For investors who have come to the realization that a slumping loonie and underperforming economy means they should buy more U.S. equities, there's good news and there's bad news. First the bad news: You're pretty late to the party. The good news? There's still a party going on.
"We've been pounding the table on this call for three and a half years," said Stuart Hinshelwood, vice-president of U.S. equities with BMO Nesbitt Burns Inc. in Toronto. "You should be diversifying up some assets into the U.S. and always have exposure, similar to having exposure to other areas and other asset classes in the world."
While the S&P 500 has had a spectacular three-year run compared with Canada's TSX/S&P, he does not expect the tables to turn anytime soon, meaning that it still makes sense to check into the U.S. recovery party, even if investors may be 11th-hour crashers.
Mr. Hinshelwood's call can be broken down to three components: the economy, the market and the currency.
Canada is first and foremost a trading nation, and it has (through the federal government and Bank of Canada) signalled to everyone that it is A-okay with a free-falling currency. Many observers expect it to drop another nickel from its current value to 85 cents compared with the U.S. buck.
Any fall in the currency means a bonus return on U.S. equities held by Canadian investors.
As for the economy, Mr. Hinshelwood is a U.S. bull and a Canada bear. The U.S. economy is one of the few in the world that can pretty much go it alone. About 70 per cent of its economy is consumer driven, while about 11 per cent is comprised of exports.
Additionally, the country is enjoying its own made-in-America economic boom.
"The best emerging market in the world is middle America," Mr. Hinshelwood said. That is being driven by less expensive energy supplies from shale gas, regional bank loan growth and employment growth. That, too, is driving the decoupling of the U.S. economy from the rest of the world.
The third pillar of his "invest U.S." strategy is the great breadth of its market. Canadian investors know all too well how our markets are dominated by commodities (energy, materials and metals) and the financial sector. "Canada has two sectors. When those two sectors stumble, there is no way the TSX can move higher."
Contrast that with the United States, where commodities are a small part of the S&P 500, its economy is broadly diversified and many companies are global giants. An investment in many U.S. equities therefore benefits not just from U.S. growth but also international economic growth.
Many investors are now worried about whether U.S. markets can maintain their mojo. Mr. Hinshelwood said that is the wrong approach.
"Don't focus on that. Focus on good companies that have opportunities and management teams that have a good understanding of where their prospects lie."
At the top of the "buy" list for Mr. Hinshelwood is the industrial sector. "These companies have cut the costs out of their business," whether that is headcount or selling off underperforming assets. He ticks off names such as General Electric, United Technologies Corp. or Illinois Tool Works, all of which are diversified and have substantial international exposure.
He also likes the technology sector: "There's a lot of good technology companies that you can pick up for relatively reasonable valuations, and they have got global opportunities in front of them."
Finally, don't forget about health care – as much as the majority of Americans would prefer not to discuss it.
"The health care system in the U.S. is broken. It is really about costs and bringing down costs, bringing down bureaucracies and making it more efficient and spreading it to more people in a cost-effective manner."
The beneficiaries of a better U.S. health care system? Managed care distributors and pharmaceutical companies.
Given the 40-per-cent outperformance of U.S. markets to those in Canada, and the expectations that this will continue, it still makes sense to buy south of the border for most investors. Just don't expect those spectacular results of the past three years, said Vincent Delisle, managing director for investment strategy with Bank of Nova Scotia in Montreal.
Buying U.S. securities gives Canadian investors exposure to sectors that are simply hard to buy here at home: industrials, technology, consumer discretionary, consumer staples and health care.
He sees plenty of pent-up potential in housing, auto sales and lending.
"U.S. banks got killed in the recession, where Canadian banks performed very well," he said. "One area where you may want to prioritize the U.S. would be in financials. Technology is also an area in the context of recovering business spending, the technology hardware and software sector should benefit."