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THE DOLLAR

Investors not quite ready to bet on low-loonie-loving manufacturers Add to ...

With the loonie wheezing along at 71 cents (U.S.), you might think it’s time for investors to look at Canadian manufacturing companies.

Not so fast, say some financial advisers and investment analysts. While the plunging loonie brings some advantages to Canadian firms that compete with rivals in the United States, it doesn’t translate directly or consistently into advantages for our manufacturers.

“Buying into Canadian manufacturers because of the lower dollar is too linear for me,” says George Christison, a British Columbia-based retirement and investment planner and founder of IFM Planning Services.

“The value of a country’s currency is typically a reflection of international investors’ confidence in a country’s present and future prospects,” Mr. Christison says. “Right now, the investors don’t think Canada is doing so great.”

The Canadian dollar recently hit low points not seen since 2004. Most people attribute the sagging loonie largely to the drop in the price of oil and other commodities, but the problem may be deeper, he says.

“The dollar is low because our economy is thought to be struggling or about to struggle, so wouldn’t Canadian manufacturers also struggle?”

Businesses in Ontario, Canada’s manufacturing heartland, aren’t particularly confident that their sector’s time is arriving. In a report released Jan. 27 by the Ontario Chamber of Commerce and the Mowat Centre in Toronto, only 30 per cent of businesses surveyed said they were confident in Ontario’s economy, compared with nearly 50 per cent four years ago.

A low dollar might make Ontario labour and products more attractive, but there are deeper problems in the manufacturing sector, the report suggests. “The province is a laggard in terms of the number of patents it produces and in labour productivity. A recent Conference Board [of Canada] report card gives Ontario a D grade on both indicators,” it said.

Investors might also find it difficult to zero in on a variety of export manufacturers on the TSX, says Markus Muhs, an investment adviser at Canaccord Genuity Wealth Management in Edmonton. “A lot of the manufacturing in Canada gets done by foreign subsidiaries, such as the auto makers.”

Even so, he says, “the manufacturing sector is one that has been on my radar for a while.”

“The weak loonie is a major boon to export manufacturers, and the industrial sector over all is one that hasn’t seen as much appreciation [as other sectors such as tech or financial services] on both sides of the border,” he says.

The climate should be right for manufacturing to rebound and benefit from a low dollar eventually, he says: “It’s a sector that tends to peak in the second half of economic expansions, once an economy is growing steadily but before input costs, such as raw materials, rise.”

With commodities at achingly low prices, “it goes without saying that we’re far away from manufacturing hitting any roadblocks on the supply side. The issue is just solid demand growth, which is what we’re waiting on,” Mr. Muhs says.

Kurt Rosentreter, senior financial adviser at Manulife Securities in Toronto, says it takes big corporations time to digest a currency change.

“I have talked to my manufacturing business owners that export to the U.S. and they are enjoying the extra profit as a result of the lower exchange rate, but they have no plans to push for higher sales at this time,” Mr. Rosentreter says. “No doubt they may look to exploit pricing advantages in the future, but this will take time.”

At the corporate finance level, the effects of changing currency rates aren’t necessarily as dramatic as they are for, say, consumers, Mr. Rosentreter says. It takes a while for exchange rates to affect a company with a billion dollars in revenue.

“You also have to keep in mind that many of these companies may have expenses in U.S. dollars as well, so the impact on changing foreign exchange is muted,” he says.

In addition, “many companies also have extensive hedging programs they use to negate the impact of currency over time on their finances. They do this to stabilize expenses and standardize margins. Depending on how they manage their hedges the impact on currency may not be what one expects.”

Mr. Muhs says it’s worth remembering that a weak Canadian dollar isn’t 100 per cent beneficial to manufacturers. “When they grow and upgrade their factories, a lot of those costs are in U.S. dollars. The cost to automate becomes more prohibitive, and at the end of the day you may end up with less efficient companies if the Canadian dollar stays low for too long.

“We saw this in the 1990s, and Canada still hasn’t caught up to the U.S. and Europe in overall economic productivity.”

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