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Afraid that the U.S. dollar is in a long-term decline? Want to protect the value of your portfolio over the long term? Looking for bigger gains than you'll get from loading up on Swiss francs or burying gold bullion in your backyard?
Try Canada. I can't think of a better place to stash part of a long-term retirement nest egg than in Canadian stocks. I'll give you three in this column to add to your long-term retirement portfolio after the current sell-off has run its course.
Let me add up the advantages that a U.S. investor -- or any investor, for that matter -- gains from going Canadian.
The biggest edge comes from the nature of the Canadian economy.
Canada is an export-driven economy. In 2006, Canada's $404 billion in exports added up to 32% of the country's $1.3 trillion economy, the eighth-largest in the world. In the United States, by comparison, exports accounted for just 8% of a $13.2 trillion economy in 2006.
Though Canada isn't just an exporter of commodities from wheat to nickel -- Canada's auto industry contributed 11% of total exports last year, for example -- those commodities do dominate Canada's export economy. Mining, energy, agriculture and forest products added up to 61% of total exports in 2006.
Canada is one of the leading beneficiaries of soaring global commodity prices. It's among the top 10 global producers of copper, lead, zinc, nickel, gold, oil, natural gas and wheat -- all commodities trading at near-term or all-time record prices in 2006 and 2007. No wonder the country ran a trade surplus in 2006 and 2005 and 2004 and 2003 and 2002.
The fallout from those good times extends to:
- The Canadian dollar, which has rallied in 2007 to near parity with the U.S. dollar. The last time a Canadian dollar was worth a U.S. dollar was in 1975. On June 4, a Canadian dollar was worth 95 U.S. cents, the most since June 1977.
- The Canadian government's budget. Canada was the only country among the old Group of Seven developed economies -- France, Germany, Italy, Japan, the United States, United Kingdom and Canada -- to record a budget surplus in 2003, 2004 and 2005. The Organization for Economic Co-operation and Development projects Canada will be the only nation among the seven to show a surplus in both 2006 and 2007. (The G7 became the G8 with the addition of Russia in 1997.)
- The Canadian economy, which is projected to grow 2.1% this year despite a slowdown in the economy of the United States, Canada's biggest trading partner (about 80% of Canada's exports go to the U.S.). The Canadian economy grew by 2.7% in 2006 and is projected to rebound to 2.7% in 2008.
Look to the horizon
Most of that is now history, of course. And any investor is entitled to ask: What is investing in Canada going to do for me in the future?Quite a bit, I think. Especially if your time horizon extends beyond the next few years.
The conventional wisdom right now holds that the Canadian dollar is about a nickel overextended in the short run and that it's likely to drop back to fair value near 89 cents to the U.S. dollar. In the longer run, say through 2008, the conventional wisdom now holds that the loonie, named after the northern lake bird that decorates the Canadian $1 coin's reverse side, will retreat against the dollar as commodity prices pull back from recent unsustainable highs.
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I think the conventional wisdom is wrong in the shortest term. The Bank of Canada, the country's central bank, has signaled that it's worried about an increase in inflation. The bank had hoped that the rising loonie would put the brakes on Canada's export-driven economy, but that hasn't worked out. Inflation is projected to climb to 2.3% in 2007 from 2% in 2006.
The next step, if Canadian economists are reading Bank of Canada Gov. David Dodge correctly, will be a quarter-percentage-point increase in short-term interest rates, to 4.25%, at the bank's July 10 meeting. Another increase in September is expected by economists. That, of course, would increase the attractiveness of the Canadian dollar against the U.S. dollar as the U.S. Federal Reserve remains sidelined by a weak economy.
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The other CanadaAs investors begin to plan for retirement, one viable option is to look at stable foreign markets. MSN Money's Jim Jubak says economies based on natural resources, with stable currencies and governments that won't radically alter investment laws, can help keep your money safe.
I think the conventional wisdom is wrong about the next 18 months, too. I don't see commodity prices pulling back significantly in that period. Certainly, I don't see oil and natural-gas prices falling enough to weaken the loonie in that time frame. On June 12, the International Energy Agency warned that, in the short term, production from non-OPEC countries would be lower than expected at a time when world oil demand is growing faster than projected. (The Organization of Petroleum Exporting Countries supplies about 40% of global oil.) The agency revised its projections for global demand growth in 2007 upward to 2% from a prior 1.8% estimate. That would put the growth rate at twice that of 2006.
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