Tuesday , 5 December 2023

Invest in Canada and Generate Emerging Market Returns – Without the Risks (+2K Views)

In this hostile financial climate, long-term investors must now give more thought than ever to capital preservation and sustainable growth… and Canada’s fortunes will surprise many. Its uniquely bifurcated economy can serve as a bridge from the developed to the developing world – at least for investors wise enough to cross it. Words: 776

So says Stephen Johnston*, Managing Director of Petrocapita Income Trust & Agcapita Farmland Investment Partnership. Below Lorimer Wilson, presents further reformatted and edited [..] excerpts from his article that appeared in http://www.europac.net for the sake of clarity and brevity to ensure a fast and easy read. (Please note that this paragraph must be included in any article reposting to avoid copyright infringement.) Johnson goes on to say:

It is not a profound observation that growth is not sustainable if it is driven by debt-fueled consumption. Sound fundamentals for growth include:
1. Favorable demographics;
2. Low national debt levels;
3. High savings rates; and
4. Persistent trade surpluses.

Many emerging economies have all of these characteristics, while the so-called ‘developed’ economies have virtually none of them. Take Canada as an example. It can be argued that Canada suffers from many of the problems of the typical developed nation, though to a lesser degree than its G8 brethren.

Canada is the best of the worst, so to speak. Still, it has familiar developed-economy problems, including:
1. Aging population, with unfunded liabilities for social benefits;
2. High debt-to-GDP levels;
3. Low savings rates;
4. Increasing government regulation and intervention in the economy;
5. Large fiscal deficits; and
6. An overly accommodative monetary authority.

The above raises the question: why should investors emphasize investments in developed economies such as Canada over emerging economies? The fact is that direct investments in emerging economies often come with higher levels of political risk – see Russia’s expropriation of oil assets or Argentina’s punitive export tariffs on agricultural commodities during its 2008 food crisis. The challenge becomes how to obtain emerging economy growth with developed economy risk. That is the investment draw of Canada. Even though it faces many of the issues of the rest of the developed world, there is an opportunity to capture emerging market returns in Canada due to its uniquely bifurcated economy.

Eastern Canada
Eastern Canada, represented by Ontario and Quebec, is heavily exposed to deteriorating U.S. demand through its automotive and aerospace industries. To put it simply, Eastern Canada imports what the emerging economies need and exports what they make – putting it under pressure on both the cost and revenue side of the equation.

Western Canada
Meanwhile Western Canada, represented by British Columbia, Alberta, Saskatchewan and Manitoba, is in the enviable position of exporting what the emerging economies need and importing what they make. What do I mean by this? It’s a well-understood process that energy and food consumption undergo rapid growth as a developing economy makes the transition to a middle class standard of living.

Energy and agriculture are Western Canada’s dominant industries – and this region, with only 10 million inhabitants, is one of the world’s largest net exporters of both energy and agricultural commodities. Here’s a breakdown:

A. Energy
1. Oil (13% of world reserves; 4% of world production)
2. Uranium (8% of world reserves; 20% of world production)

B. Agriculture
1. Potash (60% of world reserves; 30% of world production)
2. Wheat, coarse grains, oilseeds (21% of the world export market for wheat; 10% for oilseeds)

Investing in Western Canada provides exposure to emerging market growth in energy and agriculture within one of the most politically stable markets on Earth. In addition, investors who have a ‘value’ orientation have been provided what I believe are attractive entry points into the Western Canadian market by some recent events.

We all expect China to overtake the U.S. as the world’s leading economy, but I think Canada’s fortunes will surprise many. We have grown side-by-side with our North American neighbors for nearly a century, but we will not let them steer us off a cliff.

Canada’s uniquely bifurcated economy can serve as a bridge from the developed to the developing world – at least for investors wise enough to cross it.

*Stephen Johnston is the founder and managing partner of Agcapita (one of Canada’s largest direct farmland investment funds) and Petrocapita (a private energy royalty trust).

Source: http://www.europac.net/monetary_cards_table

Editor’s Note:
– The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
Permission to reprint in whole or in part is permitted provided full credit is given.
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