Investing in Canada: Outperforming Economy, Strong Resources

Includes: ABX, CLR, CNI, EWC, MOS, POT, RY, SU, TD
by: Dr. Stephen Leeb

Being rich in resources gives a nation an incredible economic advantage in today's world, where rising demand is starting to bang its head against production limits. A good example of this is our neighbor to the north, Canada.

I'm dating myself a little, but I confess the last time I visited Canada I was able to buy one and a half Canadian dollars for every U.S. dollar. Today, a US dollar is worth less than $0.98 Canadian. That's a 30% drop in the U.S. currency, or a 50% gain for the loonie.

Currency exchange rates move according to how favorably international investors view individual economies. So let's take a closer look at the differences between Canada and the U.S. to see what the makes the Great White North so appealing.

Last week, the latest figures on consumer sentiment showed that U.S. consumers are feeling as pessimistic now as they were in early 2009 – which was one of the lowest points in history. So nearly two years after the recession ended and several months after the Fed introduced the second stage of quantitative easing (QE2), the average American sees no reason to look up.

Also just out are the figures on personal incomes. Although they are up a little, after you subtract the rising costs for food and energy, the gain seems rather small. If you exclude government transfer payments, real incomes have actually fallen over the past two years.

In addition, we have every reason to believe food and energy prices will continue to climb faster than incomes. Sure, resource prices are volatile and will correct periodically, but the long-term trend is clear. So all the data points to a U.S. economy that is anything but vibrant.

By comparison, Canada seems to be doing much better than the U.S. Consumer confidence in Canada, though less than in 2007, has rebounded considerably since the recession. At 7.8%, Canada's unemployment rate is also lower than that of the U.S.

Canada also benefits from being a major exporter of critical raw materials – second only to China, in fact. It has replaced Saudi Arabia as the nation which the U.S. imports more oil from than any other.

As for government debt, Canada's deficit is a mere $55.6 billion, and the government expects it will fall to $30 billion in the next year. And that's with a corporate tax rate less than 17%. By contrast, the U.S. adds $50 billion to its deficit every month.

In fact, nothing shows how well the Canadian economy is doing more than the fact that it's not nearly the political issue it is in the U.S. Clearly, whoever wins the next U.S. Presidential election will be the person who Americans believe can fix the economy. That's the one issue foremost on everyone's minds and it's the biggest thorn in President’s Obama's side today.

By contrast, Canadian Prime Minister Stephen Harper will be forced to fight for re-election this spring for reasons completely unrelated to the economy. (Unlike U.S. Presidents, who are generally hard to impeach, Canadian Prime Ministers can be forced out of office before their 5-year term is up if they lose the support of the majority of the elected Members of Parliament. Mr. Harper's government lost a non-confidence vote last week that held it in contempt for withholding too much information on spending from the other MPs. So an election will be held that could result in a new Prime Minister taking office.) Most of the criticism Mr. Harper has received from the other parties has to do with various scandals and his autocratic style of leadership. Far from being an Achilles' heel, the economy is the current government's strong suit.

By almost every measure, Canada's economy is outperforming that of the U.S., and we expect that difference to continue. Of course no trend is perfectly smooth, but the Canadian dollar looks likely to continue gaining ground.

With that in mind, you should consider diversifying into Canadian stocks. Being a resource economy, Canada will benefit from the global rise in commodity prices while the U.S. may suffer.


Let's begin with two companies that would be great investments no matter where in the world they were located: Potash Corp. of Saskatchewan (NYSE:POT) and Mosaic (NYSE:MOS).

No economy can run without food, the most essential human resource. And the world cannot raise food production to match the rising population (and the rising number of wealthier people in Asia) without fertilizer. Potash and Mosaic constitute a duopoly in the fertilizer business. Mosaic controls supplies of phosphate, an essential and rare chemical fertilizer which it mines from five sites in Florida. The company also owns three facilities in Canada that produce potash, another essential fertilizer. Meanwhile, the leading potash producer is the Potash Corp., headquartered in Saskatchewan, Canada.

These two companies have a stranglehold on the potash industry, yet you can buy their shares today for significantly less than in 2008. With global food prices rising, the long-term gains from these stocks could be tremendous.

As events of recent years have demonstrated, Canada has arguably the most solid financial industry in the world – one that experienced no bank failures during the crisis that gripped the U.S., the UK, and elsewhere. Two of the best Canadian financial giants are the Toronto-Dominion Bank (NYSE:TD) and the Royal Bank of Canada (NYSE:RY). Their balance sheets are impressive and they are leveraged to Canada's resource economy. Both banks have also made inroads into the U.S. – Toronto-Dominion especially. If you want a stake in the financial industry, either of these would make a good choice.

As for oil, the most critical resource, our favorite pick is Suncor (NYSE:SU), the leading developer of the Canadian tar sands – the leading source of non-conventional oil. (As you know, our favorite U.S. non-conventional oil producer is Continental Resources (NYSE:CLR), a leader in shale oil.) Both these companies have an advantage over non-conventional gas sources. Non-conventional gas is considerably cheaper than oil, and produces lower revenues. That makes it more costly to clean up the environmental damage caused by non-con gas production. All these companies are big polluters, but Suncor and Continental can afford the clean up costs and still turn healthy profits. Of the two, Suncor is the leader.

If you want to play it safe, you can get a diversified exposure to the Canadian economy through the iShares MSCI Canada Index ETF (NYSEARCA:EWC). In addition to the companies mentioned above, this ETF also gives you a stake in other Canadian stocks we like. One of these is Barrick Gold (NYSE:ABX), the world's largest gold producer and a sure beneficiary of rising precious metals prices. Another is Canadian National Railway (NYSE:CNI). Railways benefit from rising commodity demand because they are the cheapest way to transport raw materials around the continent. You'll recall that Warren Buffett bought Burlington Northern Santa Fe for this reason. CNI stock has already exceeded its 2008 high of around $60 and now trades at around $74. Its forward P/E is only 14, and the company should have no trouble seeing double-digit growth.

Overall, Canadian stocks give you both a play on an economy that is outperforming the U.S. and exposure to the most certain trend today – that of rising commodity prices. And that's a combo we can't ignore.