GDP, China and Dividends

Statistics Canada reported this morning that gross domestic product north of the border contracted by 0.1 percent during April, a slower rate than in March and in line with consensus expectations. This is the ninth consecutive month output has slowed.

In its statement announcing the April number StatsCan concluded, “Declines in manufacturing, the energy sector and retail trade were the main contributors to the April decrease. Increases in the activities of real estate agents and brokers and wholesale trade mitigated the drop.”

Canada’s economy shrank 5.4 percent in the first quarter of this year, its fastest pace of contraction since 1991. That followed a 3.7 percent decline in the fourth quarter of 2008. The Bank of Canada expects the economy to contract a further 3.5 percent in the second quarter of 2009.

The US and Canada are still in recession; jobs are still being lost; factories are still closing. But the April GDP number is good news in the sense that Canada is establishing a base from which to recover in the second half of the year. Although monthly GDP numbers for May and June could actually be worse than April’s as the severe curtailment of auto production, a critical component of Canada’s manufacturing sector, continues, the worst is clearly over.

The China Factor

We’ve noted China’s growing influence on the global as well as the Canadian economy on several occasions. Many observers continue to look with wonder at oil’s rise during the last several months, perplexed by falling demand and rising inventories in the US. They’re not looking in the right direction.

In its June Commodity Price Index report, Scotia Capital, the investment banking and research arm of Bank of Nova Scotia (TSX: BNS, NYSE: BNS), concludes that China is leading the global recovery in oil and base metal demand and that the Asia-led super-cycle is gaining new momentum.

China’s dependence on foreign oil has now surpassed that of the United States: According to Scotia Capital, China relied on imports for 57 percent of its petroleum production in May, while the US imported 55 percent of its needs. China’s import dependency was less than 40 percent in 2003 and averaged 50 percent in 2008.

China is spending billions to acquire foreign oil producers and construct vast storage facilities to safeguard future needs.

Much of China’s demand has come from new car owners. In May, the government said sales increased by 54.7 percent year-over-year to 812,178 vehicles. In 2008, China sold more cars last year than the US and is forecast to see another 10 percent rise this year.

Scotia’s Commodity Price Index rose 2.2 percent in May, paced by advances in the oil and gas index, which was up 4.4 percent month-over-month. The metals and mineral index surged 4.2 percent month-over-month in May, with gains in base metals, gold, silver and uranium.

China’s imports of refined copper and iron ore were at record levels in the first four months of 2009; China’s industrial activity has re-accelerated in the past three months on the government’s aggressive infrastructure spending program. A recovery in the domestic housing market has also pushed up demand for metal-intensive appliances.

Exports of commodities and resource-based manufactured products accounted for 44.3 percent of Canada’s merchandise exports from 2003 to 2007 and 50.9 percent in 2008, of which almost a quarter was energy. China’s drive to build its strategic oil stockpile in the next several years will have profound implications for the global economy, overwhelmingly positive ones for Canada.

It’s All About Dividends

Maple Leaf Memo and the main vehicle it supports, Canadian Edge, attempts to provide a comprehensive view on investing. Macroeconomic trends, arcane financial statistics and domestic and global politics make for good reading and provide context for actionable advice.

But at the end of the day, that advice is what matters. And our basic guidance is to focus on solid businesses with healthy balance sheets that have withstood historic stress since this recession got going in late 2007. We’re interested in companies that generate sustainable dividends.

Here, courtesy of Barry Ritholtz’s The Big Picture, is third-party confirmation of the wisdom of this approach:

The raison d’être of investment or wealth management is to maintain, or hopefully improve, one’s standard of living, i.e. to earn a real return on the investment amount. This sounds easy enough if one considers that the S&P 500 Index (and its predecessors prior to 1957) delivered a nominal return of 8.7% per annum from January 1871 to June 2008. With an average inflation rate of 2.2% per annum over the period, this meant a real return of 6.5% per annum.

Yes, I can hear many readers arguing that much better returns can be generated by “playing” the market cycles, especially given the fact that the S&P 500 has made no headway since 1998. Ah, the art of market timing! Perhaps, but keep in mind that very few people have succeeded in consistently outperforming the market over any extended period of time, especially once costs and taxes are factored in.

Let’s go back to the total nominal return of 8.7% per annum and analyze its components. We already know that 2.2% per annum came from inflation. Real capital growth (i.e. price movements net of inflation) added another 1.8% per annum. Where did the rest of the return come from? Wait for it, dividends – yes, boring dividends, slavishly reinvested year after year, contributed 4.7% per annum. This represents more than half the total return over time!

Click here to see the graphic illustration of these points.

Speaking Engagements

Eight score and one year ago, with the onset of the California Gold Rush, San Francisco earned a reputation as a prospector’s town. It’s time again to seek paths to prosperity–and to enjoy one of the most beautiful natural settings in the US, if not the world.

Venture west for the San Francisco Money Show Aug. 21-23, 2009, at the The San Francisco Marriott and discover how Roger Conrad, Elliott Gue and GS Early can help you profit in these adventurous times.

Roger will discuss utilities, Canadian income and royalty trusts as well as his new service focused on exploiting the greatest spending boom in history, New World 3.0.

Elliott will detail the new direction for Personal Finance and provide his forecast on energy markets for 2009.

GS, a constant at PF for two decades, will be there to speak on emerging tech, nanotech and defense tech.

Click here or call 800-970-4355 and refer to priority code 014310 to register as a guest of MLM.