MONEY MATTERS: Canada - a notable neighbor, and investment

By Mitchell Thomas

The Daily Record Newswire

Several years ago, we would look at our bordering neighbor Canada as an extension of the United States both economically and culturally. U.S. corporations situated manufacturing facilities within the Canadian border cities. Never taken seriously beyond their natural resource influence, we fondly and arrogantly considered them as the second class of North America. Not so.

They are our closest trade partners for energy needs and we rely upon them as allies during international military conflicts. Relations have been amicable and rarely do conflicts arise as our economy impacts their GDP dramatically.

In the previous half dozen years Canada has displayed its mettle in avoiding the subprime debt crisis we created and has flourished, surpassing our own GDP growth. The student is instructing the teacher. Canada has gained the global respect from the G7 economic group. They were the first to raise their interest rates to curb inflation and respond to domestic growth.

Canada is in their second phase of recovery from the 2008 global slowdown. Natural resources comprise approximately 40 percent of their economic sector. The global exporting demands for oil, natural gas, mining and chemicals have given an impetus to their economy. This has filtered down to job creation and wage growth that has breached prior pre-crisis levels.

Canada's economy is well positioned for a recovery as households have saved more and took on less debt than U.S. households. Indeed, prior to recovery, the household savings rate in Canada was over 6 percent as a percent of disposable income. Subprime mortgage debt comprised less than 5 percent of outstanding mortgages, alleviating downside risk to their real estate market. Further, a significant factor that has immunized Canada from a strained recovery was that their public sector debt is only 35 percent of their GDP.

Presently, Canada faces certain headwinds that come with a resurging economic growth process. There has been an escalating concern of a housing bubble developing in several major cities. The diversifying of individual wealth from several Asian countries has been augmenting capital into the Canadian real estate market. This has elevated prices dramatically, shutting out homeownership for Canadian citizens.

The low interest rate environment in Canada is coordinated with the U.S. interest rate scenario. This has enticed total household debt to elevate significantly; however, the maintenance of this debt service is manageable because of lower rates. The dilemma occurs if general rates begin to rise rapidly without a collar on an individual's mortgage loan and devaluation in property values. This would have an adverse effect on household wealth. Sound familiar?

The U.S. is going through a modest economic growth pattern with anemic job growth along with risk aversion by the banking sector. The housing market has not reversed its declining trend in prices and pending foreclosures are in abundance. Credit is not forthcoming to small and mid-size companies restraining growth and progress. We are also facing a gridlock in our political process, hindering the necessary action to address economic issues. This has an unfavorable consequence to Canada because of our economic ties.

The Chinese economy is being monitored closely by Canadian economists. Their global demand for natural resources is insatiable. However, if they go through a deceleration beyond expectations this demand will adversely affect commodity prices, deteriorating Canadian GDP growth significantly. The European crisis is also instrumental in this formula because China exports 40 percent to this region.

Canada has been astute in creating growth and monitoring asset bubbles. They avoided the tempting easy money path the U.S. took during the last decade and have been rewarded with a global status of a leading economic nation. I believe that an economy never has an upward trajectory without some interruptions along the way. Canada navigated through the storms and has learned from past economic errors and the recent setbacks from their neighbors. Canada remains a solid alternative for future investments.


Mitchell Thomas is an international equity analyst/portfolio manager/head trader for Karpus Investment Management, an independent, registered investment advisor that manages assets for individuals, corporations and trustees. Offices are located at 183 Sully's Trail, Pittsford, N.Y. 14534, (585) 586-4680.

Published: Thu, Feb 23, 2012


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