Investing in Canada requires intellectual flexibility
In the last part of this series, we discussed intellectual flexibility as an important quality for investors. Intellectual flexibility allows investors to hold two opposite investment ideas at the same time. This idea was proposed by Jared Dillian of Mauldin Economics. He says that when it comes to investing in Canada (EWC), we can hold two opposite things to be true. The Canadian economy was going into a depression just a few months ago, yet today the country has a strong growth outlook and the Canadian dollar has climbed back against the US dollar.
The Canadian economy was going into a depression a few months ago. In the first and second quarters of 2015, Canada recorded economic growth rates of -0.9% and -0.4%, respectively. Now its economy is recovering. In the fourth quarter of 2015, the country recorded a growth rate of 0.8%, as compared to 2.4% growth in the previous quarter, according to data provided by Statistics Canada.
However, Dillian also points out that the Canadian economy is experiencing an energy bust and a housing bubble. Thus, economic growth could hit a wall.
Canadian dollar movement
The second point Dillian talks about is the Canadian dollar’s movement against the US dollar (UUP). Six months ago, the Canadian dollar was trading at 0.76 USD. In January, the Canadian dollar touched 0.68 USD. At the time, commodity (DBC) (BCX) prices touched multiyear lows. This indicates that the US dollar became stronger not only against the Canadian dollar but also against the world’s (VTI) (VEU) major currencies. As the US (QQQ) (IVV) (SPY) dollar became stronger, commodity prices got hammered, as commodities are US dollar-denominated. As Canada has a commodity-driven economy, the fall in commodity prices lowers investor sentiment about the economy.
However, the Canadian dollar is becoming stronger. As it continues to rise, Canada’s economy could continue to bounce back.
Hence, these two opposite ideas about the Canadian economy are true. Investors must have intellectual flexibility to accept these opposing ideas.
In the next part of this series, we’ll analyze Brazil’s performance and look at whether the country is likely to continue down the same path.