The Great White North Is on a Tear

VANCOUVER -- Life on the Canada/U.S. border has its perks. After all, most border dwellers have not one, but two countries, to shop from. During the 1980s, Canadians were typically seen heading south to stock up on cheap gas, groceries, booze and Buffalo chicken wings.

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In recent times, the flow has reversed, with Americans taking advantage of a cheap Canadian dollar to scoop up nicely priced grub, designer duds and compact discs. But in addition to maple syrup and Hugo Boss suits, Americans are adding Canadian stock market offerings to their shopping lists.

No doubt about it, stocks from the Great White North have been on a tear. The Toronto Stock Exchange 300 index, the country's chief benchmark, is up more than 29% year to date. This compares favorably with the 6.9% decline for the Dow Jones Industrial Average, as well as the 1% loss for the Nasdaq Composite during the same time frame.

Among Group of Seven countries, Canada lays claim to the best-performing of the key stock indices. Italy's MIB TEL, with a run-up of 11.3% during 2000, is in a distant second place.

The TSE 300, and the Canadian economy in general, have been buoyed by a confluence of the usual equity-favoring factors: tame inflation and surging corporate revenues. Plus, an undervalued Canadian dollar has made many Canadian companies attractive targets for foreign investors.

According to Douglas Porter, Toronto-based senior economist with brokerage BMO Nesbitt Burns, foreigners have poured $C23 billion ($16 billion) into Canadian equities since January -- easily shattering 1999's full-year record of $9.8 billion.

"A lot of this simply reflects a catch-up performance relative to the dismal 1990s," says Porter of the decade when his country was beset by recession and the Asian currency crisis of 1997. "For a number of years, Canada was almost a forgotten market, and was relatively cheap compared to the U.S. market. I think the valuation differences have narrowed substantially in the past year."

True to its national trait of modesty, however, the country has yet to taunt its American cousins with trash-talk and patriotic sloganeering. Instead, its leading companies, such as Nortel Networks (NT) and JDS Uniphase (JDSU) continue to forge ahead aggressively in their quests to become world-beating companies.

Earlier this month, JDS Uniphase, the world's No. 1 fiber-optics parts maker, announced a whopping $41 billion merger with SDL (SDLI). And while Nortel's talks with Corning (GLW) over their optical-manufacturing businesses may have fallen through, Nortel shares still have a year-to-date return of 66.5%.

Nortel's phenomenal growth during the past couple of years has made winners out of mutual funds like the (MCFGX)Merrill Lynch Fundamental Growth Fund, which counts the firm among its top-five holdings and is enjoying a year-to-date gain of 10%. Meanwhile, the Fidelity Canadafund, which claims BCE (BCE) and Nortel as its top-two holdings, has delivered an impressive 25% gain since January.

Another Nortel and BCE-heavy Canuck offering is the iShares MSCI Canada (EWC), which has a year-to-date return of 28%. The exchange-traded fund, a product of Barclays Global Investors, invests in most of the same stocks listed in the Morgan Stanley Capital International Canada Index.

The aforementioned Canadian companies, along with other technology starlets such as PMC-Sierra (PMCS) and Research in Motion (RIMM), are helping the country to shed its reputation as an economic backwater devoted exclusively to resource-related industries like forestry and mining.

In addition to technology, communications, media and financial services sectors have come alive north of the border during the past year. And yes, natural resources are hanging in there, thanks to the energy sector -- the TSE Oil & Gas subindex is up more than 17% this year -- although the exchange's forestry and mining indices are both in the red.

Steven Schoenfeld, co-head of Barclays Global Investors' International Equity Management Group, argues that investors were traditionally underweight Canada, but that new international investment strategies have shed light on the former wallflower of the world marketplace. (Schoenfeld was a guest on the TSC Streetside Chat last weekend.)

"Investors who've been ignoring Canada are now bringing up to its relative size," he says. "Canada is 4% of the world (economy) outside of the U.S. It's just been a historic anomaly that investors have missed that."

Just as classic rock enthusiasts look to Canada for albums from the likes of Rush and Neil Young, investors are gravitating toward the border to round out, and spice up, their overly domesticated portfolios. It seems that no collection is truly complete without some northern exposure.

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