Canada Is Key For A Strong Portfolio

By Aaron Levitt | November 07, 2011 AAA

As Europe continues to kick the "can down the road," with regards to its debt problems, and the United States. still facing high unemployment mixed with meager consumer spending, developed market investors are certainly in a quandary. These persistent fiscal and policy worries are contributing to recurring and increasing volatility in financial markets. With growth in these two major regions set to slow in 2012, finding developed market investments will certainly be challenging in the near term. One such opportunity could lie with our, often ignored, neighbor to the North. Canada could represent one of the best plays in the developed world, and be a source of portfolio strength in the years ahead.
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More than Just Hockey Night
For investors wanting to stay in the developed world, Canada continues to offer an intriguing choice. As a commodities super power, the nation has all the necessary ingredients that fast-growing countries in Asia and South America need to build infrastructure, and support increasing newly found consumerism. Canadian commodity exports to Asian-Pacific nations, are on track to rise nearly 60% this year. According to the Petroleum Services Association of Canada, this rise in oil and natural gas prices will cause drilling activity within the nation to grow by 10% in 2012. Overall, the nation has benefited from the rise in commodity prices, and many of its firms like Canadian Natural Resources (NYSE:CNQ) have been seeing increasing revenues. (For related reading on commodities, see Commodity Prices And Currency Movements.)

These exports of energy, agricultural and mineral commodities have helped create a stable and growing jobs base when compared to the U.S. Canada's unemployment rate currently sits at 7.1%. Unemployment hasn't been this low since December 2008, and continues to fall. A recent Statistics Canada report shows that Canadian employers hired more than 60,000 new, full-time workers in August, besting consensus analyst estimates by more than six times. In addition, year-over-year average weekly earnings grew by 2.2% in the last quarter, and Canadians have more equity in their homes due to tighter lending standards versus the U.S.

The nation's fiscal responsibility extends to its government and banking sectors as well. Canada offers one of the lowest Debt-to-GDP ratios of any developed market nation. Canada's net debt to GDP ratio of about 30%, compares favorably against the G7 average ratio of about 70%. This provides the government flexibility to enact meaningful stimulus measures without over burdening the public treasury. Additionally, Canadian banks consistently rank among the world's most sound, and didn't make the same sort of risky subprime real estate loans that their U.S. sisters did.

Adding Exposure to the Maple Leaf
Canada makes a great developed market play, and investors should consider the nation for their portfolios. The easiest way to add Canada is through the iShares MSCI Canada Index (ARCA:EWC). The exchange-traded fund (ETF) follows 103 different Canadian firms such as Royal Bank of Canada (NYSE:RY) and Goldcorp (NYSE:GG). The ETF yields 1.8%. Investors can also use the Global X S&P/TSX Venture 30 Canada ETF (ARCA:TSXV), which bets on small cap Canadian firms. However, there are plenty of individual strong ways to add the nation to a portfolio.

Valeant Pharmaceuticals (NYSE:VRX) is an interesting play. Instead of spending money on research, Valeant buys older, steady selling brand-name drugs, and over-the-counter generics in niche markets. The company has been pretty successful in executing this strategy. Additionally, investors with stronger appetites might be interested in Canadian biotechs Cardiome Pharma (Nasdaq:CRME) and AEterna Zentaris Inc (Nasdaq:AEZS).

Moving Canada's vast array of commodities towards ports for export, is the job of both Canadian National Railway (NYSE:CNI) and Canadian Pacific Railway (NYSE:CP). The railways have also benefited from the growth in Canada's economy, and traffic has picked up. The pair offers a play on vital infrastructure as well as strong dividends. (For more on railways, see A Primer On The Railroad Sector.)

The Bottom Line
With the majority of the developed world still facing problems, Canada is a beacon of growth. Fiscal discipline, along with a wealth of natural resources, makes it an ideal portfolio choice. The previous firms, along with the IQ Canada Small Cap ETF (ARCA:CNDA) make great additions.

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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

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