The Organization of Economic Cooperation and Development (OECD) Composite Leading Indictors (CLIs) for April show stronger signs of a trough in Canada, among other member nations.

The OECD CLIs are designed to provide early signals of turning points (peaks and troughs) between expansions and slowdowns of economic activity. The CLIs cover a wide range of key short-term economic data, including observations or opinions about economic activity, housing permits granted, financial and monetary data, labor market statistics, information on production, stocks and orders, foreign trade, etc.

The data selected are those known to provide an indication of future economic activity; building permits, for instance, indicate possible future construction, whereas unemployment, by contrast, is a lagging indicator because it reflects decisions prompted by past economic activity.

Monthly CLIs “point to a reduced pace of deterioration in most of the OECD economies with stronger signals of a possible trough in Canada, France, Italy and the United Kingdom,” the OECD reported. The economies in Germany, Japan and the US are also looking up. CLI across the 29 OECD member states rose 0.5 points in April but was still 8.3 points lower than the same month a year earlier.

The CLI for Canada increased by 0.4 points in April, but it’s still 7.6 points below year-ago levels.

The Purchasing Managers Index (PMI) of China’s manufacturing sector stood at 53.1 percent in May, the China Federation of Logistics and Purchasing reported June 1. The figure was down 0.4 percentage points from a month ago, but it was the third consecutive month the PMI was above 50 percent. A reading of above 50 suggests expansion, while one below 50 indicates contraction.

The PMI includes a package of indexes that measure economic performance. The survey, jointly conducted by the National Bureau of Statistics, covers purchasing and supply managers of more than 700 manufacturers across China.

The output index was 56.9 percent, down from 57.4 percent in April. The new order index fell to 56.2 percent from 56.6 percent. The purchasing price index was up 1.8 percentage points to 53.1 percent.

That PMI remained above 50 for a third consecutive month, despite an entirely normal downward adjustment, is pretty clear evidence the world’s third-largest economy is in recovery. Investment and consumption continue to grow.

Source: China Federation of Logistics and Purchasing, Bloomberg

Over the last several weeks we’ve discussed the importance of Canada’s relationship with Asia’s emerging economies, China in particular. We’ve focused on opportunities to expand the bilateral trade relationship; Canada’s resources–energy, metals, materials, soft commodities–obviously serve an enormous Chinese appetite, but in other areas as well–new clean energy, information, communications, wireless, health sciences, infrastructure and transportation technologies–Canada can satisfy critical needs for China.

One of the keys–if not the key–to a definitive resumption of normal global growth will be an increase in consumer and public spending in the emerging markets and the oil-exporting countries. China’s USD587 billion stimulus package, 65 percent of which is earmarked for infrastructure projects, will impact Canada-based companies that produce and export energy, metals, fertilizer, etc.

The Canadian economy is and will likely forever be driven by what happens in North America; the US, simply by virtue of history and proximity, will always be Canada’s largest trading partner.

But since the S&P 500, the S&P/TSX Composite Index and the S&P/TSX Income Trust Index bottomed on March 9, the two Canadian indexes have correlated more with the MSCI Asia All Country ex-Japan Index. (In the chart below, the white line represents the MSCI All Country ex Japan Index, the orange line the S&P/TSX Composite Index, the yellow line the S&P/TSX Income Trust Index, the green line the S&P 500.) In other words, Canada’s stocks have become more and more levered to the global economy, including areas in Asia where signs of economic recovery are easier to see.

Source: Bloomberg

This increasing offshore focus has served Canada well in the short term, and it will continue to benefit the country and those who invest there in the medium and long term as well.

The Asian economies have moved first out of the current downturn, and the region is primed to be the global growth leader in the next decade. Where North American and European consumers are saddled with high debt and must rein in spending, Asian consumers and governments have huge reserves of savings that can be unleashed to pump up growth. We’ve seen evidence of this with China’s massive stimulus effort, which, in terms of portion of GDP, was 50 percent greater than the US effort.

A decline in the personal savings rate in emerging Asia could more than offset the rise in the savings rate in the OECD economies. In other words, the Asian middle class can increase consumption spending to make up for the absence of the deleveraging North American/European consumer.

Resource demand will grow based on the heavy metal and other resource requirements associated with upgrades to transport and power systems and other planned infrastructure spending.

Fertilizer stocks have recovered recently, but remain well below 2008 highs. China is already one of the world’s larger fertilizer users, but demand for grain must rise to meet the expanding protein needs of a growing population. This population is also becoming wealthier, and its eating habits will evolve.

The country’s historic underapplication of potash, moreover, points to strong growth in demand for that product compared to the other major soil nutrients. The factors fueling the rise in China’s fertilizer needs, including dietary shifts and the limits on arable land, hold true elsewhere. Droughts in a number of key grain-producing countries, moreover, point up the potential adverse supply consequences of climate change, heightening the pressure to bolster yields through the application of artificial soil nutrients.

In remarks at the Conference de Montreal following release of the April CLI data, OECD Secretary-General Angel Gurria said, “Effectively, Canada will be one of the first to come out of the recession.” The April increase could be a function of Canada’s increasing leverage to the global economy, Asia in particular.

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The Roundup

Oil & Gas

Canadian Natural Resources Ltd (TSX: CNQ, NYSE: CNQ) has entered into a non-exclusive arrangement with Qatar Petroleum International (QPI) to jointly explore and develop investment opportunities, primarily in upstream oil, heavy oil and gas activities.

QPI is the international arm of state-owned Qatar Petroleum; the company currently has multi-billion dollar projects in China in association with Petro China and Royal Dutch Shell and is in discussions for major projects in the Caspian. Alberta-based Canadian Natural is focused in Western Canada, the North Sea and offshore West Africa. Canadian Natural Resources Ltd is a buy up to USD60.

Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF) is raising CAD85 million via a bought-deal offering of units. The trust is selling 8.1 million units to an underwriting syndicate at CAD10.50 per unit. The underwriters have an over-allotment option exercisable up to 30 days following the close of the offering.

Net proceeds will first be used to pay down debt, then to fund Peyto’s capital expenditures and general corporate activities. Peyto Energy Trust is a buy up to USD12.

Gas/Propane

Arctic Glacier Income Fund (TSX: AG-U, OTC: AGUNF) received some good news from a US District Court judge in Michigan last week, as the bulk of a suit brought against a subsidiary by a former employee was dismissed.

The packaged ice distributor is still under investigation by the US Dept of Justice (DoJ) for possible antitrust violations, and it still faces civil suits based on the activities under review by the DoJ. Still under threat of stiff fines and/or civil liabilities, Arctic Glacier Income Fund is a sell.

Business Trusts

IESI-BFC (TSX: BIN, NYSE: BIN) is offering 13 million shares in the US at USD10 per share for gross proceeds of USD130 million. The deal, which includes an underwriters’ option to purchase an additional 1.95 million shares, is expected to close June 10. Proceeds will go to paying down a portion of the company’s US revolving credit facility.

Also, as of June 5, IESI-BFC is trading on the New York Stock Exchange under the symbol BIN, the same three letters it trades under on the Toronto Stock Exchange. IESI-BFC is a buy up to USD14.

Real Estate Trusts

RioCan REIT (TSX: REI-U, OTC: RIOCF) is selling 6.9 million units at CAD14.50 per to a group of underwriters, who have the option to purchase an addition 1.7 million units.

Proceeds from the offering, CAD100 million, will be used to provide additional financial flexibility, to fund development activities and future property acquisitions and for general trust purposes. Buy RioCan REIT up to USD15.

Natural Resources

Ag Growth Income Fund is now Ag Growth International (TSX: AFN, OTC: AGGZF) following the completion and approval by unitholders of a plan of arrangement whereby the income trust converted into a corporation.

The grain handling equipment maker assumed the tax losses of a defunct Toronto-based diamond mining company, Benachee Resources, to take on the mining firm’s corporate status. Ag Growth International is a buy up to USD30.

Energy Services

Trinidad Drilling (TSX: TDG, OTC: TDGCF) is raising CAD140 via a bought-deal offering of 27.2 million shares at CAD5.15 apiece. The underwriters have been granted an over-allotment option to purchase an additional 1.9 million common shares under the same terms, which would push total proceeds to CAD150 million.

Net proceeds will be used to reduce Trinidad’s outstanding debt and allow it the flexibility to explore acquisition opportunities. Trinidad Drilling is a buy up to USD5.

Financial Services

CI Financial (TSX: CIX, OTC: CIXUF) reported gross sales of CAD649 million and net sales of CAD136 million in May, while assets under management increased by 5.3 percent to CAD58.8 billion. Total fee-earning assets were CAD86.1 billion, an increase of 5.4 percent. Subsidiaries CI Investments and United Financial Corp had combined retail net sales of CAD149 million in long-term funds and net redemptions of CAD13 million in money market funds during the month.

The post-March 9 rally in equity markets has certainly helped CI; assets under management have grown by 20.8 percent since the market low. CI Financial, which recently boosted its distribution by 25 percent, remains a hold.

Davis + Henderson Income Fund (TSX: DHF-U, OTC: DHIFF) is buying fellow financial services firm Resolve Business Outsourcing Income Fund (TSX: RBO-U, OTC: RBOIF) in an all-stock deal worth about CAD88.7 million. Canada’s largest check-maker, said the deal will “combine two leading providers to the financial services industry” in business process outsourcing. Davis + Henderson Income Fund is a buy up to USD15.