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The Globe and Mail

Honk if you like Canada's outlook - but buckle up

There is a tendency to presume that, because the Canadian economy has fared better than the United States's over the past few years, that, because the more conservative Canadian banking system became a model for the world in terms of handling a global financial meltdown with aplomb, the Great White North is immune to the current ailments afflicting other major developed countries.

That's a bit like presuming that, because you're a decent driver, haven't had a crash and haven't needed extra cash to pay for higher insurance premiums, it's okay to tool around town without a seatbelt.

Canada has a lot to be proud of: a stable, pro-business government, a solid banking system, an abundance of natural resources and a housing market that, while in many regards is overextended, isn't in danger of massive collapse – all of which have made the country look good in the context of the other bad drivers out there. The country is also one of precious few left in the world with a triple-A credit rating.

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But the number and diversity of caution signs can't entirely be ignored: an unemployment rate at 7.6 per cent and climbing; GDP growth that contracted 0.1 per cent in November; and a housing market that, while not as negative as south of the border and elsewhere, is for all intents and purposes looking a little lofty.

There are other signs that Canada may not be able to keep pace in a world in which the U.S. economy is still on government-assisted life support and a stagnant Europe remains heavily dependent on central bank funding that has already far surpassed the quantitative easing measures implemented by the U.S.

Don't get me wrong; if my recent sojourns outside the country attest, the interest in Canada is palpable, and deservedly so. Ditto for the plurality of capital-preservation, cash-flow-generating strategies we bring to the table, many of which carry a healthy focus on Canadian sectors and securities – both stocks and bonds.

There is another point to be made here: asset quality. Sovereign governments have moved radically to bail out banks and get away from the Great Recession, but have absolutely made dilapidated their own balance sheets in the process. So it is critical not just to have a focus on income orientation, credit, bonds and the like, but to have exposure to currencies of countries that have unblemished triple-A ratings with stable outlooks and relatively low debt-to-GDP ratios.

Again, scarcity value comes into play here as the outstanding amount of bonds in countries rated triple-A has plunged 70 per cent in the past three years to stand below $5-trillion. So which countries stand out in that regard? Australia, Norway … and Canada.

And, as mentioned, having reserves in the ground is a big plus. PetroChina is extending its reach into Canadian shale gas assets (apparently worth more than $1-billion). This may not be a well-known fact but, in aggregate, state-owned Chinese firms have invested $10-billion in the Canadian energy patch.

Prime Minister Stephen Harper, not intent on waiting around for the U.S. economy to lift its own socks up, just came back from China with a nice deal (along with several other bilateral trade pacts) that will clear the sale of Canadian uranium for use in nuclear energy generation. If you didn't know, Canada produces 20 per cent of the world's uranium and exports 80 per cent of that output.

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To be sure, there are some very tentative less-negative signs south of the border that not only have implications for Canada (since the U.S. is still our biggest customer) but also offer select investment opportunities. While I remain amazed at how the consensus economics community is so certain the U.S. economy suddenly rebounded (again!), earnings in some cases aren't looking terrible.

Last year, the S&P 500 was flat on the year, as it was a case of reduced investor risk appetite triggering a compression in the market multiple at a time of still positive earnings trends. This is what has changed, at the margin. The multiple is in the bottom 20 per cent of its historical range so the market is certainly reasonably valued. The prime issue now is that we are at an inflection point in the earnings cycle and, in 2012, this replaces multiple contraction as the crucial hurdle for stock market performance.

So from a 40,000-foot vantage point, Canada is still looking good. But like I said, just because there hasn't yet been a major pileup doesn't mean you don't have to buckle up, or look at other roads to follow.

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About the Author
David Rosenberg

David Rosenberg is chief economist and strategist for Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with Dave. More

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