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It has been a crazy year for U.S. stocks, with the market surging higher into the spring, slumping badly in the summer and regaining some lost ground as the year came to a close. After all that swing, the S&P 500 stands right where it was last Christmas.
Our neighbors to the north have not been so lucky. The iShares MSCI Canada fund (NYSE: EWC), which owns a basket of that country’s largest companies, has slumped 15% in the past year. In fact, the fund is right back where it stood in February 2007. This flat performance is a bit curious when you take a deeper look at the Canadian economy, which in many respects, stands on much firmer footing than the U.S. economy. As such, Canadian stocks represent a great opportunity.
To be sure, the U.S. and Canadian economies are heavily interdependent. But recently, the Canadian economy has demonstrated resiliency even as the U.S. economy has sputtered. In the third quarter of 2011, the Canadian economy grew at twice the pace of the U.S. economy. This marks the sixth-straight quarter the Canadian economy has grown at a faster clip.
Looking beyond recent economic indicators, the Canadian economy stands on firmer footing by other key measures as well. Take a look at the stats in this table:
Canada consistently runs a trade surplus with the United States, invests more in math and science education, and has better health care (as measured by infant mortality and life expectancy). These are key determinants of the long-term health of an economy.
Now consider these facts:
• The United States has four times more arable land than Canada, yet has 27 times the amount of actual farmland in production. This means Canada has much more expansion potential in terms of future agricultural production. Recent persistent droughts in the U.S. southwest and a trend toward warming winters in Canada could push the amount of arable land in Canada closer to U.S. levels.
• The Canadian government’s total debt peaked at $563 billion in 1997 and has stayed below that level ever since. The U.S. government’s debt load has surged throughout the past decade and now stands at $15.1 trillion. So government debt, as percentage of gross domestic product, stands at around 100% in the United States, while this figure stands at just 32% in Canada.
• Canadian unemployment peaked at 8.7% in September 2009 and now stands at 7.4%, more than a percentage point below U.S. levels. This has a direct effect on government finances, as fewer people need social services support.
This isn’t to say that the United States in deep trouble. Indeed, I’ve written recently on several occasions that the U.S. economy still has tremendous long-term growth potential. But you can infer that Canada is better-positioned to withstand any possible speed bumps in 2012 related to the European crisis. Moreover, with a much smaller level of government debt, Canada is less exposed to a potential systemic shock in the event of bond-market shocks that boost government borrowing costs. Lastly, tackling the relative debt loads is likely to require much greater austerity in the United States than it is in Canada. So even as the upside for the U.S. and Canadian economies are similar, the downside scenarios are starkly different.
This is why an investment in Canada makes so much sense right now, especially since the iShares MSCI Canada fund has lagged the S&P 500 by about 15% this year. It presents an opportunity to buy a developed, yet still promising economy at a bargain price.
So what does the fund hold? Well, bank stocks predominate, as Royal Bank of Canada (NYSE: RY), Toronto Dominion Bank (NYSE: TD), Bank of Nova Scotia (NYSE: BNS) and Bank of Montreal (NYSE: BMO) are four of the top six holdings and account for roughly 18% of the fund. Canadian banks never loosened their lending standards back in the middle of the last decade and have come out of the recent financial crises virtually unscathed. Those banks are all moving to take market share in the United States while beleaguered U.S. rivals such as Bank of America (NYSE: BAC) retrench.
Commodity stocks such as Barrick Gold (NYSE: ABX), Suncor Energy (NYSE: SU), Potash Corp. (NYSE: POT) Goldcorp (NYSE: GG), and others make up about half of the fund. The rest of the fund is made up of key transportation and industrial firms.
Risks to Consider: The United States remains Canada’s biggest trading partner, so any deep economic distress south of Canada’s border will be felt — to an extent — in Canada as well.
Action to Take –> If countries were looked at as companies, then the United States is in need of a restructuring, while Canada looks set to benefit from prudent management choices. Sound government finances, a healthier and more employed workforce, and a vast trove of commodity resources make Canada an appealing long-term investment. If you’re looking for a stable place to diversify your investment dollars in 2012, you’ll find few better options than the MSCI Canada fund.
– David StermanSource: StreetAuthority
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