Investors - especially of bonds - in Canada could see an attractive buying opportunity emerge before October's referendum on Quebec's future, a number of market players said.
Recently, Canada's dollar and bond market took hits on news that Oct. 30 had been set for the vote. While a referendum had been expected, the announced date suddenly forced investors to consider the thorny issue.
A vote against sovereignty seems likely. "When it comes down to it, people will vote their wallets," said Michael Landry, president of Mackenzie Investment Management Inc., Boca Raton, Fla., whose firm manages three funds for the Canadian retirement market.
The actual question facing voters won't be a simple vote on independence. Instead, the softer question on the ballot will ask: "Do you agree that Quebec should become sovereign after having made a formal offer to Canada for a new economic and political partnership within the scope of the bill respecting the future of Quebec and the agreement signed on June 12, 1995. Yes or No?"
But even a decision to remain with Canada won't end debate over Quebec's future. That issue has surfaced for years as Quebec sought to accommodate its cultural, French-speaking identity within a largely English-speaking nation. Quebec's concerns won't disappear.
But a secession vote could have grim repercussions. On a broad economic level, it could prompt "a lot of money and businesses to leave," as has happened with separation scares in the past, said Martin Barnes, managing editor of Bank Credit Analyst, a publication of BCA Publications Ltd., Montreal. Moreover, he said it "would discourage investment in Montreal, which used to be (the financial) center before it lost ground to Toronto."
Quebec's independence also would create myriad specific problems and questions on everything from entitlement to a Canadian government pension to which currency Quebec would use. Monetary policy in Quebec would be thrown into disarray, especially if Quebec continued to use the Canadian dollar.
For bond investors, key issues would center on the amount of debt Quebec would have to shoulder - and especially the cost of servicing it; after all, if Quebec separated from Canada, "the spreads between Quebec's bonds and Canadian government bonds would widen," Mr. Barnes said.
As the referendum approaches, some investors are clearly concerned. In short order, Canada's previously strong dollar took a hit; and the fixed-income market softened - most visibly on the short end.
On Sept. 1, the three-month Canadian treasury bill at midday stood at 6.32%; by Sept. 15, it rose to 7.01% - although it narrowed again to 6.91% Sept. 18, said Tim O'Neill, chief economist with the Bank of Montreal in Toronto. Comparing the rates on 91-day commercial paper, the spread over the comparable U.S. level on Sept. 1 was 75 basis points; on Sept. 15, the spread was 129 basis points above the rate on comparable U.S. issues, said Mr. O'Neill. At midday Sept. 1, the Canadian dollar was trading at U.S.74.5 cents; at the same time Sept. 15, it had fallen to 73.2 cents.
Mr. O'Neill said such reactions were to be expected. "I still expect to see volatile markets for the next few weeks," he said Sept. 18. But if support for the "no" vote becomes more pronounced closer to the election, "we might begin to see not only (market) stabilization, but even an improvement in the Canadian dollar." A "no" vote also should fortify the bond market. Mr. O'Neill predicts that after the election the market "should be back on track" as it heads toward lower interest rates.
Quite a few money managers see current conditions creating a buying opportunity - if they haven't already. On the bond side, Scott Lamont, a vice president with Phillips, Hager & North Investment Management Ltd., Vancouver, British Columbia, believes Quebec's political imbroglio has "largely been priced into the bond market already." Further weakness spurred by Quebec would be a buying opportunity, he believes.
Because Phillips Hager likes the "reasonably solid" fundamentals of the bond market, the firm has been buying bonds for about the past six weeks. Target maturities were slightly longer than those of an unspecified benchmark, said Mr. Lamont.
MacKay-Shields, New York, remains a "tad" overweighted in Canadian bonds in its global and international bond portfolios, said Michael Perelstein, international investments director. Although the firm isn't making any moves in Canada now (and doesn't own Canadian stocks) it's "keeping (its) power dry" because "you could get some interesting buys there in the next month or so," said Mr. Perelstein.
Conversely, Julius Baer Investment Management Inc., New York, recently bailed out of Canadian bonds. The firm has no exposure to Canadian bonds vs. 6.5% for global bond portfolios and 4.9% for international bond portfolios at the end of August. Julius Baer felt other markets were looking more attractive after gains earlier in the year in Canada; Quebec's referendum was added incentive to sell, said Managing Director Jay A. Dirnberger.
For its part, Mackenzie Investment Management "is bullish on Canadian stocks and bonds," said Mr. Landry. "Canadian stocks are a play on an extended business cycle in the U.S.; and they also tend to do well in the second part of an economic expansion in the U.S.," he said. That's a good sign for Canadian shares, he feels. Although the Toronto stock market has significantly underperformed the New York Stock Exchange so far this year, "corporate profit growth in Canada next year and the year after should be higher than that projected in the U.S." He particularly likes Canadian resources companies like INCO Ltd. and Noranda Inc.
In August, the firm raised its Canadian weighting in the Universal World Equity RRSP Fund to 8% from 4%. Its Ivy Global Fund now has only about 3% in Canada; but the firm expects to boost that by another one to two percentage points before the Quebec vote.
Altamira Management Ltd., Toronto, has "a little cash standing by to take advantage of declines leading up to the Quebec vote," said Ian Joseph, vice president. If history is any guide, he feels the upcoming referendum should present a stock buying opportunity. If so, his firm would be shopping in the resources area, seeking stocks of companies in mining, forest products, gold and oil, said Mr. Joseph.
Scotland's Edinburgh Fund Managers has a small exposure to Canadian equities; and the firm isn't altering that now. Fund manager Christian Albuisson believes the economic outlook for Canada is improving. But he expects many investors will stay away from the market until after the referendum.
Mr. Albuisson foresees a "no" vote winning by a small margin in Quebec. But that outcome wouldn't end the issue of Quebec's sovereignty.
"The election's result may bring temporary relief to the markets," he said. "But sooner or later, the issue will rear its head again because of the nature of the problem." People are worried about "the distinct culture in Quebec and its long-term future."
