It has been a crazy year for U.S. stocks, with the
surging higher into the spring, slumping badly in the summer and
regaining some lost ground as the year came to a close. After all
that swing, the S&P 500 stands right where it was last
Our neighbors to the north have not been so lucky. The
iShares MSCI Canada fund (NYSE:
, which owns a basket of that country's largest companies, has
slumped 15% in the past year. In fact, the fund is right back where
it stood in February 2007. This flat performance is a bit curious
when you take a deeper look at the Canadian
, which in many respects, stands on much firmer footing than the
U.S. economy. As such, Canadian stocks represent a great
To be sure, the U.S. and Canadian economies are heavily
interdependent. But recently, the Canadian economy has demonstrated
resiliency even as the U.S. economy has sputtered. In the third
quarter of 2011, the Canadian economy grew at twice the pace of the
U.S. economy. This marks the sixth-straight quarter the Canadian
economy has grown at a faster clip.
Some of the growth differences can be explained by the structure of
the two economies. Canada has a greater focus on natural resources
and is benefiting from rising output at key mines and energy
fields. Yet another part can be explained by the confidence
business leaders express. In the past four quarters, the Institute
of Supply Management's (
of purchasing managers has been stuck in a tight range of 50.6 to
52.7 here in the United States. (Any number above 50 signals an
upturn in activity). In Canada, the same survey has yielded
readings between 55.6 and 63.4. Simply put, Canadian firms are
ending 2011 on a much more
Looking beyond recent economic indicators, the Canadian economy
stands on firmer footing by other key measures as well. Take a look
at the stats in this table:
Canada consistently runs a trade surplus with the United States,
invests more in math and science education, and has better health
care (as measured by infant mortality and life expectancy). These
are key determinants of the long-term health of an economy.
Now consider these facts:
• The United States has four times more arable land than
Canada, yet has 27 times the amount of actual farmland in
production. This means Canada has much more expansion potential in
terms of future agricultural production. Recent persistent droughts
in the U.S. southwest and a trend toward warming winters in Canada
could push the amount of arable land in Canada closer to U.S.
• The Canadian government's total debt peaked at $563 billion in
1997 and has stayed below that level ever since. The U.S.
has surged throughout the past decade and now stands at $15.1
trillion. So government debt, as percentage of gross domestic
product, stands at around 100% in the United States, while this
figure stands at just 32% in Canada.
• Canadian unemployment peaked at 8.7% in September 2009 and now
stands at 7.4%, more than a percentage point below U.S. levels.
This has a direct effect on government finances, as fewer people
need social services support.
This isn't to say that the United States in deep trouble. Indeed,
I've written recently on several occasions that the U.S. economy
tremendous long-term growth potential
. But you can infer that Canada is better-positioned to withstand
any possible speed bumps in 2012 related to the European crisis.
Moreover, with a much smaller level of government debt, Canada is
less exposed to a potential systemic shock in the event of
bond-market shocks that boost government borrowing costs. Lastly,
tackling the relative debt loads is likely to require much greater
austerity in the United States than it is in Canada. So even as the
upside for the U.S. and Canadian economies are similar, the
downside scenarios are starkly different.
This is why an investment in Canada makes so much sense right now,
especially since the iShares MSCI Canada fund has lagged the
S&P 500 by about 15% this year. It presents an opportunity to
buy a developed, yet still promising economy at a bargain price.
So what does the fund hold? Well, bank stocks predominate, as
Royal Bank of Canada (NYSE:
Toronto Dominion Bank (NYSE:
Bank of Nova Scotia (NYSE:
Bank of Montreal (NYSE:
are four of the top six holdings and account for roughly 18% of the
fund. Canadian banks never loosened their lending standards back in
the middle of the last decade and have come out of the recent
financial crises virtually unscathed. Those banks are all moving to
in the United States while beleaguered U.S. rivals such as
Bank of America (NYSE:
stocks such as
Barrick Gold (NYSE:
Suncor Energy (NYSE:
Potash Corp. (NYSE:
) Goldcorp (NYSE:
, and others make up about half of the fund. The rest of the fund
is made up of key transportation and industrial firms.
Risks to Consider:
The United States remains Canada's biggest trading partner, so
any deep economic distress south of Canada's border will be felt --
to an extent -- in Canada as well.
Action to Take -->
If countries were looked at as companies, then the United States is
in need of a restructuring, while Canada looks set to benefit from
prudent management choices. Sound government finances, a healthier
and more employed workforce, and a vast trove of commodity
resources make Canada an appealing long-term investment. If you're
looking for a stable place to diversify your investment dollars in
2012, you'll find few better options than the MSCI Canada fund.
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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