We gave a series of lectures to finance students at Appalachian State University last fall which focused on applying a macroeconomic framework to security analysis. After a few sessions reviewing various leading indicators of the economy and the implications for portfolio construction, we concluded with a brief case study. The presentation below was the conclusion of our work with ASU where we summarized our bullish stance on Canada and our related thesis for our largest individual equity position at the time. Thanks to David Rosenberg at Gluskin Sheff who obviously provided us with much of the visual ammo for our discussion points.
The constructive view we then expressed on our northern neighbor remains strong today as Canada’s vast supply of natural resources is the primary driver of this long-term secular trend. Factors that are unlikely to change anytime soon. Don Coxe recently highlighted several pillars of our bullish thesis in this month’s issue of Basic Points:
- The TSX Index is more attractive than the S&P because more than half its weight is in sound banks, and oil, gas, and mining stocks.
- The Canadian economy is currently more attractive than the US economy because of (1) its sound banking and financial system, (2) its commodity orientation, (3) its public debt/GDP ratio is lower than the US, (4) its current fiscal deficit/GDP ratio, which is far lower than the US, and (5) because the politicians of Ottawa who share the Pelosi-Frank-Emmanuel-Obama ambitions to play an ever-increasing role in the direction of the economy are in the Opposition – not in control.
- Canada has the largest reserves of fresh water in the hemisphere, excellent ports on both seacoasts, the largest oil reserves outside Saudi Arabia, and a somewhat better K-12 public education system than the U.S.
- Canada’s national retirement program, the Canada Pension Plan, is not, like Social Security, backed by book entries in the national debt, but by a professionally-managed fund that invests globally, virtually free of political influence. It is – by far – the best-funded social pension system in the G-7 and, is somewhat comparable to Chile’s and Norway’s.
Importantly, China continues to actively seek investments in companies with valuable reserves. While the US turned down the 2005 Chinese bid for Unocal, the Canadian government has its own long term relationship with China, resulting in several recent successful acquisitions in Canada. In addition to immense proven energy reserves, Canada is the world’s largest producer of zinc and uranium, and also a major producer of other base metals, gold, and grains. In other words, Canada has what “The Client” needs.
In the presentation below, we featured Teck Resources, as one way to gain exposure to the trends described above. TCK is traded on the NYSE, has an exceptionally low political profile, and has already received attention from Chinese buyers. Domestic investors can also participate in Canada’s secular bull market driven by China’s voracious appetite for raw materials through low-cost, liquid Exchange Traded Funds – Currency Shares Canadian Dollar Trust (FXC), Canada iShares (EWC) and Claymore/SWM Canadian Energy Income Index EFT (ENY).
Disclosure: At the time of publication, the author was long Teck Resources, Currency Shares Canadian Dollar Trust, and Canada iShares, although positions may change at any time.