O’ Canada! 3 Reasons to Avoid Investing in the Great White North: Canadian Natural Resource Ltd (USA) (CNQ), Bank of Montreal (USA) (BMO)

Debt binge

Last week, StatsCanada announced the Canadian debt-to-income ratio hit a record 165% driven by cheap credit and soaring home prices. This is higher than the peak achieved in America before the financial crisis in 2007 (although there’re a few important differences).

Banks have tapped out the lucrative retail lending market. In order to grow earnings banks must either reduced interest rates, crimping margins, or lower their lending standards, risking higher defaults.

There’s evidence that a price war may be developing. Earlier this month, the Bank of Montreal (USA) (NYSE:BMO) announced it was re-offering its record low 2.99% 5-year fixed mortgage. Last year aggressive price cuts did little to improve Bank of Montreal (USA) (NYSE:BMO)’s market share in the mortgage industry. But it did prompt competitors to respond, significantly hurting net interest margins across the entire space.

Throw in a slowing housing market and you have a recipe for weak growth in the financial sector.

Foolish bottom line

Despite the headwinds, there are some good investment themes emerging from the country. The oil glut is creating a boom for midstream companies like Enbridge Inc (USA) (NYSE:ENB), TransCanada Corporation (USA) (NYSE:TRP) and Canadian National Railway (USA) (NYSE:CNI), firms that move energy product from well to market. There’re also lots of great growth stories like Catamaran Corp (USA) (NASDAQ:CTRX and Valeant Pharmaceuticals Intl Inc (NYSE:VRX).

But with so many headwinds, investors should just avoid investing in Canada as a macro theme.

The article O’ Canada! 3 Reasons to Avoid Investing in the Great White North originally appeared on Fool.com and is written by Robert Baillieul.

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