Opportunities for Canada-China trade relations are “almost unlimited,” or so says Canadian Minister of International Trade Stockwell Day. Among the areas he cited in a recent speech were aerospace, “environmentally sensitive, highly-efficient automobile products,” Chinese tourism–which Day believes will increase 50 percent by 2014–nuclear technology and agriculture.

Agricultural commodities are, of course, just one of the natural resources that Canada has in abundance, and developing Asia covets and needs desperately to modernize what are still essentially poor nations. And relentless Chinese demand for them was perhaps the most important reason Canada experienced such a short-lived downturn, particularly compared with what happened in the neighboring US.

America remains far and away Canada’s biggest trading partner, the product of one of the world’s longest national boundaries as well as a common language and history. That’s not likely to change anytime soon, if ever.

The US, for example, accounted for CAD370 billion in Canadian exports in 2008 of a total of CAD490 billion, as well as roughly CAD281 billion of a total CAD443 billion of imports. The UK and Japan ranked a very distant second and third, respectively. On the other hand, China was in fourth place closing fast on both of them, which it almost certainly did in the recession year of 2009. Canadian exports to China are up 91 percent over the past five years, versus just 20 percent for the entire world.

The total dollar value of Canada’s exports to the US grew an average of 3.6 percent per year from 1999 through 2008. However, absolute US dominance has slipped, from 82 percent of Canadian exports and 70 percent of imports in 2003, to just 75 percent and 63 percent, respectively, in 2008. And those percentages almost certainly slid further in 2009. The upshot: Asia is becoming progressively more important to Canada’s trade and the US–though still the most important partner–is increasingly less so.

The same holds true of cross-border investment. The North American Free Trade Agreement united the US and Canadian economies as never before, along with Mexico.

But while the US remains by far the most favored country for Canadian investment, Canadian enterprises are increasingly turning their eyes to the Far East in a wide range of industries.

Canadian direct investment in the US was as high as 80 percent of total foreign investment in the early 1990s. By the end of the decade, however, it was already heading towards 50 percent and has gone lower still this decade.

Absolute investment has continued to rise, but the share of other nations particularly in Asia has surged faster still.

The same is true of direct investment by other nations in Canada. At the beginning of the last decade, the US accounted for more than 60 percent of direct and portfolio foreign investment in Canada, and nearly 80 percent of direct business investment. The upshot: The CAD505 billion in direct foreign investment in Canada in 2008 was from a far more geographically diverse group. And that trend continues now.

As we pointed out in the October 2009 Feature Article, the growing ties between Canada and Asia have already begun to have profound consequences for the economy as a whole, as well as individual companies. We focused primarily on the big picture in that piece.

The most important development is Canada’s newfound strength in being able to withstand a US recession that in the past would have leveled its economy. To be sure, a number of Canadian businesses are still hurting mightily from the slump in the US. Those are mainly in industries that do a lot of exporting south and have been hurt by the weak economy as well as the softening US dollar since March 2009, which has made them considerably less competitive.

On the other hand, a growing number of companies are starting to benefit from the budding Canada-Asia relationship. The biggest winners are in natural resource industries, mainly from growing exports. These companies will score as many points as anyone as the US economy returns to normalcy. But their Asian connection will remain a major advantage, ensuring they’ll remain engines of growth.

Direct investment by Asian governments and sovereign wealth funds has also created a Canadian edge. Thus far, the headline grabbers have concerned distressed properties like Teck Resources (TSX: TCK/B, NYSE: TCK), which seemed to be headed toward bankruptcy in early 2009, due to falling commodity prices and debt taken on to buy out minority shareholders of the former Fording Canadian Coal.

China Investment Corp (CIC) stepped in with badly needed cash by buying a 17 percent stake in the company.  Today, Teck is back on its feet and better connected to Asian markets than ever, particularly China.

In fact, it’s been able to wind up its program of asset sales and debt reduction far faster than even its management had projected. Meanwhile, Teck stock has now surged more than 13-fold from its March 2009 low.

Asian investment has also been substantial in the oil sands region, providing valuable financial support in the current difficult times. Meanwhile, Canadian companies continue to invest in China in a range of sectors from banking to manufacturing.

Demand for investment and exports create demand for Canadian dollars, pushing up the value of all Canadian assets. And it lifts economic growth as well, as solid Canadian GDP growth attests. That’s very good news for Canadian investments, particularly those set to benefit from Asian demand for exports and investment.

Resources First

In less than a decade, China has increased its share of global consumption of metals to 25 percent from 10 percent. That’s two-thirds of the growth in the globe’s base metals consumption and half the demand growth for steel, copper and aluminum. In fact, developing Asia on the whole is set to account for 61 percent of the growth in global demand for commodities to 2015.

Small wonder, then, that Asian investors are interested in Canadian natural resources. The preferred vehicle: sovereign wealth funds (SWF).

There’s been much discussion in the media and among policymakers about SWFs and how they might impact the global financial architecture, particularly in the wake of CIC’s aggressive debut in 2007 and its prominent place in the post-crisis global financial firmament.

It’s important, first, to understand the relative position of SWFs in terms of the assets they control. Frankly, pension funds dwarf SWFs, as do mutual funds.

What’s remarkable about SWFs is their proliferation during the 2000s; call them, in fact, the spawn of American appetites for oil and cheap imports.

The reputed largest SWF is the Abu Dhabi Investment Authority (ADIA), which is said to manage more than USD800 billion, most of it derived from petroleum exports.

ADIA’s motivation–like that of most SWFs sponsored by Gulf Cooperation Council (GCC) and other oil-exporting states–is generally to reduce its economy’s almost exclusive dependence on petroleum.

(One of ADIA’s key recent hires was actually recruited out of the Canadian Pension Plan Investment Board to establish an in-house infrastructure investment operation. ADIA is perhaps the most secretive of SWFs; that it hired the guy who started CPPIB’s infrastructure practice, one of the institutional management world’s first, is a sure sign ADIA is on the prowl for global assets and for knowledge to bring home for long-term domestic modernization.)

States have many reasons to want to diversify and grow their assets by investing excess reserves, among them providing for future generations; providing an emergency fund in the event government revenues decline; and providing access to markets, technologies, resources, and knowledge to bring back home to help the domestic economy.

What politicians and the media initially emphasized is that SWFs are owned by the state. There are fascinating intellectual debates about the propriety of government involving itself in markets; there are vital practical debates about whether such entities will destabilize foreign markets and governments at the behest of their political bosses. But overwhelming evidence indicates that, since first appearing more than half a century ago, while making many equity investments abroad, including in iconic names such as Chrysler in 1973, SWFs have acted as responsible investors. The record suggests that their long-term focus in fact improves market stability.

CIC bought 17.2 percent of Teck Resources, Canada’s largest base-metals producer, for USD1.5 billion but opted out of board seats its ownership stake would otherwise dictate. It acquired an 11 percent stake in a unit of Kazakhstan’s state-run energy company in late September, two weeks before purchasing 45 percent of Nobel Oil Group of Russia. In November, it bought 15 percent of US power producer AES Corp (NYSE: AES) for USD2.2 billion. CIC occupies one seat on AES’ board, still consistent with the SWFs stated lack of interest in controlling companies.

History reveals no special insight, either: SWFs aren’t blessed with any particular market-beating acumen, as high-profile blow-ups with SWF-bolstered Citigroup (NYSE: C), et al, make clear. The people who actually run the money for the sovereigns are actually drawn from the same pool that feeds pension funds and mutual fund companies.

Suspicion about state-owned companies gave way to obsequiousness as the last decade’s pendulum swung from credit-driven excess to credit-driven privation and crippled banks sought new sources of capital. This–not their absolute or relative size (although their rate of growth is impressive and suggests they’ll be moving up the financial chain)–is the overarching lesson about SWFs: Their “arrival” is still more evidence of a subtle shift of global economic influence eastward.

And China’s excess currency reserves have become, in the words of one prominent editorial-page economist, “a financial, economic and geopolitical reality of surpassing significance.” CIC has been endowed with only a small fraction of those reserves to invest in foreign companies.

CIC is not the first such entity; what we now call sovereign wealth funds have been around since 1953. But CIC was capitalized with USD200 billion in 2007, making it the fifth-largest largest government-owned asset manager in the world, and it’s reported to be on the verge of another infusion of USD200 billion. It’s currently No. 3 in global SWF rankings, though, because these vehicles are notoriously secretive, accurate asset information is hard to come by.

The fact of China’s USD2.4 trillion of foreign currency reserves and CIC’s aggressiveness in the wake of the global recession means this is an entity to watch. The SWF made its initial investments in troubled US financial Morgan Stanley (NYSE: MS) and in the high-profile initial public offering (IPO) of The Blackstone Group (NYSE: BX). Both investments have resulted in significant losses and brought harsh scrutiny from Chinese officials and citizens down upon CIC management, including Lou Jiwei, chairman and CEO.

Hardened by these early experiences, CIC has been among the most aggressive players on the global financial field since mid-2009. And most of that effort has been concentrated on diversifying its holdings away from Western financials toward commodities and other sectors considered important to China’s long-term economic development. In this sense, CIC–and other SWFs–are in fact “strategic” investors; however, the long-term record suggests “strategy” for SWFs is about maximizing financial and economic as opposed to political returns.

CIC was one of the major backers of Toronto-listed, Vancouver-based SouthGobi Energy Resources’ (TSX: SGQ, Hong Kong: 1878, OTC: SGZRF) late-January IPO. CIC and Singapore-based SWF Temasek Holdings each agreed to buy USD50 million of stock in SouthGobi’s equity sale, which raised USD394 million. CIC also purchased USD500 million of SouthGobi’s 30-year senior convertible bonds issued last year. Ivanhoe Mines (TSX: IVN, NYSE: IVN) is SouthGobi Energy Resources’ largest shareholder, currently owning approximately 65 percent of the issued and outstanding shares.

SouthGobi operates the Ovoot Tolgoi mine in southern Mongolia. The company, which started production in 2009, will use the IPO funds to increase output, beef up the physical plant and look for more coal; it’s already at work on a three-year, USD800 million development plan implemented specifically to satisfy Chinese demand. Ovoot Tolgoi has been running 24 hours a day since July 2009, after it hit a monthly sales record of 231,556 tons the preceding June. CIC also has a deal in place to invest up to USD700 million in Mongolia-focused Iron Mining International Ltd.

Rumors that CIC is in talks with Australia-based Fortescue Metals Group (Australia: FMG, OTC: FSUMF), for example, make sense because of geographical proximity and, of course, China’s hunger for iron ore. CIC is also part of consortium (including Qatar Investment Authority, that country’s SWF) that bailed out Songbird Estates, the majority owner of Canary Wharf, a London office and shopping development.

That it’s come up in connection with a potential bailout of Greece (officials from both countries have denied talks) is an indication of a certain amount of “CIC mania” taking hold in the financial press; everybody wants to be connected to it.

But talk that CIC is considering an investment in US high-speed trains, however, isn’t so outlandish. China Daily, an English-language daily often characterized as a mouthpiece of the government, ran with a report originally sourced to Shanghai Securities News to this effect in mid-January. Given the breadth of CIC’s activity so far and considering its goal of accessing technologies with domestic relevance, this in fact makes sense.

More concretely, CIC has had “early” talks for direct investments in Brazil, the world’s second-biggest iron ore exporter, and Mexico, the No. 2 silver producer, Lou Jiwei said at the Asian Financial Forum in Hong Kong on January 20. It’s safe to say that, given its positive experience thus far with Teck Resources and improving relations between Ottawa and Beijing, CIC will visit Canada in 2010. Teck is up nearly 70 percent since July 2009, and Canada has resources–and technologies and manufactured goods–the Middle Kingdom needs.

Lou pumped about USD10 billion into commodity-related companies in the second half of 2009. With China’s reserves growing by an average of USD37.8 billion a month last year and another USD200 billion possibly on the way, CIC is set to exceed that aggressive pace in 2010.

The Players

In the October article, I recommended four companies as beneficiaries of Canada’s Asian connection. All four remain solid buys today.

Aggressive Holding Ag Growth International (TSX: AFN, OTC: AGGZF) has continued to expand its potential product line, inking a deal in late 2009 to purchase two million shares of privately held One Earth Farms. The venture will attempt to build one of Canada’s largest, most efficient operating farms.

The company’s bread-and-butter remains grain-handling equipment, which stands to be a big winner in 2010 from record harvests of corn and soybeans. Both are in heavy demand from Asian markets that are urbanizing rapidly and turning to North American exports to close the gap. The company is also in prime position to profit from government-mandated ethanol usage.

Despite surging in recent months, Ag Growth International remains a solid buy up to USD34.

Labrador Iron Ore Royalty Income Fund (TSX: LIF-U, OTC: LBRYF) has suffered from reduced demand in North America for steel, which has hurt prices for iron ore concentrates and pellets produced at the Iron Ore Company of Canada (IOC) facility. The IOC plant is operated by global mining giant Rio Tinto Plc (NYSE: RTP), which is also a major player in setting the global price of iron ore contracts each year. It’s the source of essentially all of Labrador’s operating cash flow.

China has remained a major consumer of iron ore, mainly from Australia. And its demand growth for steel to build infrastructure has been a real bright spot for Labrador and others in what’s been a fairly depressing market. The world’s largest steel consumer has tried to bargain its way down this year, and has succeeded to some extent. That market power will diminish substantially, however, as the global economy works back to health and as demand for steel in infrastructure picks up on government mandate.

Iron ore is the essential raw material for making steel. A resumption of demand outside Asia, particularly in North America, will almost certainly push prices a lot higher in a hurry, pushing up iron ore royalties that will flow directly to Labrador’s distribution. Buy Labrador Iron Ore Royalty Income Fund up to USD40.

Teck Resources is unlikely to be fully digested by its 17 percent owner CIC, due primarily to Chinese concerns about inflaming Canadian nationalism. But the company’s major investor gives it a tremendous leg up when it comes to accessing Asian market with its considerable resource bounty.

The mining giant was financially weakened by the hefty debt load taken on at a bad time to pay for the buyout of Fording Canadian Coal. That set off a wave of asset sales to pay for debt reduction, which has consumed management’s energy over the past year.

The good news is that divestiture wave now appears to have ended with the closing last month of the sale of the company’s interest in the Andacollo gold mine in Chile. The deal netted another USD218 million in cash for debt reduction.

According to its latest filed documents, Teck still has CAD811 million in maturities due in 2011 and another CAD2.1 billion in 2012. There are no further major debt maturities for 2010, however, and with Asian demand for its metallurgical coal output reviving, cash flows are surging.

Reflecting its newfound strength, Teck announced a plan in early January to increase the output of copper and zinc from the Antamina mine in Peru by 30 percent by late 2011. Teck owns 22.5 percent of the mine through its stake in Compania Minera Antamina. Ore reserves at the mine were increased by 75 percent in 2008, and the mine life is now expected to extend until 2029.

Teck’s share price is well off its early 2009 low but also well off its mid-2008 high, before the Fording deal. Now a much more valuable company, it deserves a higher multiple, which it will earn in coming months. There’s no dividend. But as a super bet on Canada’s Asian connection, Teck Resources is a solid buy up to USD40.

My fourth pick last month was Westshore Terminals Income Fund (TSX: WTE-U, OTC: WTSHF), the company through whose terminals Teck’s metallurgical coal is shipped. The Teck contract is 29 percent of Westshore’s revenue and the major driver of the size of its quarterly distribution, which, in turn, is hugely affected by rising demand for Teck’s metallurgical coal output for export to Asia.

Facilities are the easiest way to play rising trade volumes, and that seems a safe bet at this point for Canadian resources and the insatiable markets of developing Asia. Expect some volatility in the distributions, particularly with 2011 taxation approaching. That makes this much riskier than the other companies tracked in How They Rate as Energy Infrastructure. But for those who can accept that tradeoff in exchange for somewhat more potential upside, Westshore Terminals Income Fund is a buy up to USD12.

Outside those four, Cameco Corp (TSX: CCO, NYSE: CCJ) and Potash Corp of Saskatchewan (TSX: POT, NYSE: POT) also stand to be huge long-term winners from the Asia trade. Like Teck, Cameco has also been refocusing its operations on its core competency, in its case uranium production.

The company has been systematically divesting its non-uranium operations, last month announcing the sale of its stake in gold mining company Centerra for a projected CAD875 million. That company was actually spun out from Cameco some years earlier, with this deal marking the exit of the former parent.

The sale will help Cameco continue development of its key Cigar Lake mine in Northern Saskatchewan’s Athabasca Basin, believed to be the world’s largest undeveloped uranium deposit in the world. Production has been delayed by flooding twice from its initial startup date of 2007. This sale makes it more likely it will be able to make its new projected startup date of 2011.

The uranium market in recent years has been subject to wild volatility, in part because of rumors about new production and potential new demand from a massive fleet of new nuclear power plants to be constructed in coming years. As it’s turned out that new fleet has turned out to be more hope from hype thus far, but that may be changing rapidly.

For one thing, the Obama administration has emerged as a major proponent of new nukes, offering up some $28 billion in new subsidies in its budget. Should that make the final cut, it would ease the way for would be developers, particularly in the American South.

More important, however, China appears to have taken up the torch for nukes as an alternative to burning coal to generate electricity, a practice which is well on its way to making the country the world’s largest producer of carbon dioxide (CO₂) as well as other forms of air pollution.

The major challenge of nuclear power is the cost of building new plants. After that, however, it’s critical to secure needed supplies of uranium. Although Canada may not allow a wholesale takeover of Cameco from abroad, interest in the company’s product is certain to spur profits much higher. Trading for barely half its 2007 high, Cameco Corp is also a bargain; buy up to USD30.

As for Potash Corp, its fortunes always wax and wane with the price of its key product, fertilizer. That wasn’t so good last year, as fourth-quarter earnings plunged 69 percent on the combination of lower prices and reduced output. But the company’s dominant position and rich reserves of this vital resource are always a threat to produce massive profit gains, and windfall surges for Potash Corp shares.

A price increase from Belarusian Potash Company (BPC) indicates the tide may be turning here for potash prices in early 2010. BPC’s head of sales Oleg Petrov was recently quoted saying “global demand for potash is hardening and we expect prices will continue to rise.” Demand in Asian markets desperate to increase agricultural yields is one major reason. And there have also been increases in Brazilian and European demand.

Potash Corp itself issued a fairly dour forecast for 2010 when it released fourth quarter results in late 2010, decrying a pact between BPC and China as under-pricing the commodity. But with supplies limited and demand rising, that settlement isn’t likely to set the price for long. And with 20 percent of global potash production capacity, Potash Corp isn’t constrained by the BPC-China deal in setting prices.

The company has frequently been discussed as a potential takeover target, talk spurred as much by the fact that the stock trades at less than half its 2008 high as its unmatched assets. Either way, it’s headed a lot higher. Buy Potash Corp of Saskatchewan up to USD110.

Not all Asian beneficiaries in Canada have to do with natural resources. Discussion of Research in Motion (TSX: RIM, NSDQ: RIMM) is usually confined in the financial press to how its patented Blackberry smart phones are faring in their never-ending battle with Nokia (NYSE: NOK) and, above all, Apple (NSDQ: AAPL).

Less noted is the explosive sales potential for the Blackberry in Asia, particularly in China, where late last year RIM inked a distribution deal with China Telecom. The deal is the first major high-end handset contract for the Chinese operator, with a commercial rollout expected sometime early this year.

The deal was the result of a prolonged negotiation that involved Blackberry models supporting both GSM and CDMA infrastructure, no mean feat considering the smart phone’s distribution globally. It illustrates RIM’s ability to negotiate complex contracts in what’s known as one of the world’s more cantankerous nations for foreigners to do business.

Worldwide shipments of Blackberrys are currently running at five times that of the iPhone, giving RIM a 19 percent share of the global smartphone market. That’s second only to Nokia and is set to rise with this deal.

Amazingly, RIM trades for less than half its mid-2008 high. That’s enough to make this technology titan a value stock, for those willing to live with the lack of a dividend and added volatility. We rate Research in Motion a buy up to USD70.

Finally, for those in search of a lower-octane bet on Canada’s move into Asia, Bank of Nova Scotia (TSX: BNS, NYSE: BNS) offers a solid yield of 4.4 percent and a blue-chip balance sheet attached to a powerful banking franchise that weathered the North American slump and is now poised to take its act to the global stage. A recent issue of five-year bonds at a premium of just 98 basis points to Treasuries demonstrates both a very low cost of capital and strong investor confidence, both of which will be critical to its initiatives.

Scotiabank’s biggest ongoing foray into Asia is an attempt to buy a 47.6 percent stake in Thailand’s Siam City Bank (Thailand: SCIB, OTC: SICXF), which has now come down to a bidding war with HSBC Holdings (NYSE: HCS). If successful, the deal will dramatically expand the bank’s presence in developing Asia, and without the political exposure of taking on a controlling interest.

Speaking at a recent Morgan Stanley conference in New York, Scotiabank CEO Rick Waugh stated he sees opportunities for rapid growth in coming years by expanding in niche areas such as energy and commodity trading, as well as more such acquisitions. Infrastructure is also of interest as is wealth management for Canada’s most internationally focused bank.

Scotiabank’s core strength is, of course, its No. 3 lending position in its home market of Canada, coupled with solid capital ratios. The bank never fell into the trap of subprime mortgage lending, and in fact was one of the least exposed to the fallout from the US crash, a testament to the foresight of its managers.

The approach of acquiring small stakes in local banks–such as Siam City–as gradually increasing its interest over time is both aggressive in its vision and extremely conservative as a tactic. As a result, management has been able to build a global franchise without making the huge mistake that, for example, US money-center banks like Citigroup are so well known for.

Scotiabank was among the most profitable investments of 2009, throwing off a total return of 84 percent. Relative to expected fiscal year 2011 profits, however, they’re still quite cheap with a price-to-earnings ratio of barely 11 times the lowest estimates and 9 times the best. That’s despite consensus estimates of 10 percent for five-year average annual earnings growth and AA ratings from all the major credit raters. Buy Bank of Nova Scotia up to USD50.