Canada tops investment list: Haber

A soaring currency. The threat of inflation. A potential recession prompted by a slowing U.S. economy. Despite today’s volatile market, investors in Canadian resources are poised to cash in on a bullish market, according to Fidelity Investments Canada.

The mutual fund giant predicts that the nation’s economy is set to surge in the next few years — all because of our natural resources, including oil, potash, grains and metals. It’s a prediction supported by the surging economies of the Prairies and Maritimes, where much of Canada’s resources are located.

“We are experiencing the single greatest mass migration of people in the history of the planet,” stated Bob Haber, CIO and portfolio manager at Fidelity. “All of that [migration] accelerates the demand for commodities — commodities like oil and food. Canada is uniquely positioned to benefit from this migration … [and] I don’t see it changing.”

Speaking at an advisor luncheon in Toronto Wednesday, Haber said that despite the threat of a rising loonie, anticipated inflation and loss of manufacturing jobs, Canada will benefit from the worldwide urbanization trend. While not new, the impact of populations migrating from rural to urban settings is beginning to have marked effects on the world economy.

Haber’s colleague Chris Goudie agrees. As the senior vice-president for Fidelity’s international equities, Goudie cites China as an example of the impact and importance of the urbanization trend. According to Goudie, the Chinese government realized the importance of transitioning from a rural economy into an industrialized nation. As a result, China pumped money into urban infrastructure. The results are astronomical by Canadian standards. In just 10 years, more than 200 new cities have been created in China.

Construction of the Three Gorges Dam required the relocation of those living on the chosen site, for example. Many were moved to Chongqing, an inland port and trade centre, which, as a result of the migration, has grown from 12 million to just under 33 million — creating 21 million urbanites from formerly rural Chinese.

To emphasize this point, both Haber and Goudie point out that every new city requires infrastructure and infrastructure requires resources, including oil, foodstuffs and metals, such as nickel and cadmium. Over the next 10 years, the Chinese government plans to build between 200 and 400 cities to accommodate the shift from a rural economy to an urban economy, explains Goudie. “Think of the infrastructure expenditure and the demand for resources.”

This type of rapid growth in developing countries is what will fuel Canadian resource markets, he says, making them ideal places to invest. “Urbanization,” he says, “is the game changer.”

According to a CIBC World Markets report, the global energy markets will impact the economy in four ways:

  • There will be a rapid growth in oil demand (particularly from developing Asian countries).
  • Energy price hikes will negatively impact the U.S. economy.
  • Energy costs will push the cost of other products, such as travel, consumer products and petrochemical products, such as plastic, higher.
  • Increased demand on ethanol will push soft commodity prices higher — first by increasing the price of corn; then by pushing up the price of other feed and grain, thereby raising the price of meat, dairy and eggs.

All of this bodes well for a resource-rich country like Canada, says Haber. “If you look at the oil production in this world, only about a third of it is open to equity investors,” he explained. “And that oil is located in Canada.”

He believes the same is true for metals and agriculture — two additional hot resource areas that are abundant in Canada.

While there is fear about the impact of inflation and the slowing U.S. economy, Haber suggests that none of this will really matter to Canada’s resource-rich economy. While he admits certain sectors in Canada will feel the pinch of a strong loonie, he believes that the continued growth in developing countries and the increase in urbanization will continue to fuel the demand for resources, thereby increasing the demand of what Canada can supply.

“There is a lot going on around the world and while [Canada] is not the only place [for these resources] in the developed world, it is the place.”

Even if the U.S. goes into recession, explains Haber, China and other developing countries will continue to grow. “The Chinese government knows the importance of maintaining growth. If the U.S. decreases its imports — which decreases China’s exports — the government will accelerate infrastructure; this will keep jobs and continue to ensure the shift from rural to urban is a high priority.” He emphasizes that in the next 10 to 15 years, 2 billion people will move “into the cities.” He suggests that this migration has “enormous stock market ramifications for the infrastructure, for electricity, for wastewater treatment, for building roads, everything you can imagine, all of which falls on the industrialized worlds to supply materials, expertise and commodities.”

For Canadian investors, Haber and his colleagues suggest investing in funds that choose their companies from a bottom-up perspective. “Of course there will be some companies and areas to avoid [when investing],” he says. But if an investor chooses a product that is well researched and well managed, there should be strong, positive results over the next few years.

Originally published in Advisor’s Edge Report in November 2007