Australia vs. Canada: Household Saving Ratio and Household Debt-to-Income Ratio

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Households in Australia and Canada are carrying high-levels of debt in recent years. In both the countries mortgage is a major driver of household debt as prices of houses have skyrocketed. Overall the debt-to-income ratio for households has been rising in both the countries as shown in the chart below:

Click to enlarge

The household saving rate declined continousely since the 1980s until 2004. However they have reversed direction and has been on an upward trend in the past few years. The saving rate in Australia is much higher than in Canada

Source: Philip Lowe: Australia and Canada – shared experiences a speech by Mr Philip Lowe, Governor of the Reserve Bank of Australia, BIS

Hat Tip: Matthew C. Klein at Alphaville

Emerging vs. Devloped Markets 12-Month Foward EPS Growth: Chart

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Emerging equity markets have performed well so far this year. After a few years of disappointing average to poor returns emerging stocks are projected to have good growth potential this year. For example, commodities such as copper prices are rising due to rising demand.

Some of the emerging markets’ year-to-date returns are listed below:

China’s Shanghai Composite: 4.8%
India’s Bombay Sensex: 8.0%
Brzail’s Sao Paulo Bovespa: 14.7%
Russia’s RTS Index: 0.8%
Chile’s Santiago IPSA: 5.0%
Mexico’s IPC All-Share: 4.3%

Source: WSJ

In an article published last week, Stephen H. Dover of Franklin Templeton Investments is also bullish on emerging equities. From the article:

Despite some uncertainties, we see opportunity in emerging markets in 2017 and are optimistic many investors will see value in making greater allocations to them. GDP growth is expected to outpace that of developed markets, with the International Monetary Fund projecting growth of 4.5% in emerging and developing economies versus 1.9% in developed markets this year.8 We see evidence that earnings growth in emerging markets could likely be higher than in developed markets, too. Emerging markets have been lagging in regard to earnings growth, but 2016 marked the first time in more than five years they outperformed developed markets. We think there’s still quite a bit of room for emerging markets to further catch-up.

8. Source: International Monetary Fund World Economic Outlook, January 2017 update. There is no assurance that any estimate, forecast or projection will be realized.

Source: An Emerging-Market Evolution, Franklin Templeton Investments

From an investment perspective, not all emerging markets are out of the woods yet. However many attractive opportunities can still be found in some markets such as Chile, Brazil, Mexico, etc.

Should Investors Avoid Canadian Banks Now?

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Canadian bank stocks are a favorite for many domestic and foreign investors for many reasons. For example, they offer solid stable growth, pay decent consistent and dividends, etc. During the global financial most of the Canadian banks were largely unscathed. However despite the many positive factors investors need to be cautious of Canadian banks according to an article by McLean&Partners. Some of the reasons discussed by them are:

  1. “Tighter restrictions on mortgage lending: With the new qualification process, mortgages will be approved based on a higher posted rate. This means the maximum allowed mortgage for every level of income will decline by roughly 20%.
  2. Pending regulation on risk sharing of mortgages with CMHC: Mortgages insured by CMHC were considered risk free. If loans were to default, CMHC would cover it. The risk sharing regulation will require banks to share the risk of mortgages with CMHC, which will result in the banks allocating more capital against them.
  3. High debt to disposable income of Canadians: The current debt-to-disposable income for Canadians is 168%. The financial crisis in the US started when this ratio was 135%. Though there are hardly any similarities, eventually borrowers’ capacity to borrow will be curtailed, leading to substantially slower loan growth.
  4. IFSR9 will create provision volatility: An accounting regulation will require banks to provide or release provisions against loan losses faster, creating higher earnings volatility.
  5. High current valuations of bank stocks: We consider the banks to be expensive as they are currently trading at a 10-year high (Figure 4).”

 

Source: Caution on Owning Canadian Banks, McLean&Partners

Banks account for about one fourth of the S&P/TSX Composite index and the banks have under-performed the index only twice in recent years – once in 2007 and once in 2010.

Though all the points noted above are valid, investors need not avoid Canadian bank stocks.The benefits of owing them for the long-term far outweigh the short-term concerns. U.S. investors especially cannot go wrong owing banks from north of the border.

The bog five banks trading on the US exchanges are listed below with their current dividend yields:

1.Company: Bank of Nova Scotia (BNS)
Current Dividend Yield: 3.51%

2.Company: Bank of Montreal (BMO)
Current Dividend Yield: 3.46%

3.Company: Canadian Imperial Bank of Commerce (CM)
Current Dividend Yield: 4.12%

4.Company: Royal Bank of Canada (RY)
Current Dividend Yield: 3.34%

5.Company: Toronto-Dominion Bank (TD)
Current Dividend Yield: 3.13%

Note: Dividend yields noted above are as of Feb 17, 2017. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: Long BNS, BMO, CM, RY and TD