The new year for global markets has begun where 2007 left off. And unfortunately, Canada hasn’t been spared its share of the pain, including Canadian trusts backed by healthy, growing businesses.

As this week’s Maple Leaf Memo makes clear, no market is an island. And with Canada’s and the US’ economies historically closely tied, it’s no great surprise troubles here would trigger fallout north of the border. The energy sector in particular has been taking lumps in anticipation of a pending drop in oil prices as the US economy slips into recession.

At this point, fear is clearly in control of the markets. And although that’s the case, we’re going to see more volatility, mostly to the downside. But there are three very critical things to keep in mind.

First, this isn’t the same US/Canada relationship of even a decade ago. For one thing, the US is no longer the only major market for Canadian raw materials. Last year’s quantum lift in oil prices, for example, occurred at the same time US and European demand growth had fallen to zero.

Granted, at least some of the increase was a result of rising speculation. But oil’s resilience last year is yet another crystal clear indication that the key drivers of demand are elsewhere, particularly in the emerging economies of Asia, the Middle East, and Central and Eastern Europe. And although some of that demand could also slow in the face of a collapsing US economy, this is a shift that’s going to continue for decades to come.

This provides a powerful underpinning for oil prices, and it’s true of other Canadian commodities as well. That’s also why long-term-minded foreign capital from the Middle East and Asia is taking advantage of low prices to lock down Canadian resource assets—the TAQA (Abu Dhabi’s national energy company) buyout of PrimeWest Energy Trust was completed last week—even as notoriously short-term-minded US investors discount their value.

Second, although Federal Reserve Chairman Ben Bernanke is being widely excoriated for having a tin ear for markets, massive interest rate cuts like this week’s 75 basis points will ultimately have an impact on the real economy. And although I wouldn’t advise holding out much hope for a timely stimulus package from Washington, the Fed’s actions do make it pretty clear it will keep cutting as long as the crisis lasts.

That doesn’t ensure we won’t have a full-blown economic collapse in the US. But it certainly makes one a lot less likely. Moreover, despite the stock market’s ongoing plunge, the economy still really hasn’t sunk that far yet. For example, unemployment insurance claims have actually been falling in recent weeks, and that can’t simply be explained away by seasonal factors.

Third and most important, there are plenty of companies and sectors on both sides of the border that aren’t so closely tied to the economic cycle. These are the trusts we’ve been loading up on anyway during the stress tests of the past 15 months, and they’re set to weather this one as well.

This week, for example, major US utilities Entergy Corp and Exelon Corp reported very robust fourth quarter earnings. Regulated utilities’ control over essential services makes them uniquely resilient in the face of economic downturns, as turning off the power or heat is always the very last resort for strapped consumers. Both of these companies, however, rely heavily on the unregulated wholesale power market—which is economically sensitive—and both reported that returns are still strong on that front.

It will be a few weeks before the bulk of Canadian trusts begin to report fourth quarter and full-year 2007 earning, or post guidance as to where they believe 2008 profits will be. But the results at Entergy Corp and Exelon Corp are certainly a good sign for Canadian trusts involved in power generation, including Canadian Edge Portfolio picks Algonquin Power Income Fund (TSX: APF-U, OTC: AGQNF), Atlantic Power Income Fund (TSX: ATP-U, OTC: ATWPF), Macquarie Power & Infrastructure (TSX: MPT-U, OTC: MCQPF) and even Boralex Power Income Fund (TSX: BPT-U, OTC: BLXJF), which is encountering some internal difficulties.

Energy infrastructure is another area in good shape to resist the undertow. We’ve seen strong dividend growth in recent months at AltaGas Income Trust (TSX: ALA-U, OTC: ATGUF), Keyera Facilities (TSX: KEY-U, OTC: KEYUF) and Pembina Pipeline Income Fund (TSX: PIF-U, OTC: PMBIF). And just like the US infrastructure limited partnerships (LP) that are boosting dividends this year, these trusts’ basic businesses show no sign of weakening.
 
Canadian REITs have benefited over the past year by the steady strengthening of Canada’s property market. But even if that market should begin moving more in lock-step with its US counterpart, our picks are well positioned, with high occupancy rates of 97 percent and up based on long-term leases, below-market rents, strong market diversification, conservative debt leverage and steady payout policies. Those are strong contrasts with once high-flying US REITs, as are Canadian REITs’ much-lower valuations.

We’ll have to see the numbers to really determine how much Arctic Glacier Income Fund (TSX: AG-U, OTC: AGUNF), Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF), Energy Savings Income Trust (TSX: SIF-U, OTC: ESIUF), GMP Capital Trust (TSX: GMP-U, OTC: GMPCF), TransForce Income Fund (TSX: TIF-U, OTC: TIFUF) and Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF) are being affected by economic turbulence from the south. Bell and Yellow, however, operate cash cow businesses entirely within Canada.

As for those operating in the US, demand for ice (Arctic) has historically been very inelastic. Energy Savings is providing an essential service (power and gas) that again enjoys all-weather demand.

Of the group, GMP is most sensitive, because it makes its money in financial markets. But it’s also extremely well capitalized, has no subprime exposure like the Merrill Lynches of the world and has anticipated market events very well in the past.

It’s likely TransForce is feeling some sting from slowing transport activity in the US. But it too is well diversified in its customer base, and its strategy of building market share gives it a lot of flexibility. Moreover, it’s already more than pricing in a substantial dividend cut that may or may not occur.

The rest of the portfolio is, of course, energy-related and, therefore, is affected by changes in energy prices. Over the past year, however, the group in the Aggressive Portfolio has repeatedly measured up to the stress tests laid on it by the market. And even those that have been most impacted—particularly gas production-reliant Advantage Energy Trust (NYSE: AAV, TSX: AVN-U) and Paramount Energy Trust (TSX: PMT-U, OTC: PMGYF)—have established themselves as survivors.

As I pointed out in the December CE Feature Article, our group is also well positioned to weather a drop in oil prices all the way back to $70 per barrel. That’s because they maintained low payout ratios in the third quarter 2007 by selling oil at less than $70. All should actually enjoy a boost to fourth quarter cash flow by locking in oil sales at higher prices, because black gold was at more than $90 for most of that time.

I’m not clairvoyant. My strength isn’t projecting where oil prices will be three months from now, whether US economic growth will bottom this year at 1 percent or -5 percent or if Fed Chairman Ben Bernanke will succeed in calming the markets.

But I do know about the trusts we own in CE and the businesses that are backing up their distributions. And although I can’t promise we won’t see more damage on the share price front in coming days and weeks, I can say there’s nothing to indicate they won’t keep paying those distributions for the rest of the year and very likely well beyond what some still falsely believe is a day of reckoning for all trusts in 2011.

Over the next few weeks, I’ll be looking carefully at all of the earnings reported by our picks to ensure our faith in them is still justified and that they’re not being taken down by the slippery US economy. But as long as they measure up, history shows they’ll rebound, and we’ll be hanging in there.

In the meantime, I urge all readers who haven’t already to sign up for our free weekly e-zine Maple Leaf Memo. It’s free for CE readers and includes weekly updates on our recommended trusts, as well as all others in the How They Rate Table. But you have to sign up to reap the benefits.