Opinion: There is no place like home – investors should bank on a unified North America

Mark Wiseman is chair of Alberta Investment Management Corp.’s board of directors.

The world is undergoing a paradigm shift, both politically and economically. This is the last in a four-part series that examines several changes, including the energy transition opportunity, evolving dynamics of emerging markets and how North America can leverage its comparative advantages to strengthen its position in the global market.

Investment portfolios benefit greatly from diversification – both geographic and by asset class. At times, I have criticized investors for having too much home-country bias at the expense of maintaining the right global footprint.

But, as pointed out in the first article in this series, we are in an intense period of geopolitical and economic complexity that requires new ways of thinking. And in this environment, from a North American perspective, there is no place like home.

In recent weeks, I have analyzed this paradigm shift from the perspective of an investor or asset manager – the geopolitics, the interest rate environment, the energy transition and the technology changes, to name a few. And while there are no silver bullets, the analysis leaves me confident that allocating capital in North America is a winning bet, because a distinct combination of relative strengths and opportunities positions investors in the region for superior long-term, risk-adjusted returns.

To take a step back, regionalization has become the name of the geopolitical game. Clusters around the world such as the European Union, the Association of Southeast Asian Nations (ASEAN) and Middle East North Africa Pakistan (MENAP) are all seeking to form stronger trade blocs and integrated supply chains. Investors should look at North America through a similar lens.

Canada and the United States both have the potential to create and accelerate comparative advantage through industrial policies that attract and catalyze more trade and cross-border investments. But regardless of who is in government or what policies are put in place, the region possesses enviable benefits – today.

North America’s myriad natural resources, energy self-sufficiency, market scale, human capital and history of integration represent a winning hand. While Mexico plays an important role in this continental advantage, for the purpose of this piece I will focus on the markets I know best: Canada and the U.S.

The U.S.’s abundance of liquefied natural gas (LNG), and Canada’s dominion over base metals and critical minerals, are particularly crucial for energy security and set the stage well for the transition finance opportunity, which I believe will be the next gold rush.

After Russia, Iran and Qatar, the U.S. is home to the world’s most LNG resources. The U.S.’s command over LNG has proved strategically advantageous, particularly since the Ukraine war began and energy prices soared. Perceptive investors should look to the valuable opportunity for LNG to be exported to Europe and other jurisdictions, while, as a transition fuel, it replaces or supplements higher-emission forms of energy.

Canada has a similar ace up its sleeve, not only in natural gas, but also as the future destination of choice for the mining and processing that will drive the energy transition. A top-five producer of cobalt, copper, graphite, precious metals, nickel and uranium, it also has the potential to expand production of other key elements such as lithium and magnesium.

It’s also the only country in the Western Hemisphere with deposits of all the minerals required to make next-generation electric batteries. In an annual survey of global mining companies this year, three Canadian provinces made the top-10 preferred jurisdictions for mining investment and another listed Canada as the top jurisdiction of choice for the global mining industry to invest in new green technologies.

In isolation, these are both important assets; in combination, they set the stage for a powerful regional bloc that competes with Middle Eastern and Russian rivals for LNG, and with China for the mining of critical minerals.

Canada and the U.S. together present a massive commercial and geographic market. This positions North America to spur investment, research and development in the next generation of telecommunications, data centres and digital infrastructure, which will require a profusion of energy and a copious amount of space.

Demographically, the region benefits from its skilled and educated work force. Canada has the highest percentage of college and university grads per capita in the G7.

But the country also realizes that it needs more people – especially young people – as its dependency ratio (the number of retired people to working aged people) is increasing. In North America, in no small measure owing to high immigration, demographic and economic catastrophe is far less of a threat than it is in much of Europe and Asia.

Japan’s population, for example, fell by 800,000 last year as the country spirals into demographic crisis. China’s population is aging rapidly and its current total of 1.4 billion is predicted to decline below 800 million by 2100. By 2035, more than 400 million (30 per cent) Chinese are expected to be the age of 60 and older. And critically, China has entrenched net-negative migration going back decades.

Europe’s demographics are likewise in crisis. The European Commission acknowledges the share of people in the EU older than 65 will increase from 20 per cent today to 30 per cent by 2050, and the bloc could see its population shrink by 6 per cent, or 27.3 million people, by 2100.

By opening its borders to half a million immigrants per annum, and prioritizing young skilled workers, Canada, in particular, has established a feasible path to escaping this trap.

The U.S. has its own problems with stagnating population growth and less-widespread political and public support for immigration, but maintains a robust labour force that continues to add hundreds of thousands of jobs monthly, despite severe inflationary issues. Its population is expected to grow, albeit modestly, and reach 394 million by 2100.

All said, these global demographic trends give long-term investors another reason to bank on North America and positions the region as the market of choice.

While today North America possesses advantages, the right public policies can create a gap against its competitors. The U.S. Inflation Reduction Act (IRA) and the Chips and Science Act are an important start, signalling an unmistakable shift to make the U.S. a leader in modern industrial policy in strategic sectors such as semiconductors and clean energy.

Canada has followed closely behind with its critical minerals strategy, investing nearly $4-billion in geoscience, mineral processing, manufacturing and recycling.

Despite initial concerns from the Canadian auto industry about the IRA, it sets the stage for expanded continental trade by establishing eligibility requirements for parts assembled in North America or minerals sourced from a free trade partner. The world still relies on China to mine and to make electric-vehicle batteries, but this poses an immense advantage and market opportunity for Canadian miners and manufacturers.

One risk of embracing supply side economics, through policies such as the IRA and Ottawa’s critical-minerals strategy, will be the impact on continuing, persistent inflation. If the policies don’t massively boost productivity and innovation, they will worsen that issue.

Therefore, with interest rates rising, affecting the outlook for real investment returns, and increasing the interest paid on public debt, improvements in human capital, research and development, innovation and productivity, are all highly desirable to investors.

The challenges both countries face are real, but their ability to realize productivity gains (something that the U.S. is much better at than Canada) is bolstered by acting as a single, unified market. While Canada and the U.S. will inevitably continue to compete, they are stronger and more competitive on the global stage when working together in areas such as energy transformation and supply chain security. And we seem to be on this path politically, at least for the time being.

Earlier in this series, I opined that investing is effectively an act of faith in the future. But it should never be about blind faith.

As a Canadian who lives and works on both sides of the border, I see the North American continental economy as a source of stability and great potential for investors in this uncertain risk environment. The sheer abundance of its natural resources, its human-capital potential, the strength and size of its market and its geopolitical stability, when coupled with strategic policies, can yield unprecedented investment opportunities, right here at home.