Canada missing the boat on emerging markets

By Vikram Barhat | June 24, 2011 | Last updated on June 24, 2011
4 min read

There is a growing sense of urgency in the air about Canada’s need to broaden its economic participation by adopting a more aggressive approach to doing business in emerging markets.

Industry experts are becoming increasingly nervous about Canada as an ‘underachiever’ in emerging markets deal-making, according to PwC’s new Capital Markets Flash report.

Canada has been less acquisitive than most of its developed nation peers in the coveted emerging markets of Brazil, Russia, India and China (BRIC nations), said Kristian Knibutat, PwC’s Canadian deals leader.

“In terms of deal volumes, Canada has been slow to the switch in striking deals in these key emerging markets,” he said. “While recent turmoil in these regions supports this type of cautious approach, in the long term, Canadians will have to increase investments in the BRIC regions to stay competitive.”

With only 188 acquisitions in BRIC nations over the past decade, Canadian activity is considerably lagging that of the UK (408), the U.S. (1,504) and Germany (244). Only Australia with 106 deals in the same period ranks below Canada.

There have been only nine Canadian acquisitions so far this year; an indication that the trend is not improving.

With only $3.9 billion worth of deals Canada is nowhere close to the UK ($54 billion), the U.S. ($73 billion) and Germany ($17 billion).

The only sign of a silver lining is that the value of Canadian deals has been increasing at a healthy-rate post-crisis with $384 million worth of acquisitions announced year-to-date May 31, 2011.

“This pattern is in contrast to most other developed nations where deal values post-crisis remain well below peak,” said Knibutat.

By destination, Canadians were most acquisitive in China, representing 42% of activity while Brazil was the second busiest investment destination (38%). With only 7% of deals, India trails well behind.

Low acquisition in India is attributed to its strict foreign direct investment regime that limited foreign acquisitions into various sectors for the past decade. However, aggressive reforms aimed at attracting more foreign investment are now paving the way for increased Canadian investment.

Benjamin Tal, deputy chief economist at CIBC says now is the time for Ontario, and indeed Canada, to seize this tremendous opportunity.

“The rapidly changing global economy is dictating the need for Ontario to broaden its trade perspectives,” said Tal. “India should obviously be a top priority in this shift given the size and rapid growth of the Indian economy and the many cultural and other links between the two jurisdictions.”

The share of Canadian direct investment going to India was only 0.1% last year, unchanged over the past two decades. “While Canadian corporations were looking elsewhere to invest their dollars, others were looking at India as a land of opportunity,” said Tal.

Tal, who was speaking on the sidelines of the International Indian Film Academy Awards (IIFA), the ongoing three-day Bollywood extravaganza in Toronto, said that it is not just the world heading to India, but increasingly India itself is reaching out to the world.

“Indian green field and M&A investments into Canada have already outstripped Canadian investments into India.”

Currently, Ontario companies export a meager $400 million a year to India. India exports about $1.2 billion a year worth of goods and services to Ontario.

This is despite the fact that Canada produces many of the goods and services India has been consuming while seeing GDP growth average 6.5% a year over the past two decades.

Darren Spencer, director, alternative investments at Russell Investments, can’t help but wonder if it’s a result of the increased competition for resources globally. “What we’re seeing is a lot of emerging countries, particularly China, are doing a very significant number of deals in Australia and Canada for resources,” he said.

Bhim D. Asdhir, president and CEO of Excel Funds Management, chalks it up to the relatively smaller size of Canadian economy, but says government understands the need for increased deals with emerging markets.

“Canada is a much smaller country versus the U.K. and the U.S. and would therefore have proportionally fewer deals than those countries,” he said. “Canada is a diverse nation with many that have global ties; the government has taken steps to increase dealings with emerging markets as they realize the significant growth potential of these markets.”

As co-founder of the Canada India Foundation, Asdhir recently met with 30 newly elected MPs to discuss ways to increase dealings with India.

“Both provincial and federal governments have taken steps toward increasing trade links by working more closely with their counterparts in emerging markets,” he said. “The [ongoing] IIFA awards are one such example which demonstrates the deepening ties between India and Canada in particular.”

With increased intergovernmental cooperation Canada will continue to build more robust trade links with emerging market countries which will increase deal-making activity over time, he added.

Vikram Barhat