Many Americans tend to overlook Canada. The country seems so familiar to us that it's easy to think of them as an extension of the United States. But for Americans looking for investment opportunities abroad, this kind of thinking would be a mistake. Canada does share close ties with the US. But Canada is a foreign country, no matter how recognizable it may seem to us.
For investors, there are enough differences to warrant a second look. In this post, we will explore the Canadian economy as well as possible options for investing in Canada.
Pros Of Investing In Canada
Canada is a natural resource powerhouse and a net exporter of energy. It has a healthy government budget when compared to the States, with a debt-to-GDP ratio of approximately 85%. The US sports a tenuous 102% ratio. Canada also has a fairly strong banking sector. Canadian financial firms were never as highly leveraged as American banks.
According to the Wall Street Journal, Canadian economic growth is still beating estimates, and GDP growth is still expanding. But the International Monetary Fund recently predicted slower growth in coming years, due to higher consumer debt levels and a slowing housing market.
And for Western investors, studying Canadian investments is relatively easy. Try comparing a Canadian financial statement to its South Korean or Chilean counterpart. This is important since many investors place a premium on simplicity. They want to understanding investments thoroughly before committing any cash. Canada is easy for Westerners to understand.
Cons Of Investing In Canada
The Canadian economy is dependent on natural resources. It produces many important raw materials sold on world markets today. This pro is also one of the cons. When natural resource prices are up, Canadian industries may experience boom times. When prices are down, the reverse is true. Their economy is highly vulnerable to the whims of market forces that are beyond their control. Of course, all countries and individuals are subject to price fluctuations, deflation, and inflation. And as we will see, its energy exports are diverse.
Canada is also tightly bound to the US economy. It sent around 74% of all exports to the United States in 2011, although that is down from 87% in 2002. Despite efforts to diversify it's export mix, US consumer spending still has a huge effect on Canada’s economy. This makes Canada extremely sensitive to economic changes in the United States. This is something Canadians are attempting to change by increasing trade with Asia and other parts of the world.
Top Canadian Exports
$86 billion in 2011. Canada is a net exporter of oil and the 13th largest oil producer in the world. Alberta oil sands operations extract around 95% of Canada’s oil. Canada sells the majority of this oil to the United States. By some estimates, Canada has the third largest supply of oil in the world. They come in third after Venezuela and Saudi Arabia. Here are several Canadian oil stocks:
Cars, Trucks, And Auto Parts
$49 billion in 2011. Many people do not associate Canada with automobile production. But it makes sense, given the proximity of Ontario to Detroit. Canada is home to many assembly plants owned by foreign automakers. Most of those automakers are very familiar to us. Ford, Honda, Fiat, GM, and Toyota all have manufacturing facilities set up in Canada. Magna International is a key player in the Canadian auto parts manufacturing industry.
- Magna International – MGA
$19-21 billion per year (estimated). You will not find this number included in any official figures. But marijuana is probably Canada’s largest agricultural crop, they export large quantities to the United States every year. Vancouver, BC is at the center of the growing industry and almost 250,000 Canadians work in the field. However, strong legalization movements in the United States will likely cut into future Canadian weed profits. Read up on how to invest in cannabis stocks.
$17 billion in 2011. Canada mines large quantities of gold and has the sixth largest gold reserves in the world. Canadian gold miners have benefited from the long run up in gold prices. According to the Globe and Mail, Canada will soon lay claim to the worlds largest gold mine. Canada is also home to the most popular silver and gold streaming companies. Here are two publicly traded Canadian gold mining companies:
Liquefied Petroleum Gases (LPG)
$16 billion in 2011. Canada is the worlds third largest producer of LPG, also known as propane. LPG is a derivative of the oil industry. Canada is looking at ways to export more of this valuable commodity to markets in Asia.
$8 billion in 2011. Canada has almost 4% of the total coal reserves in the world. It exports approximately 73% of its coal production to Asia. Two large Canadian coal companies:
Other notable exports include:
- Maple Syrup
Investment Choices In Canada
There are several ways for Americans to invest in Canada. Here are a few options:
US Companies With Canadian Operations
Some US companies have operations north of the border. For example, investors could purchase shares of an American car company listed above. Obviously, this would not be a pure Canadian play.
Canadian ADRs On US Exchanges
Investors may also buy American Depository Receipts (ADRs) on US stock exchanges. Most of the Canadian stocks listed above can be purchased as ADRs.
Canada ETFs And Mutual Funds
For broad exposure to Canada, iShares offers the MSCI Canada Index ETF – (EWC). Mutual fund companies also have Canada-specific funds, although these typically have higher expense ratios.
Consider adding exposure to Canada as part of your portfolio allocation. The country is fiscally sound, has a strong economy, and is backed in large part by hard assets. Just be aware of the potential risks, given the concentrated nature of its export sector and its close ties to the Unites States.