The following commentary is from an investment professional with Clear Harbor Asset Management who is a participant in TheStreet's expert contributor program.
NEW YORK (
) -- U.S. investors are looking elsewhere for opportunities amid rising concerns about the country's debt burden, which recently reached the equivalent of $120,000 for every individual American when public and private nonfinancial debt is combined. Meanwhile, Europe is mired in its own debt crisis -- and probably sinking into recession -- and growth in China is slowing as some fear structural problems are developing there as well.
If only there was a stable, developed country that was easily accessible to investors and that wasn't mired in debt -- and that had a healthy banking system, a credible regulatory structure, a rich bounty of natural resources and a maniacal obsession with the sport of ice hockey. Such a place sounds too good to be true, but not if you consider our friendly neighbor to the north -- Canada.
For the record, no Canadian bank needed or asked for a government bailout during the financial crisis. Corporate debt in Canada is at an all-time low, and while the U.S. and other governments binged on debt when times were good, Canada actually went through a tough deleveraging process in the 1990s when the global economy was in better shape. Now, its policymakers have far more flexibility than their peers elsewhere in dealing with the problems at hand.
By the time Lehman Brothers went bust, Canada was in the best fiscal shape of all the G-7 countries, and shares of its publicly traded banks like the
Royal Bank of Canada
Imperial Bank of Commerce
have far outperformed their U.S. counterparts like
Bank of America
Many U.S. investors don't consider buying Canadian securities to be a form of foreign exposure given Canada's close proximity and correlation to the U.S. economy. But the country does have its own currency, and there is no doubt that it entered this period of economic hardship in a much stronger position than the U.S. and others in many respects.
To be sure, Canada has its problems. Household debt levels there recently surpassed those of the U.S. and the U.K., which is worrisome. The unemployment rate in Canada is 7.5% -- lower than in the U.S. (8.5%), but still high, and it's exposed to the myriad of macroeconomic threats facing the global economy. I'm not arguing that investors should liquidate their U.S. investment portfolio and bet the farm completely on Canada, but I do think it's a great place to look for quality investments these days -- particularly its natural resources sector.
For example, consider Canada's lumber industry. In 2007, 80% of Canada's lumber output was exported to the U.S., while just 3% went to China. Today, more than 30% of Canada's lumber goes to China, and a roughly equal amount goes to the U.S., according to Raymond James Financial. Due to its economic slowdown, American demand for Canadian exports in general is $30 billion lower than normal, according to the Bank of Canada.
"The U.S. market is depressed, but that will change, and in the meantime, Canada has ramped up exports to alternative markets like China," said Raymond James analyst Daryl Swetlishoff. "We don't have to abandon these new markets when the U.S. does recover and starts consuming our resources as it has in the past."