The Oct. 30 vote to keep Quebec in Canada initially cheered Canadian stock investors, but many remain wary about both the province's and the country's political futures.
The next crucial moment could come as early as next week, after Lucien Bouchard, head of the Bloc Quebecois, reveals whether he will seek the premiership of Quebec or retire from politics.
Premier Jacques Parizeau announced his resignation the day after voters narrowly defeated a plan to make Quebec independent. Subsequently, Mr. Bouchard, who had been instrumental in firing up secessionist sentiment, and would be a clear favorite to replace Mr. Parizeau as premier, hinted he might quit politics.
If Mr. Bouchard decides to run, it's feared he might call for an early election in the province, and after that, another vote on sovereignty.
Thus, "markets are still nervous, and rightfully so," said John Johnston, deputy chief economist with the Royal Bank of Canada in Toronto. Although the "no vote was a relief, the question (about Quebec's future) is still open on the political front."
Among the thorny issues for investors: whether the federal government's need to assuage Quebec's concerns - in order to keep the province in the country - will interfere with needed cost-cutting and deficit-reduction plans.
Although Canadian federal and provincial governments now are trying to trim budget deficits, some "fear the government could ease the pace of cost-cutting" to please Quebec, said Mr. Johnston.
"The Parti Quebecois had argued strongly that Quebec wouldn't need spending cuts if it separated from Canada," he noted. "But if the federal government is cutting money for all provinces, Quebec will get hit. This (creates) a difficult position for the federal government."
Such concerns have given pause to the Canadian bond market. For example, at midweek last week 30-year Canadian bond yields were about 172 basis points above their U.S. counterparts. Just before the referendum, the spread over U.S. long bonds was about 200 basis points.
Besides political concerns, huge, lingering government deficits continue to overhang the market. According to Mr. Johnston, combined federal and provincial debt is roughly 100% of Canada's gross domestic product, a level second only to Italy's in the Group of Seven nations.
Some bond managers have become more optimistic. John Braive, first vice president in the Toronto office of T.A.L. Investment Counsel, went to a more positive view immediately after Mr. Bouchard's Nov. 2 announcement that he might quit politics. T.A.L. moved to slightly longer durations on Canadian bond maturities. Although the firm generally had "stayed long on our (duration) benchmark through the referendum, some shortening had occurred in the two weeks before the vote," said Mr. Braive.
Bailard, Biehl & Kaiser, San Mateo, Calif., bought Canadian bonds immediately after the referendum, bringing the Canadian weighting in the firm's international bond portfolio to 8% from 5%, said Arthur Micheletti, chief economic and investment strategist.
But the move was just a brief foray: Bailard is likely to return the Canadian weighting to 5% if yield spreads on the 10-year government bonds narrow to 120 to 125 basis points over the U.S. counterpart, he said. "Because of the political situation in Quebec, a spread of 125 basis points in the 10-year issues represents fair value" for Canadian bonds, Mr. Micheletti said.
Given investors' continued uncertainty, Harry Marmer, principal with William M. Mercer Ltd., Toronto, suggests Canadian pension funds consider investing more heavily in non-Canadian bonds. Possibilities include issues of supranational agencies, such as the World Bank, or foreign-listed fixed-income derivatives.
If funds use those strategies, they would gain diversification and reduce risk without having the investments counted toward the 20% legal limit on non-Canadian investments.
"Canadian politics plays a powerful role in the pricing of Canadian fixed-income securities," Mr. Marmer said. "There is a need to diversify away from this huge political risk."
Compared with the bond market, equities performed better after the referendum. Between the market's recent intraday low point of 4280.03 Oct. 26, and its close Nov. 8, the Toronto Stock Exchange 300 index had gained about 6.9%. But the market still had not rebounded to its July 13 high of 4718.
Indeed, Toronto's ScotiaMcLeod Inc. had expected a stronger post-referendum rally. Right before the referendum, "we had said the TSE index would (bounce back to) 4600 the day after the vote," said Diane Urquhart, ScotiaMcLeod's managing director of equity research. But as of the close Nov. 8, that index stood at 4576.35.
Nonetheless, a bullish Ms. Urquhart expects the TSE 300 to reach 4700 by year end and 5300 by the end of 1996. As she explained: "57% of our market is in resource and export industries. And as long as there is global growth and demand for our (products and) resources around the world ...we should have strong (corporate) earnings growth."
Investors generally echo that theme. And once the referendum passed, some of them seized the opportunity to jump into the market.
Before Quebec's vote, the G.T. Canada Worldwide mutual fund (for Canadian investors) had a 30% cash position. (It also had another 20% invested outside of Canada). Two days after the vote, fund manager Derek Webb spent much of the cash buying new Canadian stock positions. By late that week, his cash position had shrunk to 5%.
He bought Biochem Pharma Inc., Canadian Imperial Bank of Commerce, Bank of Montreal, National Bank of Canada; Sherritt Inc. (a fertilizer company), Cameco Corp. (in mining), Extendicare, Intertape Polymer Group, Western Star Truck Holdings Ltd., Leitch Technologies and Alberta Energy Co. Ltd.
Assets of the Ivy Canada Fund, distributed by Mackenzie Investment Management, Boca Raton, Fla., jumped to $17 million Nov. 7 from $14 million Oct. 30. In part, the inflow seemed to signal relief at the vote's outcome. Conversely, before the referendum, Mackenzie's global funds for Canadian investors had been drawing in money at an above-average rate.
Leslie Ferris, a portfolio manager with Mackenzie, said before the referendum, worried Canadian investors were seeking to diversify abroad. But some concerns evidently faded after the vote. As a result, cash flows into Mackenzie's global funds returned to "more stable levels," she said.
Toronto-based AMI Partners is bullish on Canadian stocks. In a balanced fund, it is overweighted in Canadian equities by five percentage points. In the two weeks before the referendum, the fund did some modest stock buying, followed by some modest buying and selling after the vote.
Chief Investment Officer Normand Gregoire said he believed another referendum won't be coming for at least another three years.
Interestingly, about a week before Quebecers voted, fund-of-funds manager Diversified Fund Management Inc., Toronto, - a subsidiary of America's RCB International Inc. - surveyed managers about the impact of a vote for Quebec independence on markets and investment strategy.
Responses were hardly alarming. According to Managing Director Robert Mitchell, respondents widely predicted only minor adjustments to markets that they felt had discounted the issue already, and they expected only small changes to investment strategies.
