Trump Tax Cuts Are Making Canada's Top Fund Managers Envious

(Bloomberg) -- A reinvigorated U.S. economy under Donald Trump is a better bet than Canada, where a ticking consumer-debt bomb and declining competitiveness are dragging on asset prices, according to top-performing money managers north of the border.

President Trump’s tax cuts and pro-business agenda have revved up growth, stocks and corporate confidence, the managers said in a panel discussion at Bloomberg’s Toronto offices on Wednesday. Contrast that with Canada, where minimum wage hikes and carbon levies are ratcheting up business costs as a housing boom pushes consumer credit to a near-record 170 percent of disposable income.

“It’s not just one thing in isolation, it’s many things,” said Toronto-based Noah Blackstein, whose C$1.5 billion ($1.2 billion) Dynamic Power Global Growth Class fund has outperformed 554 global peers over the past 10 years. “I don’t see how it’s of benefit to Canada.”

Canadian stocks have trailed the U.S. for at least a decade but that gap has only widened since Trump’s election. The loonie is the worst-performing major currency against the U.S. dollar this year while Canadian bonds are outperforming on expectations of slower growth. Investors expect the Bank of Canada to lag the Federal Reserve in raising interest rates as it tries to avoid pushing consumers over the edge.

Consumer leverage is making Peter Kotsopoulos think twice about investing in Canadian bank debt. Kotsopoulos, chief executive officer and director of fixed income at Toronto-based MFS Investment Management Canada Ltd., prefers U.S. financials such Wells Fargo & Co. and Citigroup Inc. that issue loonie debt, or Maple bonds.

Read More: Consumer Debt Binge Draws Moody’s Warning for Canadian Banks

“There is a little bit of an overhang in Canada’s financial market which started to pop up a couple of years ago during the real-estate bubble,” said Kotsopoulos, whose MFS Canadian Long Term Fixed Income Fund beat its domestic peers, returning 15 percent over three years to 2017. Bank of Canada Governor Stephen Poloz will seek to weaken the currency further in order to support the country’s exports, Kotsopoulos said.

Further adding to the country’s debt concerns, Canada’s most populous province, Ontario, plans to return to deficit financing after balancing its books for only the first time in a decade in 2017-18. The plan has already prompted a warning from Fitch Ratings that it could pressure the province’s ratings.

Part of the under-performance of Canadian stocks can be explained by the lack of innovative companies in the country’s main S&P/TSX Composite index, which is dominated by the energy sector, commodities companies and banks, the fund managers said.

Technology Dearth

“The lack of tech and health care has held back Canada,” said Conrad Dabiet, who manages the C$3.4 billion Manulife Dividend Income Fund that beat its peers in the three years ending in 2017 with a cumulative 33 percent return. “We need to make sure we can compete globally because a lot of these businesses are global in scale and if you miss out, you don’t participate in that profit gain.”

While Canada has long heralded its corporate tax advantage over the U.S., that’s also disappeared. Including state taxes, the U.S. rate has tumbled to about 26 from about 39 percent before Trump’s cuts, according to Jack Mintz, an economist at the University of Calgary and one of Canada’s top tax experts. That compares with about 27 percent in Canada, including provincial levels.

Opening Gambit

To be sure, Canada’s federal budget deficit at less than 1 percent of gross domestic product is in much better shape than the U.S. where the tax cuts will push it toward 5 percent of GDP in fiscal 2019, according National Bank of Canada. The loss of key people including Gary Cohn and Rex Tillerson who had acted as stabilizing forces in the White House have injected more volatility into markets of late.

But even Trump’s tough line on trade doesn’t unduly worry Blackstein at Dynamic Funds, a unit of Bank of Nova Scotia, who sees it as an opening gambit aimed at leveling the playing field for U.S. companies abroad.

“This is a business-focused president; it’s a business negotiation,” said Blackstein, whose global fund has about 38 percent of its assets in the U.S., according to data compiled by Bloomberg. “I know there’s a lot of hyperbole, I know there’s a lot of rhetoric, I know there’s some 3 a.m. tweets, but it’s not totally unhinged."

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