Why You Want To Own Canada

Daily Edge Portfolio Strategy Comment by Vincent Delisle, CFA
Event
■ Executive summary of our report entitled “Why You Want to Own Canada”.

Implications
■ This report is a sequel to a theme piece entitled ” Foreign Exposure Rising: Impacts on Canadian Equity Strategy ” published in April 2007.
■ This updated edition will focus on reasons to own Canadian equities both for foreign and domestic investors. We also provide an updated list of Scotia Capital’s Top Picks.

Recommendation
■ Canada’s main attributes are as follows: (1) Emerging market exposure with lower volatility; (2) cheaper valuations relative to MSCI World; (3) stronger domestic fundamentals: (4) Canadian dollar strength relative to the USD and British pound; (5) proximity to the U.S. economy; and (6) above average market capitalization in Financials, Materials, Technology, and Industrials.

Why You Want To Own Canada
■ This report is a sequel to a theme piece entitled ” Foreign Exposure Rising: Impacts on Canadian Equity Strategy ” published in April 2007. In the first report, we looked at how the elimination of the foreign content rule would impact Canadian equities and funds flows as domestic pension funds would aim to reduce their home bias. Domestic investors have been reducing their “home bias” in the last five years, but foreign inflows into Canadian equities have more than compensated.
■ In our first edition, we also detailed the often overlooked attributes of the Canadian equity market and highlighted why foreign investors should overweight Canadian equities. This updated edition will focus exclusively on reasons to own Canadian equities both for foreign and domestic investors. We also provide an updated list of Scotia Capital’s Top Picks.
■ The Canadian economy represents 1.9% of world GDP (11th in the world with a nominal GDP of US$1.5 trillion in 2008) and its equity market capitalization weighs in at 3.7% of the MSCI World index. In terms of market capitalization, Its 10 yr CAGR of +7.8% (in USD terms) compares to -2.5% for the S&P 500, +7.6% for the MSCI EM index, and -0.7% for the MSCI-World.
■ In our opinion, the chief reason to own Canadian equities lies in its superior risk-reward profile. In the last 10 years (August 1999-August 2009), the Canadian equities’ compounded annual growth rate (CAGR) outpaced the MSCI World CAGR by 8.5% (7.8% vs. -0.7% respectively) with only 20% more volatility (Exhibit 1) Hence, Canada offers the stability of a developed economy with an exposure to growth in developing nations through its commodity sensitivity.

Read the full report: Why you want to own Canada