How Canada is like the UAE without the investment opportunity

Posted on 24 July 2011 with 2 comments from readers

Canada is full of natural resources and the recent inflated prices of commodities has delivered an above par economic recovery, with more jobs created last month than in the USA whose economy is ten times bigger.

The UAE has almost ten per cent of the world’s oil reserves and produces a quarter of the amount of oil per day of Saudi Arabia but with a national population about ten times smaller.

Oil tax

$100 oil is therefore a tax on oil consuming nations that benefits the resource-rich countries like Canada and the UAE with relatively small populations and big resource reserves. That is one of the main reasons why the economies of both nations have recovered more strongly than those that are resource-poor.

However, in Canada both house prices and the stock market reflects this recovery. Apartments in Vancouver cost $2-3 million for 2,000 square feet and the stock market is back to pre-global financial crisis levels.

That is not true in the UAE. Apartments in Dubai sell for less than half 2008 prices. The Dubai Financial Market is still 85 per cent off its early 2006 high.

Now the world may lurch into an Armageddon economic scenario and oil prices tumble as they did briefly in 2008, or it may stumble from crisis to crisis, keeping inflation up and GDP growth down.

The first scenario would be bad for oil producers initially and then the money printing would start in earnest and push commodity prices up. In the second scenario oil prices would stay high and remain a tax on an economic recovery.

Where would you want to be invested: in the high-growth resource economy or the low-growth economy ravaged by inflation? And would you want to invest where asset prices are already high as in Canada or where they are low as in the UAE?

Political stability

You can of course argue about political stability. It is always a risk in a country where people can vote themselves entitlements for which the money is not available, except by borrowing.

Perhaps it is best to judge from recent history, and pick a nation without any tradition of popular unrest and external security guaranteed by the USA and its allies.

Levity aside, for Canada is also politically very stable, the Arab Spring has done nothing but cement the position of the UAE as the Switzerland of the Middle East and that is the safest place to invest.