After April’s disappointing performance, Canada’s exports came roaring back in May. According to Statistics Canada, the country’s merchandise exports increased by 3.5 percent in May, well ahead of import growth of 1.6 percent. As a result, Canada’s trade deficit narrowed dramatically, to CAD152 million from CAD961 million in April.

The total value of exports was CAD44.2 billion, the second-highest value on record. Trade volume was up 4.2 percent, while prices declined 0.7 percent.

We’ve been monitoring Canada’s international merchandise trade closely because the Bank of Canada (BoC) believes a sharp rise in export activity, particularly from the country’s beleaguered manufacturing sector, is the first step in shifting the economy away from its dependence on debt-burdened consumers.

The central bank sees higher exports ultimately spurring new business investment along with the hiring necessary to precipitate a virtuous cycle in economic growth.

May’s results were primarily driven by exports of motor vehicles and parts, which grew 9.8 percent, to CAD6.6 billion, the fourth consecutive monthly increase. Volumes were up 10.7 percent.

Drilling down into this category, exports of passenger cars and light trucks led the way, with growth of 15.7 percent, to CAD6.6 billion, or nearly 15 percent of total exports in May, as production resumed after manufacturing plants had been temporarily sidelined for maintenance.

Naturally, energy products continue to account for a plurality of total exports (nearly 25 percent in May), advancing 3.4 percent, to CAD10.9 billion, on higher volumes.

Exports of refined petroleum energy products jumped by CAD505 million, to CAD1.1 billion in May, after falling nearly 40 percent in April, as some Canadian refineries that had been undergoing maintenance resumed normal levels of production.

Exports of consumer goods increased 4.4 percent, to a record CAD4.8 billion, as volumes were up 6.5 percent.

On the imports front, the one area we keep close tabs on is the import of industrial machinery and equipment, since an upward trend in this area would suggest companies are making the necessary expenditures for growth.

Interestingly, while Canadian companies have lagged their developed-world peers in keeping up with such investments, May’s number registered an all-time-high, at CAD4.3 billion, for growth of 2.5 percent month over month and 12.7 percent year over year.

Although the US absorbs roughly three-quarters of Canada’s exports (or 72.7 percent in 2013, to be precise), trade with the European Union (EU) increased the most in May, up 22.7 percent month over month, to CAD3.3 billion. On a year-over-year basis, exports to the EU have climbed 27.8 percent.

The EU is an important trading partner, accounting for 7.2 percent of exports in 2013, which means it’s ranked second after the US as an export destination. But while growth in exports to the Continent is certainly helpful at the margins and a promising sign of a resurgent global economy, obviously our focus remains largely on the US.

Exports to the US grew 2.1 percent month over month, to CAD33.5 billion. On a year-over-year basis, that number represents an increase of 14.5 percent.

Meanwhile, imports from the US declined by 0.2 percent, to CAD28.7 billion. Consequently, Canada’s trade surplus with the US widened to CAD4.8 billion from CAD4.0 billion in April.

Canada’s largest recorded trade surplus with the US was CAD10.6 billion, achieved in late 2005, amid the commodities boom that preceded the Global Financial Crisis. Since the downturn, the highest surplus posted was nearly CAD6 billion in late 2011.

So while some things have changed since then, especially since the advent of the shale revolution, that gives some sense of what might be possible once the US economy starts firing on all cylinders again.

Portfolio Update

Conservative Portfolio constituent Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF) teamed with longtime partner Desjardins Group Pension Plan to acquire the Sainte-Marguerite-1 (SM-1) run-of-river hydroelectric facility, located in Quebec, from the Hydroméga Group of Companies.

The purchase price was approximately CAD82.1 million, plus the assumption of CAD30.8 million in non- recourse, project-level debt, and was financed with cash and the issuance of preferred units.

Management described SM-1 as a high-quality, long-term hydro asset.

All of the electricity the 30.5 megawatt (MW) facility produces is covered by two fixed-price 25-year power purchase agreements with Hydro-Québec: one for 8.5 MW that expires in 2018; and one for 22.0 MW that matures in 2027. Both PPAs contain a renewal option for an additional 25-year term.

The company expects the facility will generate around CAD11.0 million in annual revenue, CAD9.0 million in adjusted EBITDA (earnings before interest, taxation, depreciation and amortization), and CAD5.0 million in free cash flow. As a result, management says the firm’s payout ratio should decline by about 3 percentage points.

Although analysts recently boosted their full-year 2014 revenue estimates, to CAD230.3 million, overall sentiment on Bay Street remains essentially neutral, at one “buy,” six “holds,” and one “sell.”

The consensus 12-month target price is CAD11.09, which suggests a potential return of just 2.2 percent above the current share price.

Innergex is a buy below USD10.