Alberta an emerging safe haven amid growing economic volatility

Alberta an emerging safe haven amid growing economic volatility

Friday, February 25, 2011

By Ray Turchansky, Freelance

The consensus of presenters at the first Financial Leadership Summit held by the University of Alberta's School of Business was that, amid global economic volatility over the next couple of decades, Alberta will be a relative safe haven for entrepreneurs and investors.

Vinay Pande, chief investment adviser for global markets research with German-based Deutsche Bank, said three things are likely to happen before 2020: world real gross domestic product growth will decline, there will be a risk of inflation, and emerging-market currencies will appreciate against developedmarket currencies.

"The style of growth that emerging markets have adopted has a shelf life not exceeding five or seven years," Pande said. "In China, Southeast Asia and eventually India, as these countries are forced to adapt to lower growth, the urge for people to invest will diminish, and there will be a massive emerging-market FX (currency) revaluation.

"It will morph into something that will not be very kind to financial assets, but may be kind to Alberta. One solution is to take a shot of Novocain, invest in Alberta, and I have a suspicion you will come out ahead. A second approach is to hold real assets or proxies for real assets, such as TIPS (Treasury Inflation-Protected Securities) and inflation-linked bonds. A third way to approach things is to play by the rules as they're written, which demands being cautious, but I don't mean buying bonds. I mean it is incumbent on all of us to maximize complexity in your portfolio, which is the responsiveness of your portfolio to macro-economic outcomes."

Concerning the crisis with the euro, he said "the most likely outcome is that we kick the can down the road. "The Europeans don't seem to understand the trap they have laid for themselves with the euro. If the Germans and Spaniards are brothers, there's no issue, but if one kicks the other out of the house .. The debt in the U.S. is extreme, but so long as the Chinese buy U.S. dollars and treasuries, it's a non-issue.

"The less likely outcome is that some tabloid in Greece publishes a picture of the deputy minister of Greece having a great time on his yacht, and the German worker says, 'This is what my tax dollar goes to support?'

"The third option, that's far too late, is for Greece or Portugal to go to a dual currency. But think of something like a dual-currency zone for a country like Germany; that it keeps its existing liabilities and assets in euros, but tomorrow morning you pay for everything in new Deutschmarks. This is the least likely."

As for the U.S. economy he said: "The answer to debt is renegotiate, tighten your belt, or grow, which is the least unpleasant."

Gordon Ritchie, vice-chairman with RBC Capital Markets, said there has never been as much cash on the balance sheets of North American corporations since the Second World War, roughly 12 per cent in the U.S. and 30 per cent in Canada.

"We believe there will be a continued dominance in resource activity in Canada," Ritchie said. "We will see an increase in Canadian outbound activity with the high Canadian dollar.

"Sovereign wealth funds will continue to be buyers of real assets in Canada and globally, because I think they're trying to reduce their exposure to the U.S. dollar.

"If you look at areas in the world where public oil and gas companies can invest, when you exclude Saudi Arabia and Mexico and places like that, 75 per cent of the known energy resource is in Canada, and of that 75 per cent, 90 per cent is in Alberta.

"We also see large Canadian companies having large merger and acquisition activity outside of Canada because the strength of our dollar."

Jason Montemurro, managing director with Calgary-based KERN Partners, said a sector of intermediate companies is emerging in the Canadian oil and gas business.

"It's a tale of two cities in Calgary right now: oil companies are doing amazingly well; gas companies are doing terribly," Montemurro said. "Because of horizontal drilling, we've gone back to properties that, 30 or 40 years ago, we had vertical drills going in. The best place to find oil is where it is; the problem is getting it out. Completion companies, fracturing companies, service companies are going to make a lot of money over the next decade.

"You should amass as much land as you can, drill some of that land up, and then sell to the next person who has a lower cost of capital.

"The smart thing, I think, is to buy gas. If you have a five-year time horizon, people will switch to natural gas from coal; you're not going to see many coal power plants in the United States. T. Boone Pickens has it kind of right, that if you have infrastructure built for natural gas, you'll use more natural gas.

"If you can make money on a flat price of $4 an MCF (thousand cubic feet) for gas, keep that gas as your option, so in three years when it comes back, you can make money."

Todd Hirsch, senior economist with ATB Financial, isn't worried by the prospect of the Canadian dollar going to $1.10 US.

"I don't think the impact will be as much economic as it will be political, because that probably would be accompanied with oil trading above $100 a barrel," Hirsch said.

"The impact of a loonie at $1.10 will be felt much more in Central Canada, and less so in Alberta and resource-rich provinces. And there lies a political problem for Ottawa. It probably calls for it to rebalance things -wisps of the National Energy Program."

Ray Turchansky writes Fridays in The Journal. turchan@telusplanet.net

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