The very natural reaction most Canadians have to watching the loonie sink to new lows against the U.S. dollar has been to keep it local: skipping the cross-border shopping in favour of local malls, forgoing the annual sojourn south to Florida and staying home for the holidays and generally buying Canadian-priced goods and services with good, old-fashioned Canadian dollars.
From an investing standpoint, the equally natural tendency for many is to do the same: avoid buying stocks that are 30 per cent more expensive while sticking to local investments where a dollar spent is a dollar spent. Problem is, while a Canadian dollar spent might only get you 70 cents (or less) of a U.S. stock, that stock's potential return over the long haul will likely more than offset its higher sticker price -- not to mention help you diversify your portfolio out of Canadian-only investments.
In other words, Canadian investors who are intuitively thinking they either can't afford to buy stocks and other investments outside Canada or think they might be saving a few bucks buying home-grown, Canadian dollar-denominated securities are actually missing out on owning American companies with good growth prospects and solid long-term potential.
And while the loonie isn't exactly soaring high above other global currencies these days, there are still a lot of countries and markets out there where it can and does go a little further than the U.S. -- and where investors can also achieve positive long-term returns and diversification.
Below are some common questions that we receive from clients about the Canadian dollar's ongoing decline, plus how one should go about both protecting their portfolio and making the most out of their investments.
How much lower will the Canadian dollar will fall, and what is behind its ongoing decent?
While we are not forecasters, we do see signs that point to further troubles for the loonie: ongoing weakness in commodities prices as well as lower interest rates, which make the Canadian dollar less attractive to international investors.
As most remember, the Canadian currency traded much higher against the greenback when the U.S. economy was on its knees during the depths of the global financial crisis, and I don't think the U.S. is going to be on its knees again anytime soon, which likely means a 70-cent or even 65-cent Canadian dollar.
That said, over the longer term, a stronger U.S. economy will be good for Canada, which will help strengthen our economy and, at some point, mean higher interest rates. It is at that point that the loonie will start to rebound.
Should I just keep all my assets in Canadian dollars for now until the loonie rebounds?
It is understandable that many think this may be a smart approach. However, if you do this you could be forgoing better returns and a comfortable retirement. Don't equate or limit international exposure to U.S. exposure. When you start moving capital into a country with international exposure, look for markets where assets are on sale.
If even 10 per cent of your portfolio is invested outside of Canada and producing a conservative three per cent income, you can use that foreign income to invest in additional international markets. Emerging market countries such as China, Hong Kong India, Korea and Taiwan and are among the markets we think are attractive and offer value right now.
How should I be looking to invest outside Canada right now?
If you have no exposure beyond Canada right now, don't assume that the U.S. is your best and only option. Go to Europe or look at U.S. (export/import) proxies like Korea and Taiwan. If you already have U.S. exposure, porting some (or all) of your U.S. gains now into other markets makes sense.
The non-commodities sectors of Australia and New Zealand -- along with some Eurozone countries, Scandinavia and Switzerland -- offer good investment options for Canadian investors right now. Even with it costing more in Canadian dollars, investing in high-quality companies outside Canada allows Canadian investors to better diversify their portfolios and be better positioned for longer term returns.
What should I do to protect against further currency downside from an investing standpoint?
Quite simply, investing internationally if done correctly can lower risk by increasing diversification and will improve returns by exposing investors to opportunities not available here in Canada. Once your portfolio is better diversified, you won't need to rely on an oil boom in Calgary or a strong real estate market in Vancouver to fund your retirement.
Exposure to interest rates globally can protect your portfolio from being severely affected by events that impact particular sectors, i.e. the auto sector decline in North America since 2009; the current decline in the mining sector; regional market slowdowns such as the Eurozone recession; and so on. One market that is incredibly out of favour is South Africa, yet there are companies there that are internationally diversified and, at the same time, extremely inexpensive.
How are international gains generated?
Typically, international gains are generated three ways. First, a country enters recession (the U.S, in 2009) and its currency declines. Buying high-quality companies in that market at that time will position Canadians for a return-to-the-norm currency trade -- i.e. the U.S. dollar then strengthened against the Canadian dollar, yielding a currency gain for Canadian investors with U.S. assets.
Second, during the recession, U.S. companies generally experienced declining valuations. An economic recovery in the U.S. has resulted in improved prospects for U.S. companies. Consequently, investors have been increasingly willing to pay more for U.S. companies.
Third, and the best international portfolio gain generator, is achieved by buying companies with depressed share prices in a depressed currency. Buying shares of U.S. companies in 2009 exposed Canadians to depressed share prices and a cheap currency. The U.S. was on sale. The currency rebound alone since 2012 has generated a 50 per cent currency gain. Additionally, inexpensively purchased U.S. assets have appreciated substantially increasing the overall portfolio return.
The key takeaway here is that the world is a big place, and all you need is a good recession in a foreign market to repeat the portfolio gains the U.S. has generated for Canadians since 2009.
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