Strategic advantages over many advanced economies increasingly well recognized
TORONTO,
July 14 /CNW/ - Canada's outperformance versus many advanced economies is creating "staying power" for the country's growing popularity with
foreign investors, notes a new report from
CIBC World Markets Inc.
"
Canada is increasingly on the lips and minds of international investors," says
Warren Lovely, government strategist with CIBC's Macro Strategy group, fresh back from meetings with investors across the U.S. and Asia. "Those we've talked to are getting religion on Canada's potential outperformance versus a growing list of advanced economies. Indeed, it's hard to recall a time when the country possessed such relative, if not absolute, strength."
In CIBC's latest Global Positioning Strategy report,
Mr. Lovely identifies a growing list of "strategic advantages" that are boosting interest in
Canada and its weighting in global investment portfolios.
Central to Canada's strong story is its fiscal advantage, says
Mr. Lovely. He points first to Canada's much smaller need for fiscal adjustments to stabilize debt ratios. "Canada's provinces are not feeling the same heat as some U.S. states, are less prone to severe program cuts or increased revenue measures, and are therefore putting their regional economies at less risk."
In addition, the revenue picture for Canada's federal and provincial governments is also "brightening materially" with
$15 billion in extra revenue projected for the year.
Mr. Lovely says the fiscal improvement will serve to reduce borrowing requirements and protect federal and provincial credit ratings. It also means less bond issuance from
Ottawa which will "leave plenty of room in the long end for provincial and corporate issuers."
Other distinguishing advantages for Canada noted in the report include the following:
Years of fiscal outperformance and surpluses in Canada have created
budgetary room to slash corporate taxes. This result combined with
important tax reforms have given Canada a growing advantage over
competing tax jurisdictions.
Canada has emerged as a growth leader in the developed world, with
the IMF the latest forecaster to see the country leading the G7 in
terms of average real GDP growth during 2010-11. While Canada's
growth rate is only modestly above that of the U.S., its indicators
of domestic economic health, such as employment, are substantially
brighter.
Canada has a well-capitalized banking sector with a less dramatic
adjustment to regulation in store.
Canadian exporters have limited direct exposure to slow-growing
Europe and at the same time have had success in increasing exports to
the faster-growing BRIC region.
Healthy international and interprovincial migration, particularly in
western Canada has created less onerous demographic pressures which
in turn support a faster potential economic growth rate.
But
Mr. Lovely also sees some challenges to Canada's continuing outperformance. He notes that three quarters of Canada's exports go south of the border, meaning a "U.S. slowdown will leave its mark on
Canada."
"Canadian and U.S. real GDP growth has never been more tightly correlated than during the past five years. So the end of an
American inventory rebuilding process will sap demand for Canadian wares," adds
Mr. Lovely.
Other risks to Canada's economic prospects include the impact of a continuing strong
Canadian dollar on manufacturing, an overheated housing market and highly indebted household sector.
"Notwithstanding these challenges, Canadian governments are courting international investors from a position of strength, hardly beholden to foreign capital, but happy to take full advantage of a healthy appetite for Canadian fixed
income product," says
Mr. Lovely. "The message is getting through, and there's every reason to believe that today's strong foreign investor interest in
Canada will have staying power."
The complete
CIBC World Markets report is available at:
http://research.cibcwm.com/economic_public/download/gps_jul10.pdf
CIBC World Markets Inc. is the corporate and investment banking arm of CIBC. To deliver on our mandate as a premier client-focused and Canadian-based wholesale bank, we provide a wide range of credit, capital markets, investment banking, merchant banking and research products and services to government, institutional, corporate and retail clients in
Canada and in key markets around the world.
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