Halloween and Emerging Markets:  What Scares Canadian Investors and Exporters?

October 31st, 2013

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Although Canada’s most important trading partner remains the United States, major industrial investment projects announced in Canada recently tend to target emerging markets rather than  the U.S. Should these projects succeed, they will alter the structure of Canada’s foreign trade and accelerate the trend toward greater geographical diversification in Canada’s exports. A few dangers might be lurking ahead, however…

The long-term growth of emerging markets, seemingly a sure thing until recently, shows signs of hesitation. Signs are difficult to decipher, however, in a world of imperfect and occasionally asymmetric information. Two examples from China help illustrate the rather perplexing situation:

• Given long term growth potential of emerging markets, commodity prices are not as strong as they should be. Prices are not only stagnant, but might also decrease. The price levels of certain commodities have been kept artificially high by the recently revealed stratagem of using purchased commodities as collateral to secure low interest-rates loans in the United States, and then using the loans to invest in China-based investments that yield higher rates of return. The liquidation of these stocks could further depress commodity prices—prices that did not, we must admit, reflect actual supply and demand.

• In addition, evidence suggests that data regarding construction activity in China may have been overstated. Dissonant information indeed, when compared with the reassurances of Chinese authorities that manage to keep the country’s economy  growing at an annual rate of 7.5­–7.8 percent, right on official target or just a tad higher. Clearly, we are dealing with a government that has actually found a way to precisely control the growth of its economy.

Physical demand less than expected, stagnant prices: two emerging spectres haunting not only investors of today but also Canadian exporters of tomorrow.

To learn more, register for the webinar « International Systemic Risks for Canadian Resource-Development Projects ».

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