Gold miner George Vanderwolf pans for gold in the Fraser river as ice and snow float by in Lillooet November 13, 2012.John Lehmann/The Globe and Mail
The "sell Canada" trade is getting crowded. The number of voices recommending investors either steer clear of our stock market or even bet against it is on the rise, but the pessimism has an upside: In a world of fully-valued stock markets, Canada is looking like a bargain.
A few days ago, Marc Faber, editor and publisher of The Gloom, Boom and Doom Report, told The Globe and Mail that Canadian real estate is in bubble territory while household debt levels are high, raising the risks of investing in any lending institution.
The commodities market is also taken a drubbing. Stanley Druckenmiller, the former hedge fund manager and chief strategist for George Soros, told the Ira Sohn conference last week that the commodities "supercycle" – which had driven energy and base metals prices on a multi-year bull market – is over, with potentially disastrous consequences for the Canadian dollar.
Indeed, the Canadian dollar is being targeted by short-sellers in a big way: Thumbs-down on the loonie has become the most popular currency bet among speculative traders, next to the yen.
It goes on. Steven Eisman, famous for betting against the U.S. housing market, is now issuing warnings about Canada's housing market. And a U.S. hedge fund manager named Vijai Mohan has generated an enormous amount of attention when he bet 95 per cent of his fund against Canada.
Faced with this onslaught, it is tempting to accept that Canada is in big trouble. More likely, though, the onslaught merely suggests that the bad news has already been priced in, and Canada is now set to outperform.
Indeed, the chorus of warnings comes at a time when the Canadian stock market is already struggling. The S&P 500 has been hitting a succession of record highs, while Japan's Nikkei 225 has surged more than 40 per cent this year. But Canada's S&P/TSX composite index remains 16 per cent below its record high in 2008 and hasn't made much progress in about three years.
Commodities producers, which represent about half of the benchmark index, are the chief reason for the underperformance. Materials stocks have slumped 45 per cent since 2011. Energy stocks are down 22 per cent since 2011.
But if you are looking for cheap, beaten-up investments, Canadian commodity producers should top the list. The upside is persuasive: As the developing world grows more affluent, energy and base metals will meet rising demand.
Commodity prices themselves reflect this view. For example, crude oil trades at about $95 (U.S.) a barrel, even though the U.S. economy is barely growing, the euro zone is mired in recession and China's growth is slowing. Imagine what the price of oil will be when the global economy is humming again.
Canadian financials haven't felt the same downward pressure, and the banks in particular can hardly be called bargains. But the chief worry among many pessimists is that the Canadian housing market will experience a sharp downturn similar to what was seen in the United States several years ago, hobbling financial firms.
While it is likely that Canada's housing market will wobble and mortgage revenue for banks will decline, the U.S. doesn't serve as a good template: In Canada, mortgages are essentially backed by the government, and lending practices have been far less aggressive.
There have been Canadian housing downturns before, and banks have emerged in good shape. There is little to suggest that this downturn will be any different.
The pessimistic views on Canada look about five years out of date. Canada is by no means a hot market set to fall on hard times. It's an out-favour market that is looking considerably more attractive than just about everything else.
David Berman