Strachan: credit conditions make Canada more enticing than US

Alliance Trust’s Matthew Strachan says the improving availability of credit in Canada makes the country a far more compelling investment case than the US.

Strachan, who manages the £50m North American Equity fund, says Canada will be the first of the G7 member countries to move from a federal deficit to a surplus, while its smaller businesses will recover more quickly than their US counterparts.

As a result, he has built up a 15% holding in Canadian stocks against a benchmark weighting of 8.8%. This includes the addition of a 2% holding in Yellow Pages, a Canadian income trust that owns the Yellow Pages franchise.

The trust will revert to a corporate structure at the end of the year, but is still expected to pay a dividend of 10%, says Strachan.

“Yellow Pages is still one of the main advertising vessels for small businesses in Canada and as we see that area recover and revive, it will be a key beneficiary of that growth,” says Strachan.

“It is a very strong dividend payout but it is also attractive because of the underlying growth we are seeing in Canada.”

Credit conditions in the US are still relatively tight, says Strachan, particularly for small and medium-sized enterprises and households. As a result, he is unconvinced the US is about to enter a period of credit expansion able to drive a recovery, and the fund’s key underweight is to consumer discretionary spending.

Strachan believes the outlook is much brighter across the border, however, and in addition to his holding in Yellow Pages he has increased his exposure to Canadian energy and banking stocks.

“You have a banking system, which has been voted the world’s strongest two years running by the World Economic Forum and has not required a government bailout,” says Strachan.

“They are seeing their loan growth go up, which for me is one of the key investment differences between the US and Canada. You will get a cycle of credit creation in Canada you will not get in the US.

“The Bank of Canada has as good as said rates will go back up in June as it cannot hold them down any longer, and the economy now looks to be on the way to recovery. The Canadian dollar is close to parity with the US dollar and we remain confident in our large exposure to Canada.”