Gordon Pape, editor of The Canada Report, explains why Canada's stock market has been outperforming that of the US.

MoneyShow.com What is going on in the Canadian stock market these days?

Gordon Pape:  Well, actually a lot. Of course, like the US market, we had a huge rebound after the market meltdown from the lows of 2009, and now we have retraced a lot of that. The Canadian market overall last year gained about 37% so we had a very, very good year.

I'm looking for the Canadian market to produce a gain this year, [but] we are going to slow down.  Obviously the momentum that the markets built up in the second half of 2009 is not going to be sustained. It just could not be. 

But I would say the Canadian markets this year will probably see a nice double-digit gain-say, in the 10% to 15% range, led probably by such sectors as energy. One of the things I think is interesting [is that] the TSX Composite Index has outperformed the Standard & Poor's 500 every year for the past five years.

Q:  And that is because of strong banking and energy and all that?
A Well of course, Canadian banks are the soundest in the world and none of our banks failed, none of them needed government bailouts. When everybody discovered that hey, these banks are pretty good, they came roaring back. 

The energy sector again, of course, took a hit when the price of oil dropped from $147 all the way down to $33 at one point. Now we are back up in the $80 range and of course the energy stocks are coming back as well. So those are the two main components of the Canadian market and if they are doing well then the Canadian market is doing well. 

Q Yeah but [in] Canada I think, the economy is 70% dependent on exports to the US?
A Our export market is dependent on exports to the US, not the economy itself.

But 70% of our exports would certainly go to the United States and obviously if the US is slow in the recovery, that is going to hurt us. 

On the other hand, we are aggressively going after other markets. We are doing a lot of prospecting in India. We are repairing our relations with China. We had some difficulty with the Chinese government because our prime minister, Mr. Harper, has been very strong on human rights and they have not been very happy about that. 

But the relations between the two countries are starting to thaw a bit and I think we are going to see more trade going into China. Research in Motion (Nasdaq: RIMM), which of course produces the Blackberry and is a Canadian company, has just opened up a window into China. It is going to be distributing its products there. So we are seeking markets all around the world.

Q So, do you expect the Canadian market to continue to outperform the S&P?
A:  I certainly expect it to continue to outperform the S&P this year. I think only a fool is going to try to look beyond that into 2011 and 2012. You know, it all very much depends on the policies that are implemented in Washington and the degree of confidence that American investors have in the ability of the US market to recover. Canada is pretty confident right now. We came out of the recession in reasonably good shape, and so certainly I think this year you are going to see the Canadian market do better. 

Q: Thank you.