With roughly three-quarters of its exports destined for its neighbor to the south, Canada hopes to ride the coattails of a resurgent US economy. But the Bank of Canada (BoC) has observed that in recent years the linkage between US economic growth and Canadian export activity has been weaker than in the past.

BoC Governor Stephen Poloz has previously stated that he believes there’s a “wedge” that could be undermining this historically strong correlation, but he’s still contemplating the factors that could be behind it. One explanation we’ve previously explored is the fact that Canadian firms chastened by the Global Financial Crisis are hoarding cash and failing to invest in new growth.

Indeed, nearly two years ago, former BoC Governor and “rock star” central banker Mark Carney, who currently helms the Bank of England, famously exhorted Canadian companies to free up the “dead money” idling on their balance sheets by either investing in productivity or returning cash to shareholders.

But now there’s a new report from the Canadian think thank C.D. Howe Institute that acknowledges the sizable trove of cash on companies’ balance sheets, but says this hasn’t stopped them from investing in new assets.

“Notwithstanding concerns over rising cash on corporate balance sheets, and impatience over the pace of business investment, cash in the Canadian economy remains conspicuously alive,” policy analyst Finn Poschmann observes in the report.

To be sure, companies’ cash balances are still growing. Statistics Canada (StatCan) reported in June that at the end of the first quarter, private non-financial firms had a staggering CAD630 billion in cash idling on their balance sheets, up from CAD621 billion at year-end.

And Canadian companies have in the past underinvested in growth compared to their US counterparts. According to a report issued earlier this year by Deloitte, a major accounting firm and consultancy, Canadian companies invest less than half of what US firms spend on research and development.

And on a per-worker basis, expenditures on machinery and equipment are just 65 percent of what US firms spend, while Canadian companies invest just 53 percent as much as their US peers on information and communication technology.

But that trend could be changing. More recently, in mid-June, Jayson Myers, president of Canadian Manufacturers & Exporters, an industry association, told the Financial Post that manufacturers are “making record investments in machinery, equipment and technology and making those investments at a more rapid pace than in the United States.”

That assertion surely cheered the BoC, which is hoping that exporters will assume leadership of the country’s economy from its debt-burdened consumers. Mr. Poloz believes a rise in export activity, particularly among manufacturers, will spur business investment, new hiring and ultimately more spending.

The question over the extent to which so-called dead money is a drag on the country’s economy could also have unintended consequences for companies’ financials. According to the aforementioned C.D. Howe report, some policymakers are using the present situation to build a case for heavier taxation.

Hopefully, the nonprofit’s analysis will help to discourage such thinking. For instance, the report says that since 2011 Canadian business investment has been growing at roughly the same pace as the country’s economy, with the investment share of output just above its 30-year average.

In fact, capital spending has been strongest in the energy and mining sectors, where cash holdings have grown the most.

Mr. Poschmann, who authored the institute’s report, lauds Canadian firms for their prudent balance sheet management in the wake of the Global Financial Crisis. He attributes the run-up in cash balances to the necessary shoring up of balance sheets in response to the shock from the global downturn.

But in typical Canadian fashion, the trend toward such caution was already underway at least a decade ago. Mr. Poschmann notes that over this longer-term period, Canadian companies have “steadily trimmed the share of current assets held in relatively unproductive inventories, and similarly trimmed accounts receivable.”

Additionally, he says that businesses “began accumulating more liquid financial assets, cash and cash-like instruments, to be deployed as investment opportunities arose.”

This behavior was first prompted by earlier shocks in the 1990s and early 2000s, with the goal of maintaining liquidity for both normal operations as well as during extraordinary periods such as downturns.

Cash has also been boosted by changing business practices and new technologies. For instance, companies are now more easily able to convert less-liquid assets such as inventory and accounts receivable into cash through improved inventory management, faster collection of accounts receivable thanks to e-commerce platforms and automated billing, and the ability of non-financial firms to securitize their receivables.

Still, it’s obvious that at least some of the cash build-up is from an excess of caution. Assuming the Canadian economy continues to find greater traction, then companies will eventually have the confidence to spend more on new investment, while still maintaining solid balance sheets–the best of both worlds.

Ultimately, businesses could also pursue a mergers and acquisitions spree, thereby unlocking additional value for shareholders of sought-after firms.

Portfolio Update

Conservative Portfolio Holding Northern Property REIT (TSX: NPR, OTC: NPRUF) reported second-quarter funds from operations (FFO) per unit, the relevant measure of a real estate investment trust’s (REIT) profits, increased by 7.0 percent year over year, to CAD0.61. That was good enough to beat analyst estimates by 2.4 percent, for the first upside surprise in three quarters.

Management attributed this performance to higher net operating income (NOI), which rose 5.3 percent, to CAD27.6 million. The REIT’s multifamily and commercial business segments contributed the most to this gain, though higher NOI from these businesses was partially offset by declines in the execusuites and hotel segments.

The current mix of analyst sentiment is neutral with a slightly bullish tilt, at two “buys,” six “holds,” and one “sell.” The consensus 12-month target price is CAD31.00, which suggests potential appreciation of 6.6 percent above the current unit price.

For full-year 2014, analysts forecast FFO per unit to climb 7 percent, to CAD2.38, and year-over-year growth is projected to rise by 8 percent in 2015.

Northern Property pays a monthly distribution of CAD0.1317, or CAD1.58 annualized, for a current yield of 5.4 percent. The REIT’s payout ratio for the quarter was 64.8 percent, a decrease of 2.4 percentage points from a year ago.

Over the trailing year, Northern Property’s units have risen 11.3 percent on a price basis in local currency terms, lagging the performance of the Bloomberg Canadian REIT Index by 1.1 percentage points. On a distribution-reinvested basis, the REIT has delivered a total return of 17.7 percent in local currency terms over that same period.

Northern Property REIT is a buy below USD30.