(Source: Morningstar, 9/26/16)
A similar stock rebound has been taking place in other hard-hit commodity economies, including Brazil and Russia, which have posted year-to-date returns ever greater than Canada. Peru, a base-metals economy, is second to Brazil this year in country stock market performance.
Last week the news of an OPEC deal to cut production — the first notable agreement since the oil price collapse of 2014 and first production cut since 2008 — buoyed crude prices. But doubts remain about follow-through on the deal from OPEC members, as well as the extent to which a production cut would propel further oil price gains. Goldman Sachs said it was making no change to its oil price forecast through 2017 — $43 through the end of this year and $53 a barrel in 2017.
Rising oil prices also impact Canada's currency, which after a couple years of declines has strengthened considerably against the U.S. dollar. Since the start of the year, the greenback has fallen by more than 5 percent against the loonie, which means that even if the Canadian market was flat, you'd still make money off that currency movement. "The Canadian dollar has bounced off the bottom," Lingard said. It's a currency move that has benefited a broad Canadian stock fund like EWC, which is up 19 percent this year — its total return without the currency move is roughly 13 percent.
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As good as these gains have been, why would an American want to invest in Canadian stocks? One reason is that, as commodity-driven economies go, Canada is a much safer place to invest in than other commodity-rich countries, such as Brazil and Russia. While both of those nations have seen bigger market gains this year, they're much more volatile than Canada. And while Canada is, of course, not an emerging market, people do lump the country in with these developing countries because of its oil and materials exposure. If you do want that commodity exposure, it makes a lot of sense to buy Canadian.
"If you're investing in a commodity-heavy index, downside risk is very important," said Risteard Hogan, lead manager on the Fidelity Canada Fund. "In Canada there's a rule of law; there's corporate governance. In emerging markets there's not an immaterial chance of getting an asset appropriated. Investing in Canada is a much higher-quality way of owning these businesses."