Bullish on Beaver: Why We Like Canada On The Long Side

"Canada is the linchpin of the English-speaking world."
    - Winston Churchill


Positions: Recently sold our long position in Canada via EWC, but have a positive bias...


The lack of correlation continues to resonate in global equity markets.  While we can debate whether Churchill's quote above is still true, year-to-date Canadian equities have been the leaders versus their major English speaking counterparts, specifically the United States and the United Kingdom. As of yesterday's close, Canada's TSX was up +1.5% YTD, the SP500 in the U.S. was down -7.9%, and the FTSE 100 in the U.K. was down -10.0%, so we can accurately say that Canada is currently the linchpin of English speaking equity markets. 


We recently sold our position in Canadian equities, which we owned via the etf EWC, for a 12.6% gain.  This was a fortuitous sale as EWC is trading at $17.37, down 6.9% from last Friday's sale price.  Clearly, when commodities deflate, as they did on Monday, with oil down  ~-9%, it will be challenging for natural resource-rich Canada to outperform. 


The Canadian economy is heavily levered to both natural resources and financial services, which is reflected in the holdings of the EWC.  In the chart below, the top 10 holdings of the EWC are outlined - three are banks and six are resource-related companies.  While the Canadian banks have suffered in the global economic malaise they are much better capitalized than their American counterparts and have substantially lower exposure to bad debt either through housing or leveraged loans.  As a point of fact, no major Canadian bank has either gone bankrupt or been in any real risk of bankruptcy.


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This morning the Bank of Canada followed their U.S. counterparts and effectively lowered interests to zero.  The BOC noted in their statement that:


"Today's decision to lower the policy rate by 25 basis points brings the cumulative monetary policy easing to 425 basis points since December 2007. It is the Bank's judgment that this cumulative easing, together with the conditional commitment, is the appropriate policy stance to move the economy back to full production capacity and to achieve the 2 per cent inflation target."


With the overnight rate at 0.25%, the Canadian government will have limited ability going forward to stimulate, which is not dissimilar to both the United States and the United Kingdom where the overnight rates are at all time lows.  Canada though, in contrast to its two counterparts, has a much healthier balance sheet and seemingly better growth prospects. 


According to the most recent data, Canada has $365BN in public debt, the United States has $11,152BN, and the United Kingdom is at $1,010.7BN.  On a per capita basis, this equates to $11,012 in Canada, $16, 595 in the United Kingdom, and $36,709 in the United States.  From a projected growth perspective, the IMF, which obviously is only one data point, projects Canadian GDP to decline at -1.2% in 2009, the United States to decline at -1.6% in 2009, and the United Kingdom to decline at -2.8%. 


As always, everything has a price, which is why we sold Canada on Friday, but with a healthier balance sheet, better growth prospects, and a banking system that remains largely intact, we will be revisiting it on the long side, particular vis-à-vis its English speaking brethren.


Daryl G. Jones
Managing Director


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