Enquirica Research is a Calgary based firm focusing on independent analysis of alternative asset classes and investment opportunities in exempt market securities that target investments in western Canada. For copies of Enquirica research register at www.enquirica.com.

1. Investing in Canada’s Bifurcated Economy
economic, financial and marketing analysis

2. In this hostile financial climate, long-term investors must now give more thought
than ever to capital preservation and sustainable growth. It is not a profound ob-
servation that growth is not sustainable if it is driven by debt-fueled consumption.
Sound fundamentals for growth include:
– Favorable demographics;
– Low national debt levels;
– High savings rates; and
– Persistent trade surpluses.
Many emerging economies have all of these characteristics, while the so-called
‘developed’ economies have virtually none of them. Take Canada as an example.
It can be argued that Canada suffers from many of the problems of the typical
developed nation, though to a lesser degree than its G8 brethren. Canada is the
best of the worst, so to speak. Still, it has familiar developed-economy problems,
including:
– Aging population, with unfunded liabilities for social benefits;
– High debt-to-GDP levels;
– Low savings rates;
– Increasing government regulation and intervention in the economy;
– Large fiscal deficits; and
– An overly accommodative monetary authority.
This raises the question: why should investors emphasize investments in devel-
oped economies such as Canada over emerging economies? The fact is that di-
rect investments in emerging economies often come with higher levels of political
risk – see Russia’s expropriation of oil assets, or Argentina’s punitive export tariffs
on agricultural commodities during its 2008 food crisis. The challenge becomes
how to obtain emerging economy growth with developed economy risk.
That is the investment draw of Canada. Even though it faces many of the issues
of the rest of the developed world, there is an opportunity to capture emerging
market returns in Canada due to its uniquely bifurcated economy.
Eastern Canada, represented by Ontario and Quebec, is heavily exposed to de-
teriorating US demand through its automotive and aerospace industries. To put it
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3. simply, Eastern Canada imports what the emerging economies need and exports
what they make, putting it under pressure on both the cost and revenue side of
the equation.
Meanwhile Western Canada, represented by British Columbia, Alberta, Saskatch-
ewan and Manitoba, is in the enviable position of exporting what the emerging
economies need and importing what they make. What do we mean by this? It’s
a well-understood process that energy and food consumption undergo rapid
growth as a developing economy makes the transition to a middle class stan-
dard of living. Energy and agriculture are Western Canada’s dominant industries
– and this region, with only 10 million inhabitants, is one of the world’s largest net
exporters of both energy and agricultural commodities. Here’s an approximate
breakdown:
Energy
– Oil (13% of world reserves; 4% of world production)
– Uranium (8% of world reserves; 20% of world production)
Agriculture
– Potash (60% of world reserves; 30% of world production)
– Wheat, coarse grains, oilseeds (21% of the world export market for wheat;
10% for oilseeds)
– Farmland (80% of Canadian total)
Therefore, investing in Western Canada provides exposure to emerging market
growth in energy and agriculture within one of the world’s most politically stable
markets. In addition, investors who have a ‘value’ orientation have been provided
what we believe are attractive entry points into the Western Canadian market by
some recent events.
In the energy sector, the credit crisis has caused financing to become scarce for
junior oil & gas companies while low natural gas prices are reducing their profit-
ability. They are being forced to sell assets to stay in business. This has created
a buyers’ market for the acquisition of smaller oil production assets – assets that
are highly cash-flow positive at current oil prices.
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4. In the agriculture sector, the regulatory barriers that made it difficult to invest in
Saskatchewan farmland have recently been liberalized, allowing capital to move in
and acquire the cheapest farmland (on a productivity basis) in Canada and per-
haps the world.
We expect China to overtake the US as the world’s leading economy, but we
think Canada’s fortunes will surprise many. Indeed, Canada’s uniquely bifurcated
economy may serve as a bridge from the developed to the developing world – at
least for investors wise enough to cross it.
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herein are subject to change without notice. Some of the information, opinions, estimates,
projections and other materials contained herein have been obtained from numerous
sources and Enquirica Research Inc. and its affiliates (“ENQUIRICA”) make every effort
to ensure that the contents hereof have been compiled or derived from sources believed
to be reliable and to contain information and opinions which are accurate and complete.
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not to be construed as an offer to sell, a solicitation for or an offer to buy, any products
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other financial instruments), nor shall such information, opinions, estimates, projections and
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economic, financial and marketing analysis