Some Compelling Arguments for Investing in Canada

“When I’m older, I want to travel around the world,” your editor’s 12-year old son, Ethan, declared recently.

“That’s a great idea!” his dad replied. “I think that would be a great experience, Ethan.”

“Yeah,” Ethan continued, “I think it would be really sick [i.e., cool] to live in different places all around the world.”

“Absolutely!” his dad agreed. “You could get one of those around-the-world tickets that all the major airlines sell…and then figure out where you’d want to go. The tickets are usually good for a year of travel.”

“That sounds fine, too,” Ethan replied. “But that’s not what I have in mind. I don’t want to travel around the world, I want to live around the world. I want this to be, like, my career.”

“A career world traveler?” his confused father asked. “How would that work, exactly?”

“Well I would just live in one place for a while, then move on to the next place. That would be sick to say, ‘Yeah, I used to live in Viet Nam, but now I live in Brazil.’”

“True,” his father agreed. “But how would you support yourself?”

“I would just get a job wherever I was living,” Ethan explained. “Then when I moved to a new country, I would get a job there.”

“Ummm…okay,” his father replied, “but that just means that you would probably live in poverty all around the world. Because in most cases, you’d only be able to earn the local minimum wage, which would not support a very appealing lifestyle. You might be better off earning money here in the States, then traveling for a while. You could do that over and over again, at least for a while.”

“No, that’s not what I’m talking about,” Ethan insisted. “I want to live around the world…as a career. I’ll figure it out.”

“Okay. Go for it, Eth.”

Usually, relocating to an overseas locale is the unintended result of a given career choice, not the objective. But Ethan’s plan turns the traditional relationship between cause and effect on its head.

Investors might want to consider a similar course of action…

Send your dollars overseas – not just for a visit, but as a long-term “career.”

For many American investors, foreign investments are more of an accident than an objective. They might own a few foreign stocks through a global mutual fund. Or they might have some exposure to foreign economies and currencies through the shares of an American multi-national corporation like Johnson & Johnson or GE.

But American stocks and bonds remain the steak and potatoes of traditional American investment portfolios. Foreign stocks and bonds are merely the spices and sauces. This economic provincialism – epitomized by the spectacular success of Warren Buffet’s Berkshire Hathaway – has served American investors very well for several decades. But a re-assessment may be in order.

For starters, even after the spectacular rally of the last two years, the S&P 500 Index has produced a negative total return during the last ten years. But the strongest reasons for looking overseas have nothing to do with the recent past…and everything to do with the imminent future. Simply stated, the America of the future may not reward investment as handsomely as the America of the past.

Therefore, US investors may want to consider shifting from a dollar-centric view of the world to a wealth-preservation-centric view. They may want to consider increasing their allocations to places that don’t use our currency, don’t use our alphabet and might not be able to distinguish between George Washington and George Clooney.

But one of the very best investment destinations of the moment is not very foreign at all. It’s right next-door in the friendly, mostly-English-speaking land we call Canada. (Oui, nous savons qu’ils parlent francais aussi!)

“In my three decades in the forecasting business,” writes David Rosenberg, the Chief Economist and Strategist at Canada’s Gluskin Sheff & Associates. “I don’t remember a time when the upside potential and downside risk to investing in Canada vis-à-vis the USA – from an economic, financial and political standpoint – was as compelling as it is today.”

Rosenberg cites a variety of striking contrasts between the two economies. In no particular order:

  • Canada is a net oil exporter; the US is the world’s largest oil importer.
  • Canadian employment growth is booming; US employment growth is moribund.
  • Canadian government finances are fairly solid; US government finances are spiraling out of control.
  • Canadian inflation is tame; US inflation is resurgent.

As a result of these trends, Canada is becoming an increasingly attractive investment destination, relative to the US.

“The Canadian economy remained very strong in the opening months of 2011,” Rosenberg writes. “It looks like the Canadian economy could outperform the US economy for the second quarter in a row… Canadian manufacturing shipments jumped 4.5% month-over-month in January, the best monthly showing in over a year and a half… Wholesale sales were also very strong, jumping 1.6% month-over-month on an inflation-adjusted basis… On top of this, the economy has created 84,000 jobs in total in January and February (adjusted for population, this would be equivalent to about 800,000 US jobs!).”

Meanwhile, south of the 49th parallel, employment growth remains disturbingly lackluster. “While companies, in the aggregate, are no longer shedding labor,” says Rosenberg, “there is no evidence that either job openings or new hirings are taking hold. The latest Job Opening and Labor Turnover Survey (JOLTS) data for January showed that US job openings dropped 161,000…and now stand at their lowest level since July 2009 when the economy was barely emerging from the worst recession since the 1930s. New hires also fell 193,000 and are now down in six of the past seven months – the lowest they have been since October 2009.”

Meanwhile, America’s national finances are going from bad to worse, as Democrats and Republicans alike, respond to trillion-dollar deficits by proposing billion-dollar spending cuts. By comparison, Canada’s finances are in tip-top shape.

“Canada stands out as being one of the few countries that is not only rated AAA by the major credit agencies but actually does have a AAA balance sheet,” Rosenberg points out. “[Accordingly], the Canadian dollar…has emerged as a safe-haven currency – like the Swiss franc but with a decent positive yield and exposure to raw materials… The Canadian dollar experienced no fewer than five intermittent pullbacks last year and yet still finished 2010 with a 5½% gain, not just against the USD, but versus a basket of non-dollar currencies too… The added fact that the loonie has so vastly outperformed its commodity counterparts such as the Aussie and the Kiwi attests to the view that the Canadian dollar story transcends the prices of crude, corn and copper.”

Not surprisingly, Rosenberg winds up, “foreign investors continue to love the Canadian story. The latest international transactions in securities data showed that foreigners added $13.3 billion of Canadian stocks and bonds in January, after adding nearly $120 billion in 2010. It is worth noting that the CAD hasn’t sold off on the latest round of global turbulence (like it used to in the past) and has remained above parity since late last year. In fact, in 2010, sell offs were short in duration and provided only brief windows of opportunity to accumulate positions.”

Rosenberg makes a compelling case for Canadian assets. Canadian stocks and bonds may not be the very best non-US investment destination, but they are probably very far from the worst…and they speak our language!

Eric Fry
for The Daily Reckoning