Time to go long on Canada: the key is globally sensitive market timing.

• Author: Robson, William

Cynics are fond of saying that Canada is the country of the future--always has been; always will be. For investors looking for alternatives to U.S. equities, an indication that Canada is finally about to realize its potential would be most welcome. Could it finally be Canada's turn?

The answer is yes, though many jaded Canadian investors, acutely conscious of their country's shortcomings when compared to the United States, take a different view. Their international friends and colleagues will be familiar with the case they make against Canada and its markets.

On average, Canada taxes investment and entrepreneurship more heavily than does the United States. Canadian productivity growth lagged that of the United States for much of the past decade and government monopolies and regulations hobble key parts of the Canadian economy, including areas of future growth, such as health care.

The political scene can also unnerve potential investors. In 1995, secessionists in the Province of Quebec came frighteningly close to victory in a referendum. And for almost 10 years, the conservatively oriented opposition in the national parliament has been crippled by a regional split and personal infighting. Public-sector unions dominate the labor scene, obstructing efforts to improve the performance of health and education programs. Meanwhile, Canadian advocates of lower taxes and more market-oriented public policies have long faced the handicap of a reflexive branding as "too American"--the charge that such steps are threats to Canadian identity and independence resonates loudly in the media and in public debate.

However, investors familiar with the glum assessments of their Canadian colleagues need to put these criticisms in perspective. Many financially savvy Canadians are deeply frustrated that their compatriots do not more readily embrace growth-friendly policies and more enthusiastically espouse global competitiveness as a national goal. Frustration with the slow pace of economic reform, in turn, tends to be reflected in overly pessimistic assessments of Canada's long-term prospects.

Despite the Canadian dollar's decline against its U.S. counterpart during 2000 and 2001, Canada's domestic economy has outgrown the U.S. economy since 1998. The relatively strong performance of Canadian equity markets since then, moreover, has a very good chance of being sustained in the future.

Looking at the fiscal climate, Canada's public sector underwent a wrenching...