Invest in Canada

With the bursting of the US housing bubble, it seems more than likely that the world’s most important consumers – the American public – will finally be forced to stop spending, as the equity in their homes disappears. That’s bad news for the rest of us.

As Morgan Stanley economist Stephen Roach puts it: “An unbalanced world remains highly vulnerable to a consolidation of the asset-dependent American consumer.” In other words much of the rest of the world – China in particular – has been relying on US consumers buying their goods to keep their economies thriving.

But in turn, the US consumer has been relying on never-ending house price growth to fuel their spending, in the form of borrowing against the equity in their houses. Now that house price growth has crashed, there’s no more money left in the piggy bank – in fact, many Americans are getting nasty shocks that they actually owe the piggy bank money.

So investors might want to start looking for safe havens. The US slump is being felt in all the major world markets, but there is one region standing out as being a good bet for the longer term. Ironically enough, this safe haven is not terribly far away from the US – in fact, it’s just north of the border.

Canada has a great deal to recommend it. At a time when the commodities sector is doing better than expected in this economic downturn,  it is sitting on vast reserves of gold, uranium and nickel, to mention just a few of its natural resources. It also happens to have the second-largest oil reserves in the world after Saudi Arabia, in the form of the Alberta tar sands. It’s not easy to get oil out of the sands – in fact it is very expensive, but with the price of oil slowly creeping up, it will be viable to extract the oil.

Canada also has an even more important liquid in abundance. A global water shortage is threatening the economic development of both China and India. A full 30% of the global population is expected to experience water shortages by 2025, according to the Centre for Strategic and International Studies. But Canada is one of the most water-rich countries in the world – in fact, it may even be exporting water by then.

And Canada is one of the few developed countries that has not suffered a massive house price crash. Certainly, areas such as Alberta have seen prices soar and drop,  boosted by the tar sands. But elsewhere in the country, single-digit annual growth and now decline is more the norm.

The only concern is that Canada does most of its export business with the US – this accounts for about a third of Canada’s GDP. So the country is by no means immune to a slowdown in its neighbour to the south. But it is also expanding its business relationships with China – the far-eastern giant has been hunting all over the world for resources to feed its expanding economy, and it is now working on a deal to create a pipeline supplying oil from Canada to Asia. And if the resources boom continues, Canada is one of the best-placed developed economies to benefit.