Canada’s fortunes tied to China’s

Canada is a resource-rich nation, and such stocks make up about half the S&P/TSX Index.

Yet “resources are only really meant to be 5%-to-10% of your portfolio,” says Craig Porter, fund manager at Front Street Capital and manager of the Renaissance Global Resources Fund.

So when tides change for resource stocks, they change for our economy.

At the moment, many big natural-resource stocks are sitting at the same low valuations seen in 2008.

“The CEO of Newmont Mining, one of the world’s largest gold companies, says it’s much cheaper to actually go out and buy production as opposed to building it yourself.”

This is unpleasant for investors, but Porter says, “At some point the valuations will get so cheap that the stocks will start to bounce again. The sectors will recover.”

In fact, it was M&A activity that led the economy out of the 2008 crash, because “corporations saw their competitors were so cheap that they started buying them.”

These low valuations on resources may have much to do with the economic situation in China.

“There’s a lot of concern about China, as a big consumer of commodities,” says Porter. The Chinese government manufactured a slowdown by bringing in tighter fiscal and monetary policies because of soaring inflation rates last year, which reached about 7%.

Read: Portfolio managers bullish on China

With inflation now under control, China may be able to relax, which is good news for Canada. “There’s a good correlation over the last 15 years between the Chinese government lowering rates and the TSX doing well after that.” says Porter.

The reverse is also true: “in periods where the Chinese government has tightened its fiscal and monetary policy, typically the TSX has done poorly.”

Porter praises Prime Minister Harper’s strategy of reaching out to the Chinese government and not simply relying on the U.S. for trade. “Much of the Canadian economy is resource-based; we should be friends with the big buyers.”