The Hunt Is On for Canada’s Next Central Bank Chief

By Ari Charney • April 30, 2013 • Canadian Edge Weekly

With about a month remaining in current Bank of Canada Governor Mark Carney’s tenure, it remains to be seen who will take the helm of the central bank. That news could be out as early as this week, though today had been Finance Minister Jim Flaherty’s self-imposed deadline for appointing Carney’s successor. Yesterday, Flaherty characterized the selection process as “drawing to a close,” while implying that the decision was unlikely to occur by the end of April.

The next central bank governor has considerable shoes to fill. Carney, who was appointed to the position in early 2008, is widely credited with helping Canada largely avoid the worst of the financial crisis that ravaged the global economy in 2008-09.

The former Goldman Sachs investment banker first joined the Bank of Canada in mid-2003 as a deputy governor, later serving in the Department of Finance as a deputy finance minister before returning to the bank in late 2007. Carney’s ascension to the top spot caught a number of economists by surprise, as Paul Jenkins, who was then the bank’s second in command, had been widely expected to win the appointment. At the time, Carney was one of the youngest central bank chiefs in the developed world.

Despite his relative inexperience, Carney made the prescient move to cut the bank’s overnight lending rate by 50 basis points, to 3.5 percent, just one month into his term, at a time when many other central banks were still in tightening mode. He lowered the rate another half point a little more than a month later, and over the course of the subsequent 12 months ultimately lowered the rate to 0.25 percent.

Once at that level, the bank made the announcement of a “conditional commitment” to hold that rate steady until the end of the second quarter of 2010. That along with other measures to boost short-term liquidity got the credit markets moving again, which restored confidence and enabled Canada’s economy to rebound the following year.

The Bank of Canada was the first of the G-7 nations to raise rates again once the financial crisis had subsided, and Carney has made hawkish pronouncements about the need to raise rates further. Nevertheless, the overnight rate currently stands at 1 percent, which is where it’s remained since September 2010, the longest pause since the 1950s.

More recently, the central bank chief teamed with the finance minister to dampen Canada’s housing market before it turned into a runaway bubble, while also bringing attention to unsustainable consumer debt levels. Carney’s success along with his pragmatic, non-ideological approach to policymaking has turned him into a rare star among his quieter central bank peers. That status earned him the appointment as governor of the Bank of England, the first non-Briton to hold the position.

The Shortlist

Meanwhile, investors and economists alike are attempting to handicap the race to succeed him at the Bank of Canada. The process typically begins when the Bank of Canada’s board of directors provides a shortlist of potential candidates to the finance minister, who then vets the recommendations. Once the prime minister’s cabinet arrives at a consensus, it approves the appointment.

Tiff Macklem, the bank’s senior deputy governor, is considered the current front-runner and has openly acknowledged he wants the job. Macklem worked closely with Flaherty during the financial crisis and helped engineer the government’s bailout of the auto sector. However, there’s speculation the government could select someone from outside the central bank.

And the fact that the process has taken longer than anticipated has added fuel to the rumors that a less-obvious choice could emerge as Carney’s successor. Additionally, some believe that Macklem’s favored status on Bay Street could compel Flaherty and Prime Minister Stephen Harper to look more closely at other candidates, to avoid the appearance of merely formalizing the preference of the investment community.

Macklem’s lack of private-sector experience and more cautious demeanor offer a contrast to the charismatic Carney, and some insiders wonder if that could undermine his efficacy as an advocate of the bank’s policymaking. Beyond that, both Carney and his predecessor David Dodge were essentially outsiders, and their success in the role certainly increases the chance that the government could opt for an outsider yet again.

The other names that have been bandied about as possibilities include Stephen Poloz, the CEO of the government’s Export Development Canada (EDC), Darrell Duffie, a professor of finance at Stanford University, Michael Evans, vice-chairman of Goldman Sachs, and Andrew Spence, a managing director at OMERS (Ontario Municipal Employees Retirement System).

If Macklem isn’t chosen, and at least one jumpy journalist has already tweeted that his sources tell him that Carney’s second in command has indeed been bypassed, then Poloz is the next most likely candidate. Poloz previously worked at the central bank for 14 years, then worked in the private sector for several years before joining the EDC in 1999 as its chief economist.

Regardless of who makes the cut, they’ll have a very short time to prepare for their new position. And if the government goes with an outsider, the financial markets may have to wait a bit longer to discern whether that means a significant departure from Carney’s approach to monetary policy.

The Roundup

Here’s where to find analysis of Canadian Edge Portfolio Holdings’ fourth-quarter and full-year 2012 earnings.

Conservative Holdings

Aggressive Holdings

And here’s when Portfolio Holdings will report numbers for the first quarter of 2013. Those that have revealed firm dates for announcements are noted as “confirmed,” while we provide an “estimate” for those yet to make specific commitments.

Conservative Holdings

  • AltaGas Ltd (TSX: ALA, OTC: ATGFF)–April 26 (estimate)
  • Artis REIT (TSX: AX-U, OTC: ARESF)–May 7 (confirmed)
  • Bird Construction Inc (TSX: BDT, OTC: BIRDF)–May 14 (estimate)
  • Brookfield Real Estate Services Inc (TSX: BRE, OTC: BREUF)–April 17 (estimate)
  • Brookfield Renewable Energy Partners LP (TSX: BEP-U, OTC: BRPFF)–June 7 (estimate)
  • Canadian Apartment Properties REIT (TSX: CAR, OTC: CDPYF)–May 9 (estimate)
  • Cineplex Inc (TSX: CGX, OTC: CPXGF)–May 10 (estimate)
  • Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF)–May 8 (estimate)
  • Dundee REIT (TSX: D-U, OTC: DRETF)–May 3 (estimate)
  • EnerCare Inc (TSX: ECI, OTC: CSUWF)–May 15 (estimate)
  • Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF)–May 14 (estimate)
  • Keyera Corp (TSX: KEY, OTC: KEYUF)–May 8 (estimate)
  • Northern Property REIT (TSX: NPR, OTC: NPRUF)–May 8 (confirmed)
  • Pembina Pipeline Corp (TSX: PPL, NYSE: PBA)–May 3 (estimate)
  • RioCan REIT (TSX: REI, OTC: RIOCF)–May 3 (estimate)
  • Shaw Communications Inc (TSX: SJR/A, NYSE: SJR)–April 12 (confirmed)
  • Student Transportation Inc (TSX: STB, NSDQ: STB)–May 9 (estimate)
  • TransForce Inc (TSX: TFI, OTC: TFIFF)–April 18 (confirmed)

Aggressive Holdings

  • Acadian Timber Corp (TSX: ADN OTC: ACAZF)–May 1 (estimate)
  • Ag Growth International Inc (TSX: AFN, OTC: AGGZF)–May 15 (confirmed)
  • ARC Resources Ltd (TSX: ARX, OTC: AETUF)–May 2 (estimate)
  • Atlantic Power Corp (TSX: ATP, NYSE: AT)–May 7 (estimate)
  • Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–May 9 (estimate)
  • Colabor Group Inc (TSX: GCL, OTC: COLFF)–May 2 (estimate)
  • Crescent Point Energy Corp (TSX: CPG, OTC: CSCTF)–May 10 (estimate)
  • Enerplus Corp (TSX: ERF, NYSE: ERF)–May 10 (estimate)
  • Extendicare Inc (TSX: EXE, OTC: EXETF)–May 8 (estimate)
  • IBI Group Inc (TSX: IBG, OTC: IBIBF)–May 10 (estimate)
  • Just Energy Group Inc (TSX: JE, NYSE: JE)–May 17 (estimate)
  • Newalta Corp (TSX: NAL, OTC: NWLTF)–May 8 (estimate)
  • Noranda Income Fund (TSX: NIF-U, OTC: NNDIF)–May 15 (estimate)
  • Parkland Fuel Corp (TSX: PKI, OTC: PKIUF)–May 8 (estimate)
  • PetroBakken Energy Ltd (TSX: PBN, OTC: PBKEF)–May 2 (estimate)
  • Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF)–May 9 (estimate)
  • Vermilion Energy Inc (TSX: VET, OTC: VEMTF)–May 3 (estimate)
  • Wajax Corp (TSX: WJX, OTC: WJXFF)–May 8 (estimate)

Stock Talk

Comments Guidelines
Robert Genander

Robert Genander

Is EXETF a buy, sell or hold?

Richard Stavros

Ari Charney

Dear Mr. Genander,

We’ll be analyzing Extendicare’s dividend cut and its effect on our rating in the Dividend Watch List section of our forthcoming May issue, which will be published this Friday, May 3. The Aggressive Holding has been on the Dividend Watch List since December due to concerns about how it would cope with US federal spending changes.

Management says the new level is “consistent with Extendicare’s philosophy of maintaining a conservative payout level and cited “continuing US economic weakness” for its decision. Cash saved from the dividend cut will be used to invest in business operations, provide financial flexibility and help the company adjust to a changing US health care landscape.

RBC Capital Markets cut its rating on the stock to “sector perform” from “outperform” and reduced its 12-month target price to CAD6.25 from CAD8.50. TD Securities maintained its “hold” rating but cut its 12-month target price to CAD6.50 from CAD8.

Management will report results for the first quarter of 2013 on May 9. In the meantime, however, the dividend cut suggests management will report continuing problems adjusting to the prevailing environment in the US. The company did cover the fourth-quarter payout—at the higher level—comfortably, which suggests the new rate should be sustainable.

We’d like to see financial and operating numbers before we adjust our advice, although our first impression is the selloff is a bit of an overreaction. If you’re still inclined to sell anyway, you should wait for what’s likely to be a better exit point once downside momentum abates.

Best regards,
Ari Charney

Investing Daily Service

Investing Daily Service

Hi Mr. Genander:

Extendicare is still a buy <8 in the Aggressive portfolio. Extendicare was most recently discussed in the March 1st Alert. The link is enclosed below.

http://www.canadianedge.com/canadian-edge/alerts/8412/3113-four-solid-reports-and-more-on-atlantic-power/#exe

Guest

Anonymous

This recommendation to buy Extendicare is still valid in light of Extendicare’s recent dividend cut from .07 to .04? Is Canadian Edge going to publish an Alert to discuss this?

Richard Stavros

Ari Charney

Hello,

We’ll be analyzing Extendicare’s dividend cut and its effect on our rating in the Dividend Watch List section of our forthcoming May issue, which will be published this Friday, May 3.

For our initial take on this action, please see our reply to Mr. Genander’s comment above.

Best regards,
Ari Charney

Robert Genander

Robert Genander

Colff, buy, sell or hold? Thanks, Bob G.

Robert Genander

Robert Genander

Colff, buy, sell or hold?

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