Canada has basically been re-rated coming out of the credit crisis as a bastion of stability in an increasingly unstable world, and for a variety of reasons:
- The federal government actually deserves the AAA credit rating that it receives on its debt.
- No Canadian bank failed.
- No Canadian bank even cut its dividend. Canadian banks spin off a dividend yield of just under 4%, compared to a little less than 1% in the USA.
- The Bank of Canada is now raising rates in the face of a solid domestic economy, while the Fed is on hold for a long time. So, global investors who are looking for a place to park money in liquid short-term securities get a yield premium over U.S. alternatives.
- Top marginal tax rates are already higher in New York City than they are in Toronto.
- On a global scale, real estate in Toronto, Montreal and Vancouver is cheap as borscht (as my Bobba used to put it). This may be why property prices have been heating up. It may come as a surprise to many Torontonians that when American high net worth investors visit the city, they canāt believe how inexpensive the Bridle Path is -- especially considering its proximity to downtown (New Yorkers canāt get anything like that south of White Plains).
- Itās not just about oil any more, but also natural gas ā whose price has carved out a bottom ā and precious metals, which command a 13% share of the TSXās market cap versus less than 1% for the S&P 500.
It was fascinating to see the Canadian dollar only correct down to 92 cents during this most recent round of global financial turbulence and flight-to-safety. That is a far cry from the correction down to 78 cents following the Lehman aftershock, not to mention the move down to 62 cents after the tech wreck a decade ago.
At the current time, the Canadian dollar is moderately overpriced but the fair-value line is moving up two to three cents a year, which means that within the next half-decade, it could easily be worth 15% more than it is today. This is something for global investors in general and Americans in particular to contemplate for in any given year, half of the total return differential between Canada and the U.S., whether it be in stocks or bonds, is derived by the direction of the exchange rate.
For the birdwatchers among us, this may well be the time when the loon beats up on the eagle.
Copyright (c) Gluskin Sheff
