An opportunity

For the past several years Canada was in the forefront of the globe’s major economies.


Then last year we no longer were a favourite. Foreigners shifted some of their investments out of Canada to other, supposedly-more-promising regions.

The most common observation was that alternative nations offered better substitutes. The situations now is changing, and our relative performance is going to take a turn for the better.

It is not surprising that investors became disenchanted with Canada. After all, our economy to an important extent is commodity-based, and materials have undergone a significant decline in 2013.

Even the usually stable agricultural components decline precipitously. Furthermore, conventional wisdom even now suggests that the outlook is for not much improvement.

As a result of this widespread pessimism, the Canadian stock market now trades at a large discount to the counterpart in the United States. This follows the weak results last year when our market rose about 10 per cent less than the U.S.-based stock index. However, it appears that now a pronounced upturn is underway.

For those who take a contrarian point of view, an opportunity seems to have appeared, especially with the Canadian dollar trading at the low end of its three-year trading range. Sentiment scarcely could be more negative, without flows from our markets running at the highest rate in years.

When a nation’s currency declines appreciably, and it as declined more than 10 per cent in the last year, that country’s equity market responds very favourably.

In the 1960s, even though our economy appeared to be in the doldrums, our dollar fell from more than parity with the U.S. currency to $0.925 (remember that talk about “Diefenbucks”?), but our stock market began a multi-year upswing.

More recently, after the Japanese yen depreciated more than 10 per cent, the Japanese stock market began the best recovery since the 1990s.

A review of the elements of the our equity market reinforces longer-term optimism. Agricultural companies are recovering because of the more favourable export markets and prospects for an improved growing season.

Our major export market for metals remains China, and there the economy has at least stabilized with stronger growth likely.

Gold equities are selling at the level of the 1990s with gold itself only at a fraction of the current price. The price of metals should not decline further as at any further alum producers will be forced to close down, causing supply and demand pressures.

In addition, the economy south of the border is at a stage where capital spending is resuming and that creates demand for copper and other metals.

In view of the low levels of prices-to-earnings correlated with growth and strong demand for commodities, the Canadian stock market is poised to once again to be the world leader.





Bruce Whitestone