Canada's IMF Upgrade an Important Sign Post

Canada's GDP growth outlook got an upgrade from the IMF this week thanks in part to the outlook for commodities prices, as well as global demand coming from the developing world, in particular, China and India. Yesterday, we discussed the outlook for China and India in Mobius, Rogers, and IMF Love China.

Bloomberg reports: Canada’s economy will grow more in 2010 than previously forecast and shrink more in 2009, helped by commodity prices that have rebounded ahead of a global recovery, the International Monetary Fund said in its World Economic Outlook report.

The U.S.’s biggest trading partner will contract 2.5 percent in 2009 and grow 2.1 percent in 2010, the IMF said today. The IMF had predicted in July the Canadian economy would shrink 2.3 percent this year before rebounding to 1.6 percent in 2010.

“The recent rebound in commodity prices and reduced reliance on manufactured products have helped exports,” the report said. Canada exports oil, natural gas, metals and other commodities.

The IMF upgrade is an important signpost, and on its own, its great news, but it is actually far more important than it appears at first. As local investors, we tend to focus more on how we feel locally. You have to also pay close attention to Canada's attractiveness to foreign investors.

Last week, we discussed the idea that China and BRIC peers may not be interested yet in investing in Canada Bonds, even though they are an ultra-safe alternative to US Treasuries, because the by-product would be a higher Canadian dollar, which means they would pay higher prices for our commodities exports.

Its true, for those reasons, they may not be interested in our paper, but on the other hand, large global investors are.

Our yields are not only higher (for now), our bonds are also perceived to be inherently safer than those of the US and UK, thanks to Canada's sound fiscal position, stable credit market, and strong, and well capitalized banking system.

Andrew Willis reports that Ontario floated $2-billion of 10-year bonds, with a 4% coupon in the US, following an offering of Canada bonds made by the Federal Government.

Ontario tapped American credit markets on Tuesday with a $2-billion (U.S.) 10-year bond offering, a financing that follows of a federal government issue in the global market.

As part of a busy week, Ontario sold debt with a 4 per cent interest rate, offering investors a 73 basis points premium over the benchmark U.S. government bond. Bank of America/Merrill Lynch, BNP Paribas, Deutsche Bank and TD Securities were the lead underwriters.

These developments continue to provide evidence that Canada is in the uniquely advantageous position in the developed world to become a powerful, and key, world financial market, as a result of its once-in-several-decades position.

The benefits are two-fold.

  1. Canada's capital market as a magnet for foreign capital, attracting large investments from global investors looking for a safe haven in both the fixed income and equity markets. Canada's risk/reward is favourably tilted for reward given its position in the global commodity complex and economic stability.
  2. Canadian companies will be among the world's biggest producers and vendors of commodities to the emerging markets, which all face long term shortages of oil, food, water, and metals.

Its high time for Canadians to recognize that Canada is poised for superior growth during the next decade.

The perfect-storm-like convergence of the credit crisis, which has investors looking for the safest places in the world to invest, and the dramatic redistribution of wealth and economic transformation that is driving the growth of the developing world, and the resultant demand for commodities has Canada is in the cross-hairs of both.

Bottom Line: Canadian investors should view any weakness in markets as a graduated opportunity to accumulate positions in Canadian banks and key, preferably under-levered, commodities producers.

Previous Article

Mobius, Rogers, and IMF Love China

Next Article

Jim Rogers Outlook - Inflation, China, and the US

Related Posts
Subscribe to notifications
Watch. Listen. Read. Raise your average.