Cashing in on Canada: Four Ways to Profit - Big - From the World's "Safest Economy"

[Editor's Note: Commodities expert Peter Krauth - the editor of the Global Resource Alert advisory service and a frequent contributor to Money Morning - most recently penned a special investment report on gold-buying basics. It was one of the best-read Money Morning essays of the past 12 months.]

Canada is more than just back bacon, maple syrup, and hardscrabble-mining claims. It's a leader in natural resources, precious metals, and such alternative-energy investments as oil sands.

In fact, Canada right now boasts one of the world's most compelling targets for investors' hard-earned money. Consider that:

  • Through 2008, Canada enjoyed 12 straight years of budget surpluses.
  • Since the outset of the global financial crisis, not a single Canadian bank failed.
  • Canada was the first G-7 nation to raise interest rates.
  • And while Canada has already reaped the benefits of a full 10 years worth of a full-blown bull market in commodities, there are at least 10 years more to go.

Added together, this points to a major potential payoff for those who invest in Canada right now.

Conservative Management Attracts Big Money

If the safety of a nation's banks is an indication of its economic well being, then Canada gets a clean bill of health, without the need for stress tests. The World Economic Forum has ranked Canada's banking system as the world's safest. The U.S. banking system, by comparison, was ranked 40th.

With the looming risk of a double-dip recession in the U.S. market, the potential for a second worldwide slowdown is becoming very real. That's because the U.S. consumer is still widely considered to be a make-or-break factor in the world's economic health.

The reality, however, is quite different. Developing-economy countries are increasingly paying more attention to internally generated growth. They will attempt to fuel domestic consumption, while building up their valuable export sector. To achieve these objectives, these fast-growing countries will invest in their own infrastructure, further fueling the demand for natural-resource commodities.

China is an excellent example. China's own trade surplus has been gradually shrinking, from $295 billion in 2008 to $198 billion in 2009. It was projected to fall to $160 billion this year and could drop all the way down to $100 billion or less by the time the New Year rings in. But that has more to do with China's growing imports of raw materials - it needs so much of the stuff to modernize and meet the needs of a burgeoning middle class. A rising yuan (China's currency) will make commodities more affordable, so domestic demand is certain to rise.

In order to satisfy their appetite for energy-related resources (such as oil, coal and uranium), basic metals (like copper, nickel, and zinc), and even agricultural products (like wheat and fertilizers), emerging-market countries are turning to stable, reliable resource powerhouses, such as Canada.

That's one reason that economists with CIBC World Markets Inc. - a subsidiary of Canadian Imperial Bank of Commerce (NYSE: CM) (Canada's 5th largest bank) - are projecting Canada will enjoy the fastest growth rate among the world's seven-most-developed nations (the G-7). [See chart below].

According to a recent Globe and Mail article, global investors are increasingly looking at Canada as the "Un-American North American play" or the "non-Euro-wealthy economy." Indeed, CIBC government-debt strategist Warren Lovely told the Toronto-based newspaper that Asian and American central banks and global sovereign wealth funds are increasingly committing their cash to Canada - some of them for the first time ever.

"Those we've talked to are getting religion on Canada's potential outperformance versus a growing list of advanced economies," Lovely told the newspaper. "It's hard to recall a time when the country possessed such relative, if not absolute, strength."

This allure has recently been most noticeable in the net purchases of government and corporate debt from Canada: This past April, in fact, net purchases of Canadian bonds reached a new record for 12 consecutive months, at $95 billion.

It seems the knockout combination of massive resources of nearly every variety, outpacing economic growth, and an enviable banking system combine to make Canada simply irresistible to institutional investors. It doesn't hurt, either, that Canada's exposure to both the U.S. mortgage debacle and the European sovereign debt crisis was severely limited.

"The country is getting itself more and more on the radar screen of foreign investors," CIBC's Lively told the newspaper.

The Strength to Raise Rates

This "maple leaf" nation of 34 million boasts a strong fiscal foundation at the national level, while its provinces are not in the dire straits of so many U.S. states. More than 400,000 Canadian jobs were lost in the recession. To date, nearly all those jobs have already been recouped.

Bank of Canada (BoC) Gov. Mark Carney was the first G-7 central bank head to raise interest rates in this post-financial-crisis world. And yet, he recently felt confident enough in Canada's outlook to again raise Canada's benchmark overnight rate by 25 basis points. This increase - the second in a row - takes the rate to 0.75%.

Even with all the relatively good news, Gov. Carney acknowledges he's not wearing rose-colored glasses. In its recent Monetary Policy Report, the BoC tempered its outlook, recognizing that European debt crisis may not have run its full course, and that the American recovery is still in a fragile state.

And despite these outlying risks, odds are good that Canada's economy will continue to outperform that of most other developed nations. Asian growth prospects alone are becoming a significant factor.

Only two weeks ago, the International Energy Agency (IEA) told us that China has passed the U.S. as the world's largest consumer of energy. Only 10 years ago, China used half what it uses now. With that level of appetite, it's easy to imagine that China looks to oil, natural gas, and nuclear energy to satisfy her needs to keep the lights on, the factories humming, and the people moving. As it turns out, Canada holds large reserves of each of these energy sources.

A New Energy Bridge

And don't think the Chinese, or Canadians, haven't courted each other. Already two of the larger Canadian energy companies, Kinder Morgan Energy Partners LP (NYSE: KMP) and Enbridge Inc. (NYSE: ENB), are proposing plans to transport crude oil to Asia.

China has inked numerous deals over the past three years to buy sizable shares of Canadian oil sands projects. And just recently, it signed a long-term contract to buy uranium from Canada's Cameco Corp. (NYSE: CCJ). This came on the heels of a visit to Canada by China's President Hu Jintao, who promised to double Chinese trade with Canada to $60 billion by 2015.

But Canada knows that China's not the only game in Asia. Korea is one of the world's largest importers of crude oil. Just last October, state-run Korea National Oil Corp. bought Calgary's Harvest Energy Trust for $3.9 billion, rewarding shareholders with a 37% premium.

Ride the Loonie

Clearly, Canada is a winner. But how should investors play it?

My first suggestion is to consider the loonie, as the Canadian dollar is affectionately known. Back in 2002, the loonie bought as little as USD $0.62. In October 2007, currency traders had pushed that rate to USD $1.10. Today, we sit near USD $0.96, and the loonie is a good bet to hold its value, and even to appreciate against its U.S. counterpart.

Money flows where it's treated best, and the massive-and-growing debt loads being carried by the United States and the state and federal level doesn't portend well for the U.S. dollar's long-term prospects - or for the European euro, for that matter.

In Canada, by contrast, we see rising interest rates, sounder fiscal management, and a massive hoard of resources to back it all. Given that, the Canadian loonie is set to take flight, or at least maintain its cruising altitude. The easiest way to play the Canadian dollar is the CurrencyShares Canadian Dollar Trust (NYSE: FXC). Even some central banks, like Russia's, have indicated they're shifting cash reserves toward the loonie. Maybe you should, too.

Bank on Canada, the Royal Way

The Royal Bank of Canada (NYSE: RY) was founded as a private commercial bank in 1864 in Halifax, Nova Scotia. Today, it is Canada's largest bank. Here's how it looks:

  • More than 80,000 employees worldwide.
  • Total assets of $655 billion, with 2008 income of $3.9 billion.
  • Established in North, Central, and South America, as well as the Caribbean, Europe, Asia, and Middle East.
  • A large retail banking presence in the Southeast United States.
  • Operates in personal and commercial banking, wealth-management services, insurance, corporate, investment banking, transaction processing, and trustee services on a global basis.
  • Has paid a common-stock dividend every year since 1870.

Royal currently sports a reasonable Price/Earnings (P/E) ratio of 14, and a dividend yield of 3.7%. That's way better than you'll earn in a savings account or even in a standard money-market account - in either the U.S. or Canadian markets. If you're thinking about investing, but you're worried we may be headed into a full-blown depression, you'll be interested to know that Canada didn't experience any bank failures, even during the Great Depression.

Fertilizer King

Right now, the world's least-developed countries achieve only 10% of the developed world's productivity levels. That's a major shortfall. Yet most food demand growth comes from poorer nations. What's more, fertilizers boost farm productivity, and are responsible for between 40% and 60% of the world's food supply.

Fertilizers' major nutrients - nitrogen, phosphorus and potassium - replenish soils in harvest and add nutritional value to food. According to the International Fertilizer Development Center, "no country has been able to expand agricultural growth rates and eliminate hunger without increasing fertilizer use."

One of the resources Canada is especially good at producing is potash. And the king of potash resides in Saskatchewan, Canada. Potash Corp. (NYSE: POT) is a clear leader in its field, with one of the lowest production costs anywhere. The company boasts 100 years' worth of reserves and over 75% of worldwide excess capacity. It clearly dominates this sector.

Six of the company's potash mines are located in Saskatchewan, and the seventh is in New Brunswick, Canada. Nitrogen production takes place in the United States and in Trinidad, and Potash's phosphate mines are also in the United States.

The world's biggest potash producers had slashed production in reaction to the economic crisis, so they can't immediately return to peak production even as demand returns. That's really bullish for the lowest-cost producers, as potash prices head higher. So Potash is looking like a good buy at these levels.

A New Bridge to Asia

While some American non-governmental organizations argue over the environmental concerns of Canadian oil sands, Enbridge and Kinder Morgan are looking to submit a plan to transport large volumes of crude on to Asia. By creating this open access to the famished Asian energy market, Canadian oil producers can begin to play American refiners against willing Asian customers, gaining top dollar in the process.

Enbridge Inc. (NYSE: ENB) is one of Canada's most powerful energy plays. The company is a leader in North American energy transportation, owning and operating the longest crude oil and liquids transportation network. The firm also owns and operates the largest natural-gas distribution company in Canada. Holdings extend into northern New York State, and include transmission-and-gathering pipelines in the Gulf of Mexico.

With a market cap of $18 billion, a P/E near 14, and a 3.4% yield, Enbridge makes for a great play on higher energy prices, and possesses the "wild-card" potential to lever up on access to voracious demand for energy in Asia.

Action to Take: Canada may have been little more than an afterthought for your investments, so far. But it needs to be front-and-center. So consider the CurrencyShares Canadian Dollar Trust (NYSE: FXC) as a currency play on the stronger Canadian dollar, the Royal Bank of Canada (NYSE: RY) as a way to profit from the world's "safest" banking system, and Potash Corp. (NYSE: POT) as the global king of the fertilizer producers. Finally, look carefully at Enbridge Inc. (NYSE: ENB) as a global profit play on energy, and as a proxy for the higher oil and energy prices that are certain to come.

[Editor's Note: Peter Krauth, a frequent contributor to Money Morning, is the editor of the Global Resource Alert, a private advisory service that focuses on precious metals, energy commodities and other natural-resource-related topics. Krauth spent two decades as a market analyst and portfolio advisor, and has covered all the commodities sectors, including gold, silver, coal, alternative energy and agriculture. He even makes his home in Canada - the topic of today's essay - to be closer to the action. For more information on this service, as well as on a new way to play gold, please click here.]

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