What’s quite possibly the best bet that Canadian investors can place right now? Buy American.
It’s not a very patriotic stance. And it certainly isn’t the view shared by my colleague John Heinzl, who wrote the other day about how Canadians may be best off avoiding foreign stocks altogether.
But I think those who don’t venture across the border will soon be wishing their portfolios made the trip.
Granted, the argument for global diversification is diminished these days. Markets have become highly correlated. On a day when the U.S. or European or Asian markets are rallying, chances are the TSX is partying right along. There are more sectors in the U.S. to dabble in, like health care, but I can accept the point of view that you can get reasonably decent exposure in Canada to a broad enough range of industries.
And sure, there is currency risk if you buy a non-hedged product. The Canadian dollar could appreciate further against the greenback, which would diminish the value of U.S stocks, bonds or non-hedged funds in our local currency.
But I think in the long term, the odds are stacked much more in favour of the loonie descending back to well below parity.
A number of indicators back this up. The Economist magazine’s Big Mac index, for instance, is hinting that our currency has put on too many pounds. It compares the purchasing power of various currencies by examining the price of that high-calorie sandwich across the globe. It suggests the loonie is about 15 per cent overvalued against the American buck.
Then there’s the Organization for Economic Co-operation and Development’s purchasing power parity index, currently pegging the Canadian dollar as 31 per cent overvalued against the greenback.
BMO Nesbitt Burns, which has a model that looks at such factors as commodity prices, interest rates and inflation differentials, says the loonie is about 10 cents north of fair value.
The evidence that suggests the loonie is flying unsustainably high doesn’t end there. Yet, Canadians are easing back on their purchases of foreign stocks, even at a time when brokers have been devising new ways to minimize the hefty foreign exchange fees that apply when buying U.S. securities.
According to Statistics Canada, between January and August of this year, we purchased $14.087-billion worth of foreign equity and investment funds, a decline from $21.350-billion during the same period a year ago. During those months in both years, we sold more in foreign bonds than we purchased.
I think part of the reason is that many Canadians holding foreign securities got stung badly over the past decade when the loonie shot up from 65 cents (U.S.). I know I did, and I shared in the pain of seeing an otherwise winning pick turn into a loser simply because of foreign exchange rates.
But that’s the past. Some 10 years from now, buying U.S. stocks, bonds and funds in Canadian-dollar terms will very likely come with a hefty premium again.
Already there are signs we’re heading in that direction. Commodity prices, which have been key to supporting the currency, have been weakening as growth in the Chinese and European economies slow. And despite all the doomsayers warning that the quantitative easing by the Federal Reserve will deflate the U.S. dollar, it’s holding pretty steady against most global currencies and is still a haven for traders when shying away from risk.
Now is not the time for Canadian investors to cocoon at home.
READERS: What do you think of buying foreign securities right now? Where do you see the loonie in the future? How much foreign content should Canadian investors have?
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