This week, my Investment U colleagues are talking about “off-kilter” investments. These are assets that most U.S. investors either under-own or don’t own at all.
For instance, David Fessler likes rural real estate, and Adam Sharp recommends “ground floor” stakes in young startups.
But I’m casting my eye north to our biggest trading partner: Canada.[ad#Google Adsense 336×280-IA]Canada is the world’s second-largest country by area and the 10th-greatest in per capita income.
It also ranks higher than us on the Fraser Institute’s Index of Economic Freedom.
However, widening spreads between corporate and government bonds – and a stumbling stock market – are signaling a recession there.
Could that be a good thing?
It is if you like buying low.
The Toronto Stock Exchange is in bear market territory, down more than 20% from its September 2014 highs. In fact, the resource-rich benchmark is one of the worst-performing equity markets worldwide over the past year.
A glut in crude supplies has collapsed prices to a 12-year low, leaving Canada’s oil the cheapest in the world. Natural gas is near a 16-year low. And coal, iron ore, copper, gold and silver are also in the dumper.
Banking stocks make up 38% of Canada’s equity markets – and this sector has also been hit. For a while, Canadian banks held up better than those in the U.S. and Europe, but they recently capitulated.
Why? As I mentioned, there are concerns about Canada’s commodity-oriented economy. Low natural resource prices undermine growth. And the nation’s housing market – which held up far better than our own during the Great Recession since Canadians were required to make actual down payments – is now looking precarious too.
So why buy Canadian equities?
Because these concerns are fully discounted in current prices. As famed Legg Mason fund manager Bill Miller likes to say, “If it’s in the papers, it’s in the price.”
There are no signs of deterioration in the banks’ financial performance or unusual stress on Canadian households.
Profits at Canadian banks will actually increase this year. And major financial institutions – like Canadian Imperial (NYSE: CM), Toronto-Dominion (NYSE: TD) and Bank of Nova Scotia (NYSE: BNS) – will increase their quarterly dividends when they report.
Of course, it isn’t just Canadian stocks that are inexpensive. Take a look at the loonie.
Less than four years ago, the Canadian dollar traded at a slight premium to the U.S. dollar. That is emphatically not the case today.
The loonie now sits near $0.71. That makes Canadian assets fully 30% cheaper to U.S. dollar-based investors.
A declining loonie will bring more venture capital, in fact more investment capital generally. Canadian startups are already seeing a sharp influx of cash, according to PitchBook, which tracks startups globally.
In addition, international transactions are generally settled in U.S. dollars, a big plus for Canadian exporters and multinationals that will reap a windfall on the currency exchange.
So let me recap why Canadian stocks are now triple-cheap:
- Canada is in bear market territory.
- Within that bear market, resource stocks have been clobbered, as Canadian oil is the cheapest in the world. The country’s banks have also been knocked down, although they are likely to report higher profits this year.
- And the loonie is greatly depressed, trading at a 30% discount to the greenback.
When you have bombed-out assets, in a devalued currency, during a bear market, that’s triple-cheap.
How do you play it? One easy way is to plunk for a few shares of iShares MSCI Canada (NYSE: EWC).
This ETF is an excellent proxy for Canadian markets. Thirty-eight percent of assets are in financials, 20% in energy and 9% in basic materials, with the rest spread among consumer cyclicals, industrials, transportation, healthcare, real estate and technology.
With this fund, you’ll own everything from Canadian National Railway to Suncor to Valeant Pharmaceuticals.
And, incidentally, the U.S. market – as measured by the S&P 500 – has a current dividend yield of 2.2%. This fund yields a bit more: 2.4%.
Don’t expect miracles next week or next month. But three to five years out, natural resource prices, the loonie and the Canadian equity market should all be substantially higher.
If you want to sell high, you have to start by buying low. Here’s your opportunity.
Source: Investment U