Canada: Better Demographics than Many of Its Peers

Today we highlight the demographic landscape of Canada, which looks in better shape demographically than many of its developed economic partners. The country has been battling against the strong headwinds of a downturn in consumer expenditures that started in 1999 (Peak births in 1959 plus 40 years). However, this is set to turn up in 2013 and remain positive until 2031.

For the last ten years the Canadian economy has benefited from, and is expected to continue to benefit from, the global commodity demand in the energy, materials and agriculture sectors. This, combined with a strong banking system, following it's restructuring from its "bust" in the early 1990s, places it in a strong economic position going forward.

The iShares MSCI Canada index ETF (EWC) has been a strong performer since the March 2009 lows. It has returned 78.5 percent versus the S&P Global Index ETF (IOO) return of 59.8 percent. This outperformance has been driven by the Index's overweight position in the top performing sectors since the March lows: Financials, with a 36 percent weighting; and Materials, with 18 percent. This has made up for the underperformance of the ETFs second largest sector, Energy, with a 26 percent weighting. The iShares Canadian Small Cap fund (Canadian listed ETF: XCS) is up 54.3 percent and has underperformed the large cap index because of its lower weighting in financials, 14 percent versus the 36 percent weighting in the EWC.

Both Canadian ETFs need a period of consolidation after such a strong run, and we would favor buying opportunities in the IShares Canadian Small Cap fund over the next two to three months.

Economic Background

Third in Forbes 2009 Best Countries for Business:

As an affluent, high-tech industrial society in the trillion-dollar class, Canada resembles the US in its market-oriented economic system, pattern of production, and affluent living standards. Since World War II, the impressive growth of the manufacturing, mining, and service sectors has transformed the nation from a largely rural economy into one primarily industrial and urban. The 1989 US-Canada Free Trade Agreement (FTA) and the 1994 North American Free Trade Agreement (NAFTA) (which includes Mexico) touched off a dramatic increase in trade and economic integration with the US, its principle trading partner. Canada enjoys a substantial trade surplus with the US, which absorbs nearly 80% of Canadian exports each year.

Canada is the US's largest foreign supplier of energy, including oil, gas, uranium, and electric power. Given its great natural resources, skilled labor force, and modern capital plant, Canada has enjoyed solid economic growth, and prudent fiscal management has produced consecutive balanced budgets from 1997 to 2007. In 2008, growth slowed sharply as a result of the global economic downturn, US housing slump, plunging US car sales, and drop in world commodity prices. Public finances, too, are set to deteriorate for the first time in a decade. Tight global credit conditions have further restrained business and housing investment, despite the conservative lending practices and strong capitalization that made Canada's major banks among the strongest in the world.

Demographic Landscape

Canadian Population

2009 Population: 33,460,900

2025 Estimated Population: 37,911,800 (Growth 13.3%)

Canadian Generations

Generation X–1965 to 1984: 7,358,156

Generation Y–1985 to 2004: 7,289,816 (Decline 1%)

Generation Z–2005 to 2024 (Est.): 7,362,000 (Growth 1%)

Generation Blend–2025 to 2044 (Est.): 7,773,000 (Growth 5%)

Population over 65

Next year 14.3 percent of the Canada population will be over 65 years of age, and this is set to rise to 25.2 percent by 2044. In comparison Japan, with the highest 65-years and older ratio in the developed world, is 22.5 percent rising to 36.4 percent by 2044.

Canadian birth numbers peaked in 1959 at 479,275, versus a 2010 estimate of 375,000 (a fall of 21.8 percent). The number of children per women has fallen from 3.2 in 1965 to 1.6, and is forecast to remain static at 1.8 until 2044.


2025 Canada Population Pyramid

Source: UN 2007 and Insitut National d'Etudes Demographiques

The iShares MSCI Canada Index Fund (EWC) relative to the S&P Global ETF (IOO)

Index/Sector	Canada	S&P Global	Diff.
Financials	36.4	18.2	18.2
Energy	25.7	14.7	11.0
Consumer Staples	2.9	13.8	-10.9
Technology	4.6	13.4	-8.8
Healthcare	0.2	12.0	-11.8
Consumer Discretionary	3.1	7.3	-4.2
Industrials	5.4	7.4	-2.0
Materials	17.7	5.1	12.6
Telecoms	2.9	5.0	-2.1
Utilities	1.1	3.1	-2.0

Comments

[bob adamson:]

Beacon Asset Managers have given rather a scatter gun description of Canada’s economic prospects. On the question of demographics (which is prominent in the title of their comments but is undeveloped in the comments themselves), Canada falls between Western European low growth and the US moderate growth pattern. One plus, is the diversity of origins of Canada’s people and the relative success of Canada in bringing this diversity together in reasonable harmony.

Turning to other factors, Canada enjoys a number of important advantages at present but, from a mid term perspective, there are limitations on how much it will benefit from those advantages.

First the advantages. As Beacon Asset Managers have noted, Canada is a big and stable (both economically and politically) country with lots of primary resources for which it has the infrastructure and access to both markets and financing to develop. Its economy is also much more developed and diversified than is commonly assumed.

During relatively good (compared to today’s anyway) global economic times in the 1990s Canada went through tough streamlining of national and provincial fiscal and monetary policies and social programs; think restraint on bank expansion and amalgamation, sound bank regulation, public pension reform, balanced federal and provincial budgets, universal health care provision cost containment etc. When the global real estate, secularized debt and derivative bubble began to burst in 2007, Canada therefore was affected less and was better able to respond internally. Thus it has come through the collapse of the bubble (2007-8), the resulting banking panic (July 2008 to March 2009) and the resulting credit crunch and ensuing deepening recession (November 2008 to July 2009) quite well compared with the other major economies. As evidence of this, the national unemployment rate is now significantly lower than that in the US and it is falling, residential and commercial property markets are stable and beginning to expand, commercial and consumer credit is reasonably available and, while government surpluses of the past decade have ended, current annual deficits are moderate.

Now the limitations. While Canada’s internal economy and fiscal situation at present rivals the best in the world, Canada depends to a much greater degree than most advanced economies on a healthy international trade environment and the pace of Canada’s economy will slow dramatically if the current recession and the attendant growth in protectionism continue for an extended time. The fact that Canada’s population is only about 11% of that of the US and its economy is so integrated with that of the US makes the pace of Canada’s growth limited by the health or otherwise of the US economy. Further, while resource extraction and some attendant processing is a bright spot looking forward, other sectors are contracting in the face of the appreciation of the Canadian dollar (around 40% increase relative to the US dollar over the past 4 years) and declining foreign markets. Given that many of the costs of production of Canadian companies (including primary producers) are measured in Canadian dollars while a large portion of the value of their output is measured in US dollars, one can see the profit squeeze many companies face.

In short, Canada will do reasonably well but its future economic success depends on the pace of the global recovery to a greater degree than the comments of Beacon Asset Managers suggest.

Sep 29 02:59 AM

[Larry House:]

I added EWC to the portfolio a few days ago. Seems as good bet as any.

Sep 29 02:52 PM

[tripleblack:]

I have made excellent returns since March from several Canadian investments, including PDS (which I still own a little of, though I cashed out most of that position). I particularly like their energy sector, including some of the trusts.

Sep 29 10:40 PM

[jse17:]

Perhaps Larry’s two sentence presentation of why one should invest in Canada is more than succinct enough! Think about the future “stability index” vs. their lumbering, flailing, and floundering neighbor.


On Sep 29 02:52 PM Larry House wrote:

> I added EWC to the portfolio a few days ago. Seems as good bet as
> any.

Oct 01 09:59 AM