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Canada's Hard-Won Virtue
02/25/2010 9:30 am EST
Gordon Pape, editor of The Canada Report, ties his country's success to financial prudence—and its mineral riches, of course.
Q. Canada has modest growth and a modest deficit, an unemployment rate of 8.3% and homes selling for 70% more than in the US. What's your secret?
A. We were lucky never to have built a big manufacturing base. The impact on the Canadian economy of manufacturing job losses is a lot less than on the US economy. Commodities have come on very strongly: Canada, like Australia, is extremely well positioned to take advantage of that. So, we just happened to be in the right place at the right time, I guess.
Canada faced a very serious deficit crisis in the 1990s. This created a national crisis of confidence and a national consensus that something had to be done. As a result, Canadians, who've always been more willing to accept higher taxes if they perceived a need for higher taxes, went through several years of austerity—cutbacks on spending, higher taxes, and so on—[and] eliminated the deficit entirely.
And we've had 11 years of surpluses until this year, when the government, like others around the world, went into deficit for stimulus spending.
Q. And the higher taxes didn't destroy jobs or devastate the economy?
A. No, quite the contrary. The fact that the country was brought back to financial respectability had the effect of attracting foreign capital.
Q. And why are your homes so much nicer than ours?
A. Canada has always had much tighter lending policies—in fact, right now there is discussion under way to tighten these up even more, because we don't want a housing bubble in Canada. When the credit crunch and the subprime mortgage crisis hit, Canada was not anywhere near as vulnerable, because we didn't have anything like the same percentage of subprime mortgages. So the housing market never took that kind of a hit, but of course interest rates dropped dramatically as they did around the world. That's increased affordability and stimulated a lot of buying.
Q. Isn't Canada still tied to the US economy?
A. Despite NAFTA, the Buy American policy has certainly hurt. So, Canada's been very actively stepping up its efforts to increase its trade with India and China and trying to negotiate a free trade agreement with Europe. The US will always be our top trading partner, but we've got to diversify to a greater degree than in the past.
Q. You've recently written that the Canadian market is likely to remain stuck in a trading range until there is clarity on the direction of interest rates and corporate profits.
A. And also until it's clear that the world economy is really starting to pick up. A lot of our valuations are based on what's happening to commodity prices. For example, if the price of oil gets back up to $90, it's going to be a huge boost for our energy producers.
Q. Canada seems to have weathered the correction from the commodity peak in 2007 really well.
A. We've suffered. Our unemployment rate has gone up, we did go into a technical recession. But the country was in a sound financial position, our banks are sound, and are now being held up as a beacon to the rest of the world for their financial stability—no bank bailouts, no bank failures, nothing like that. The underlying structure of the economy was perhaps in better shape than that of the United States and therefore we were better positioned to weather the storm with minimal damage.
Q. But you're still cautious on the market?
A. I always counsel readers of our newsletters to err on the side of caution, [but] when there are big pullbacks in commodities such as we have now, then perhaps you should gradually start adding to those positions.
Q. What else looks like a relative bargain in the Canadian market?
A. Some of the income trusts look pretty good. The new trust tax comes in 2011, so this is really the last year for income trusts. Many people don't realize that trusts actually went up 30% as a group last year. We see some excellent opportunities, because we've identified several trusts that are going to be able to maintain their distributions after they convert to corporations, and yet have very attractive yields—in some cases, 8%, 9%, 10%.
Q. What are some of your favorite stocks?
A. We like the banks, especially TD Bank (NYSE: TD) and Bank of Montreal (NYSE: BMO). Their profits are improving; their capital base, which was never weak, is stronger now than ever. They aren't raising their dividends at this point, but we expect that over the next 12 months we are going to start seeing the dividend increases.
Q. What else looks good?
A. We like Suncor (NYSE: SU) as an excellent oil sands play. Some of the natural gas producers look pretty good. We don't expect any big increases in the price of natural gas, but these are very efficient producers, like EnCana (NYSE: ECA).
I like Research in Motion (Nasdaq: RIMM). It was beaten down a lot over fears of competition from all kinds of new products coming on line, and people lost sight of the fact that the BlackBerry has moved beyond its traditional business market and has now become much more of a consumer product, adding greatly to the sales potential—recent numbers from RIMM were pretty good.
Q. What are the lessons for the US from Canada's experience?
A. Good government comes at a price, and the price is taxation. And if you're not willing to pay the bill, you're going to have ongoing crises in government which are only going to get worse. And who know where that ends?
Q. Thank you.
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