The Land Where All Is Well
06/28/2010 12:01 am EST
In a world wracked by debt and doubt, Canada’s enjoying good fortune of startling proportions, writes Roger Conrad in Canadian Edge.
Last month, Canada became the world’s first major country to raise interest rates coming out of the Great Global Financial Crash of 2008.
The Bank of Canada’s (BoC) increase in its benchmark lending rate from 0.25 to 0.50 percent was hardly dramatic. And banks’ follow-up boosts in the prime lending rate—Bank of Montreal (Toronto: BMO, NYSE: BMO) raised from 2.25 to 2.5%—still leaves borrowing costs near historic lows.
But the BoC’s move IS a compelling vote of confidence in Canada, particularly as investors fret about a European sovereign debt contagion plunging the world into a reprise of late 2008. And that has major bullish implications for the high-yielding equities we favor.
It’s not hard to see why the BoC is upbeat. This [month], Statistics Canada reported the country’s economy grew at a sizzling 6.1% rate in the first quarter of 2010. That was on top of 4.9% fourth-quarter growth—and far exceeded the 3% managed by the US economy.
In fact, Canada’s growth of the past two quarters was far faster than that of any other developed nation. Equally remarkable, it’s actually accelerated at the same time Ottawa has begun cutting back on stimulus.
Overall growth in government expenditure slowed to just 0.5% in the first quarter, down from increases of 1.6% and 1.7% in the third and fourth quarters of 2009. Government capital expenditure growth slowed to 1.1%, from an average of more than 4% over the past five quarters. The contrast with what’s happening in the US and Europe could scarcely be more stark.
What’s setting Canada apart? For one thing, it has an extremely sound financial system. Only half of the country’s mega-banks managed to top Bay Street’s lofty first-quarter earnings expectations. But all reported vastly strengthened capital ratios and profitability, as everything from investment banking to consumer services boomed. Corporate Canada remains reliably conservative and debt-light.
Then there’s the budding relationship with Asia, rooted in natural resource exports but increasingly extending to cross-border investment as well. In US recessions past, Canada practically sank into depression as its sole major export market contracted. This time around, as StatsCan noted in its April report, the recession was “shallow” and did not disrupt “the production and employment cycle.” That’s in large part because it had another major market that didn’t falter, namely developing Asia.
Most encouraging, Canada’s ongoing recovery has extended to almost every sector. Not only are natural resource exports booming, but there’s accelerating production in manufacturing, robust consumer spending, job creation and even a healthy real estate market. Both export and import volumes rose for a third consecutive quarter.
That’s a pretty strong suggestion that this resurgence has legs, and that there are going to be a lot of beneficiaries in corporate Canada.
Given the level of fear in the current market, it’s hardly surprising that few investors are really paying attention to this bullish story. The broad-based S&P/Toronto Stock Exchange Income Trust Index (SPRTCM) is still up for 2010, by 1.8% in US dollar terms and 1% in local currency.
That’s slightly better than the 1.5% loss in the S&P 500. But the SPRTCM is still more than a third off the high set in mid-2006 and briefly visited again in mid-2008. And even the most secure companies’ equities have repeatedly been subject to wild volatility, particularly during last month’s Flash Crash.
Clearly, Canada is still in that “everything else” camp, which is sold off in favor of US Treasury paper every time there’s a doubt about the health of the global economy. And with the “Four Horsemen” of BP’s (NYSE: BP) Gulf of Mexico oil spill, European debt crisis and rising regulation and taxes in the US still raising fears of a “Big W” recession, I fully expect those ups and downs to continue.
As I said repeatedly in late 2008, however, good businesses always recapture lost value in the market place. What happened in 2009 was a good start in restoring values of Canadian trusts and the high-yielding common stocks most are transitioning into. But there’s a lot more ahead for patient investors who buy good companies—without using self-destructive strategies like stop-losses—and waiting for the inevitable rally/recovery.
Yes, it’s hard to stick to your plan when the market seems to be running off the track on a daily basis and the talking heads are prophesying Armageddon. But buying and holding good businesses is the income investing strategy that stood the test of late 2008. And whatever today’s problems and worries, they’re still not in the same ballpark with the potential collapse of the US financial system, the threat we were most assuredly facing then.