Canada is hot - but don't buy in now

published 30 August 2006

When it comes to resource-rich markets, it's hard to top Canada. The country carries far less political risk than other countries, it boasts huge reserves of gold, nickel, timber and uranium, and its people will not be among the 30% of the global population likely to face a water shortage in 2025, as the Centre for Strategic and International Studies forecasts. Canada is also sitting on an estimated 170 billion barrels of recoverable oil in its tar sands, more than the total in Saudi Arabia's Ghawar, the biggest oil field ever found in the Middle East.

The upswing in raw materials prices of the past few years has buoyed growth and produced both a budget and a current-account surplus a rarity in the developed world. Since commodities are in all likelihood still in the early stages of a secular upswing, there should be plenty more commodities-induced growth over the longer term. That bodes well for the market's long-term outlook and also presages further gains for the Canadian dollar, which has risen over the past few years amid growing demand for commodities. Now worth US$0.9, it should rise beyond US$1 in the years ahead, says Robin Griffiths of Rathbone. So there are currency as well as market gains in the offing; given all this, it's no wonder Griffiths sees Canada as a "core holding" for global investors over the long term.

But this hardly seems an ideal time to buy. Canada is still closely correlated with the US exports to America comprise 33% of its GDP and with Wall Street looking vulnerable to the US slowdown, the Canadian market is likely to be caught in the downdraft. Griffiths expects a slide in the Toronto Composite now over 12,000 to just above 10,000 late this year before buying in again in anticipation of the next leg of the secular upswing.