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Accord Update

August 2010

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 observation 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
– Large fiscal deficits; and
– An overly accommodative monetary authority.
This raises the question: why should investors emphasize
investments in developed economies such as Canada over
emerging economies? The fact is that direct 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.

Summary (continued)

Eastern Canada, represented by Ontario and Therefore, investing in Western Canada provides
Quebec, is heavily exposed to deteriorating US exposure to emerging market growth in energy and
demand through its automotive and aerospace agriculture within one of the world’s most politically
industries. To put it simply, Eastern Canada imports stable markets. In addition, investors who have a
what the emerging economies need and exports ‘value’ orientation have been provided what we
what they make, putting it under pressure on both the believe are attractive entry points into the Western
cost and revenue side of the equation. Canadian market by some recent events. 
Meanwhile Western Canada, represented by British In the energy sector, the credit crisis has caused
Columbia, Alberta, Saskatchewan and Manitoba, is in financing to become scarce for junior oil & gas
the enviable position of exporting what the emerging companies while low natural gas prices are reducing
economies need and importing what they make. their profitability. They are being forced to sell assets
What do we mean by this?  It’s a well-understood to stay in business. This has created a buyers’ market
process that energy and food consumption undergo for the acquisition of smaller oil production assets –
rapid growth as a developing economy makes the assets that are highly cash-flow positive at current oil
transition to a middle class standard of living. Energy prices. 
and agriculture are Western Canada’s dominant  
industries – and this region, with only 10 million In the agriculture sector, the regulatory barriers that
inhabitants, is one of the world’s largest net exporters made it difficult to invest in Saskatchewan farmland
of both energy and agricultural commodities.  Here’s have recently been liberalized, allowing capital to
an approximate breakdown: move in and acquire the cheapest farmland (on a
  productivity basis) in Canada and perhaps the world.
– Oil (13% of world reserves; 4% of world We expect China to overtake the US as the world’s
production) leading economy, but we think Canada’s fortunes will
– Uranium (8% of world reserves; 20% of world surprise many. Indeed, Canada’s uniquely bifurcated
production)  economy may serve as a bridge from the developed
to the developing world – at least for investors wise
Agriculture enough to cross it.
– Potash (60% of world reserves; 30% of world  
– Wheat, coarse grains, oilseeds (21% of the
world export market for wheat; 10% for
– Farmland (80% of Canadian total)


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