2 reasons Canada will lag this year

The housing sector and sluggish retail sales will drive down Canada’s growth this year.

Though housing is still strong in some cities (such as Toronto, Calgary and Vancouver), overall home sales are only up by 0.4% so far, says Pablo Martinez, assistant vice president at CIBC Asset Management. He is co-manager of the Renaissance Canadian Bond Fund.

As a result, the current inventory of unsold homes is rising, he adds. That means it should be a buyer’s market throughout most of Canada.

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Yet, our housing market has been identified as one the most overvalued in the world. And Martinez concedes that home prices have risen above what most people can afford if you consider the average wage across the country.

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But there’s some good news: “You [also] have to consider maintenance costs… Mortgage rates have been going down, so interest expenses” are also falling, says Martinez.

Though Canadians are carrying a lot of debt, they’ll remain in good financial positions as long as rates stay low, and as long as they effectively manage their debts and cash flows. This would also help boost consumer sales across the country.

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Danger ahead?

If interest rates rise, your clients will need help managing their debts and portfolios.

As well, a “sudden increase in interest rates [could] choke any kind of economic growth,” says Martinez.

Read: After a stellar 2013, what’s next for equities?

On the bright side, he doesn’t expect interest rates to move significantly higher this year. Even if the Bank of Canada did hike rates, he says they’d likely have to come down again since people owe too much and markets would become volatile.

Still, Martinez suggests advisors tell clients to boost portfolio diversification and maintain weights in fixed income.

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At the end of last year, we were getting a lot of calls from investors who were worried about the fate of the bond market, he adds. But, “People who decided to sell their entire bond portfolios suffered because bonds performed very well in…January.”

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Guiding clients right now is key, explains Martinez, especially since markets tend to adopt euphoric outlooks at the start of a new year—even if markets are already high. Also, the economic recovery is still fragile.

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