In this hostile financial climate, long-term investors must now give
more thought than ever to capital preservation and sustainable
growth. It is not a profound observation that growth is not
sustainable if it is driven by debt-fueled consumption. Sound
fundamentals for growth include:
– Favorable demographics;
– Low national debt levels;
– High savings rates; and
– Persistent trade surpluses.
Many emerging economies have all of these characteristics, while
the so-called ‘developed’ economies have virtually none of them.
Take Canada as an example. It can be argued that Canada suffers
from many of the problems of the typical developed nation, though
to a lesser degree than its G8 brethren. Canada is the best of
the worst, so to speak. Still, it has familiar developed-economy
– Aging population, with unfunded liabilities for social benefits;
– High debt-to-GDP levels;
– Low savings rates;
Increasing government regulation and intervention in the
– Large fiscal deficits; and
– An overly accommodative monetary authority.
This raises the question: why should investors emphasize
investments in developed economies such as Canada over
emerging economies? The fact is that direct investments in
emerging economies often come with higher levels of political risk
– see Russia’s expropriation of oil assets, or Argentina’s punitive
export tariffs on agricultural commodities during its 2008 food crisis.
The challenge becomes how to obtain emerging economy growth
with developed economy risk.
That is the investment draw of Canada. Even though it faces
many of the issues of the rest of the developed world, there is an
opportunity to capture emerging market returns in Canada due to its
uniquely bifurcated economy.
Eastern Canada, represented by Ontario and
Quebec, is heavily exposed to deteriorating US
demand through its automotive and aerospace
industries. To put it simply, Eastern Canada imports
what the emerging economies need