Canadian investors waiting for our dollar to recover could be missing out on great opportunities outside the country, according to a money manager and a currency expert.
It's not hard to see why many are feeling trapped. Here at home pickings are slim on the resource-heavy TSX as plunging oil prices take Canadian stocks into what seems like a bottomless pit.
Outside Canada a 76-cent loonie doesn't go very far when buying stocks in U.S. dollars. Investors also face the risk that U.S.-denominated equities could decline in value in Canadian dollars if the loonie rises.
One way to eliminate the risk of a rising loonie is through hedged mutual funds or exchange traded funds, but annual fees for that sort of safety can be more than 10 basis points higher.
The solution? Damn the loonie.
"I don't think you're going to get burned on the currency right now," says Allan Small, senior investment adviser with Allan Small Financial Group, of HollisWealth in Toronto. He says investors who didn't take advantage of the above-par dollar three years ago to diversify outside Canada should get over it and move on. "People will be afraid of the currency today when they should have been afraid of the currency six months ago."
Betting on a volatile currency market by paying a premium on a hedged mutual fund or ETF is wasted money, he says.
"Sure, you're losing on the dollar to buy today, but unless the Canadian currency really moves higher over the next 12 months, when you go to sell your U.S. investment you're going to make what you lost," he says, pointing out that a currency hedge could also impede gains if the loonie falls.
"You could even see our dollar fall further when the U.S. raises their interest rate."
The bigger risk is holding too much of an investment portfolio in Canadian stocks, he says, because our market lacks diversity. One-third of all publicly traded Canadian stocks are resource related, and another third are banks and insurance companies with close ties to the resource sector.
"You want to gain exposure into areas we don't have, such as retail and biotech," he says. "I challenge you to find more than three Canadian retailers today. You would tell me Loblaw, you would tell me Canadian Tire and you would be stumped – maybe Rona? Over all, we have nothing up here."
He encourages his clients to diversify now into a much broader pool of non-resource and non-finance stocks in the United States. "It's difficult enough to play the stock market. Playing the currency market is even more volatile," he says.
Even Boris Schlossberg, head of currency strategy with BK Asset Management in New York, agrees that the future relationship between the U.S. and Canadian dollars is tough to call.
"I think [the loonie] is mired in a long term decline," he says. "It's very rare that the oil market just bounces like a rubber ball from the bottom. When oil goes into a bear market it tends to be pretty extended – 12 to 18 months. That means by extension the bear market in the Canadian dollar is very likely to be 12 to 18 months, minimal."
As oil finds a bottom Mr. Schlossberg doesn't expect the Canadian dollar to fall any lower than 66 cents. "We're pretty close to the bottom of that cycle, which could be 5 to 10 years in the making before it comes back up to 80 or 85 cents," he says.
Any fluctuations during that time will be influenced by the strength of the Canadian economy in relation to the U.S. economy, he says. "Either Canada is going to get better or the U.S. is going to get worse. Either way the Canadian dollar is going to strengthen eventually against the U.S. dollar."
He reminds investors that unlike stocks, currencies are bound within a range because central banks control their supply. "They never go to zero and they never go to infinity. There's always a natural boundary," he says.
Mr. Schlossberg's advice to Canadian investors is to avoid incurring a certain loss by paying extra to hedge the loonie. He says the best currency hedge is purchasing U.S.-dollar investments in increments over time. "Simply buy an index fund at a regular interval. You will be buying lots of those shares when they are low and few of those shares when they are high, and they will naturally be timing the market," he says. "This is the single best way to diversify."
The biggest mistake Canadians can make, he says, is trying to time the currency market hoping for a quick shift in the loonie – a term he calls "FOMO," or "fear of missing out."
"The best way to psychologically beat FOMO," he says, "is to never engage in it in the first place."