per cent in December over prior-year levels (4.4 per cent when adjusted for inflation), but slipped 0.2 per cent from November levels.
Meanwhile, U.S. retail sales are now almost 8 per cent above year-ago levels. The spread in favour of the United States in recent months is the largest since the tech boom of the late 1990s, notes BMO Nesbitt Burns Inc. economist Douglas Porter. The widest margin was in October, when U.S. sales growth of 7.9 per cent was running more than 4 percentage points higher than Canada's 3.7 per cent.
Inflation is similar between the two countries, so the gap in real growth is also wide, he said.
"This is, of course, a 180-degree turn from just over two years ago, when Canadian year-over-year sales growth was as much as 9 percentage points stronger than the U.S.," Mr. Porter said. October of 2008 saw growth of 4.3 per cent in Canada and a decline of 5.3 per cent in the United States.
Why the gap? Canadian retail sales did not fall nearly as far in the recession, "and thus there is simply less pent-up demand," Mr. Porter said. "As well, there may be some leakage of cross-border shopping from the Canadian results."
Saudi Arabia's new friends
China and India have risen to new economic prominence in the Middle East - but that doesn't necessarily translate into political influence, says Said Hirsh, the Middle East economist for Capital Economics.
A look at both exports and imports by Saudi Arabia shows the transition: While the United States provided nearly a quarter of Saudi imports and received one-fifth of its exports in early 2000, the figures have now dipped into the low teens.
Meanwhile, the share of combined imports from China and India has tripled in just over 10 years, while exports have risen from the low single digits to a share of over 20 per cent.
Mr. Hirsh says the wave of protests over the past month reminds him of the pan-Arab nationalist movement in the 1950s and 60s, "which led to a Western-Soviet split across the region."
"There is no prospect of a similar division this time, as there is currently no alternative to the U.S. as the world's global power," he said. While Middle Eastern trade relations have shifted in favour of Asia over the past decade, "the new emerging powers in Asia are unlikely to fill the political and military void left by the Soviet collapse."