Europe's sovereign debt crisis could drive more investors to 'safe harbour'
Canada: CIBC World Markets Inc.

Economic and fiscal strengths have foreign investors scooping up Canadian bonds

TORONTO, Feb. 11 /CNW/ - Canada's superior economic and fiscal prospects are making the country increasingly attractive to foreign investors seeking "safe harbour" from a debt crisis looming in Europe, notes a new report from CIBC World Markets Inc.

"For a number of European countries, Greece and Portugal chief among them, a fiscal reckoning is at hand, sparking concerns of broader contagion on and off the continent," says Warren Lovely, government strategist with CIBC's Macro Strategy Group. "We've long advocated the economic and fiscal merits of Canada. But as a sovereign debt crisis swirls, the nation's relative standing has strengthened further. Simply put, highly-rated Canada offers safe harbour in today's global debt storm."

In the latest Global Positioning Strategy report, Mr. Lovely writes that Canada's attractiveness to investors abroad is anchored on multiple fronts. For starters, the nation has strong economic prospects and growth that should lead the G7. These factors support government revenues and imply "an easier fiscal row to hoe" in the coming years.

"But it's the federal government's fiscal credentials that shine the most favourable light on Canada," says Mr. Lovely, pointing to the elimination of large structural deficits and an earlier decade of surpluses. "Notwithstanding Canada's substantial stimulus efforts, the country's fiscal rectitude is well proven. There's a staunch commitment on the part of the main parties in Ottawa to restore fiscal health, and expect the upcoming federal budget to chart a course back to balance."

While Mr. Lovely sees the federal budget shortfall being all but eliminated by 2015, the nation's debt levels carry greater significance for investors. "Today, net debt is 35 per cent of GDP and likely to turn lower starting fiscal 2011, with only 14 cents of every revenue dollar required to service the debt." This is a stark improvement from 1995 when the net federal debt hovered around 70 per cent of GDP and interest costs ate up more than one-third of Ottawa's revenue dollar, he says.

"The country's AAA rating is rock solid," he adds, and it compares favourably with both the U.K., which is currently on negative outlook, and the U.S., "where the sanctity of the AAA rating has come into question." France and Germany remain AAA rated, he notes "but with the outlook for the euro weighed down by aforementioned debt troubles in Greece et al, there are major risks to investing in their home currency."

A strong and stable-looking loonie, by contrast, offers safety and potential upside for foreign investors. "We are decidedly more bullish on the outlook for the Canadian dollar, seeing 5-10 per cent near-term upside for the loonie with the country's rich endowment of natural resources providing longer-term support.

"In sum Canada represents a compelling investment, with a growing roster of foreign investors likely to remain hungry for the name," says Mr. Lovely.

Meanwhile, elsewhere in the report, CIBC's Chief Economist Avery Shenfeld writes that "while government debt concerns will be longer term drags on global growth," the U.S. and Canada should experience healthy growth rates in the first half of 2010.

"While we are vulnerable to corrections in equities when the market gets nervous over some of the credit hangovers from the recession (including the ongoing troubles in U.S. real estate), healthy growth in the first half of the year should be enough to steady the equity market's ship, undoing the upside for bonds in the process."

The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/gps_feb10.pdf

CIBC's wholesale banking business provides a range of integrated credit and capital markets products, investment banking, and merchant banking to clients in key financial markets in North America and around the world. We provide innovative capital solutions and advisory expertise across a wide range of industries as well as top-ranked research for our corporate, government and institutional clients.

SOURCE CIBC World Markets

For further information: For further information: Warren Lovely, Government Strategist, CIBC World Markets Inc. at (416) 594-8041, warren.lovely@cibc.ca; Avery Shenfeld, Chief Economist, at (416) 594-7356, avery.shenfeld@cibc.ca; or Tom Wallis, Communications and Public Affairs at (416) 980-4048, tom.wallis@cibc.ca


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