Canada: A Safe Haven for Foreign Investment

If Davinci had kept making copies of the Mona Lisa, would they have increased in value or decreased? My preteen kids can answer this one, yet highly sophisticated currency traders seem to have trouble with the concept. Somehow, the USD has enjoyed the privilege of making my kids – and common sense – wrong, at least since it became the world's reserve currency. But all good things must come to an end...and our perceptions of “safe” investments are certain to change when it does.

The US has benefited greatly from its unprecedented run as the primary global reserve currency, but with the amount of printing their massive deficit now requires, alternatives are inevitable. The Chinese have slowed their printing and continue to refuse to float their currency. Europe is in the same boat as the US and will continue to print the EURO to bail out the floundering PIIGS (Portugal, Ireland, Italy, Greece and Spain). The Japanese are worried about deflation and so they are in the same predicament.

Canada has also been printing frantically in an effort to keep pace, but it will come woefully short of maintaining parity with our neighbors. Although the policy here has been to print in hopes of maintaining some order in the currency markets, it is impossible to avoid the long-term, upward pressure of our dollar. We may have mostly avoided the carnage our “big brother” to the south has been enduring, but with inflation looming the printing is set to slow.

That being said, Canada has the strongest banking system in the world, among many other advantages. Canada avoided all of the follies of over-lending, is strongly resource-backed and based, and is politically secure with a convenient proximity to the largest market in the world. Russia, for one, has recently realized the long-term stability inherent in a developed Western country boasting the lowest debt to GDP ratio in the G7. In an unprecedented move, the Russians recently declared that they would be holding some of their national reserves in Canadian Dollars. Movements such as these are significant when taken in the context of Canada’s relative economic size.

As this article from the CBC illustrates, many other nationalities have begun pouring money into Canada:

Foreign investors flock to Canada

With inflation fears looming – particularly in the United States – investors are once again seeking the insulation offered by hard assets. Gold tends to be the default commodity for circumstances such as these, but its commonly-held derivatives are still denominated in USD, thus retaining the risks posed by currency fluctuations. Owning US real estate, another hard asset alternative, leaves the investor open to both risks of the devaluation of the dollar and the still-uncertain American real estate market. The dollar correction alone will significantly outpace any interest income on savings or reserve cash with the inherent protection of a hard asset, if you realize that Canadian commercial real estate may well be the safest long term investment going for US investors familiar with the field.

Commercial Real Estate in Canada has weathered the global financial storm more than admirably with only scant evidence of any Power of Sales (foreclosures) and is now set to begin rising. The sector did not experience the boom in anything other than slow moderate growth from the mid nineties through the early part of the 2000’s and is now set to get its’ moment in the sun. Banks in Canada, which avoided the sector with anything other than lower leverage, are now dipping their toes into the market and with coffers brimming (RBC, Canada’s largest Bank, has a tier 1 capital reserve of app. 14%) the market is set to take off.

If you are in the sector or have clients sitting on cash making peanuts, I can think of no better way to unlock that cash into a higher and safer return with excellent up side!