Strong dollar, markets: Why Canada is attracting investors

Michael Babad

Oh, Canada

Canada is increasingly becoming a destination for foreign investors amid the global turmoil.
Its economy is sound, it has a rich resource base amid rising commodity prices, its banking system is safe, and Ottawa's fiscal policy is deemed as attractive compared to its peers. "What the markets are telling you is that Canada, the little brother to the north, is a much safer place to park your money from a fiscal balance sheet standpoint," chief economist David Rosenberg of Gluskin Sheff + Associates, noting lower longer-term bond yields in Canada. All of this has helped drive the Canadian dollar to around parity with the U.S. greenback, where it's projected to stay for some time yet.

That's a far cry from the days of 40 or so cents when the loonie was dubbed the Hudson Bay Peso and Canada, with its public finances in a mess, was deemed a basket case. Analysts believe the loonie will continue strong throughout the year, buoyed by a stronger economic outlook, high commodity prices and a weaker U.S. dollar. "The Canadian dollar is on a tear as the combination of rising commodity prices (particularly oil) and a bullish outlook for U.S. economic growth in 2011 leads to a sell Europe, buy North America mentality," said Rahim Madhavji of Knightsbridge Foreign Exchange. Mr. Rosenberg, in a note titled Oh, Canada!, also noted that Canada's benchmark stock index, the S&P/TSX composite , did better than the S&P 500 last year on comparable currency terms, gaining 21 per cent when expressed in U.S. dollars compared to 13 per cent. That outperformance has happened in seven of the past eight years, he said.

"Canada is experiencing very similar modest rates of economic growth like the U.S. but not on the back of quantitative easing and not at the risk of blowing a hole through the government balance sheet," Mr. Rosenberg added.
"Household debt in Canada is clearly problematic, but for now, completely serviceable. At the national level, as far as we know, Canada is the only G7 country with a credible federal government plan to balance the books over the next five years and at the same time promote domestic competitiveness via a schedule of sliding top marginal corporate tax rates."

Why 2011 could be year of the loonie

Goldman sees loonie reaching $1.05
.What history tells us
If history is any kind of guide, this could be a decent year for stocks. Add a grain or two of salt to that. If the financial meltdown, the recession, Europe’s debt crisis, and the ups and downs of the recovery have taught us anything, it’s that nothing is a given, and that one bad number or credit downgrade can burst the hopes of investors dreaming of heady days. Some believe the market is running ahead of itself anyway. So with that in mind, here’s some trivia to mull over today as global markets continue to rally: Since 1945, when the S&P 500 has gained on the first trading day of the year, the index has been up 74 per cent of the time for an average gain of 10.6 per cent, says Cleve Rueckert, equity strategist at Birinyi Associates. Historically, the third year of a U.S. administration has generally been a positive one for stocks, Malcolm Polley, president of Stewart Capital Advisors, tells the Wall Street Journal.

Over about the past eight decades, when the S&P 500 climbed in January, it gained on the year 73 per cent of the time, Howard Silverblatt, senior index analyst at S&P, tells the Journal.A rise in the S&P 500 over the first five days of the year has been followed by annual gains almost 90 per cent of the time, according to the Stock Trader’s Almanac and reported by The Associated Press.For some, January is a barometer of sorts for the year. Of course, we’re just one day in, and it was a good one, boosted by U.S. economic data and continuing on December’s hefty gains, which were the best since 1991. The S&P 500 climbed 1.1 per cent and the Dow Jones industrial average 0.8 per cent. Canadian markets were closed.

Yesterday, Citigroup boosted its target for the S&P 500 to about 1,400 for this year. That’s up from an earlier projection of 1,300 and would mark an increase of more than 10 per cent from where the index closed out 2010. The U.S. bank also sees the Dow reaching 13,500, which would mean a gain of about 14 per cent. But helping stocks along yesterday was the “January effect” that traditionally sees investors putting cash into retirement savings and asset managers acquiring stocks they believe will do well, according to Reuters, so the gauge is obviously questionable. There was also the December run-up to keep in mind.

“I do think that the best December for equities in almost 20 years has likely brought forward some of the performance we might typically see in January, so I expect the pace of the market’s advance to slow,” David Joy, chief market strategist at Columbia Management, told Reuters. U.S. economy stirs again, but recovery won't be vigorous

Bull v. Bear: The outlook for 2011

Coal prices rise
Coal prices are at a two-year high today, though floodwaters are receding somewhat in Australia's key mining area. Some mines are slowly bringing production back, Reuters reports, though most remain shuts in the wake of the stunning floods in Queensland state, the world's largest exporter. "Due to wet weather/flooding, the largest producers in Queensland have in the past month declared force majeure," UBS analysts said in a research note today, citing several companies including BHP Billiton, Xstrata, Rio Tinto and Vale, among others, and noting that the floods have affected both mines and rail lines. "The flooding in Queensland will disrupt the supply of metallurgical coal the most followed by thermal coal," they wrote. "As explained, it is not possible at this stage to estimate the volume impact, as further wet weather could prolong the disruption." The analysts also said that the "ideal equity exposures" to higher prices are those companies with large interests in metallurgical coal, but with no impact on volumes. In Canada, they cited Teck Resources , Western Coal , and Grand Cache Coal . Australia floods hit commodity exports