Many investment advisers suggest diversifying globally, but with potential risks for Canadians looking abroad, the choice can be a tough one. Here are seven stock and fund picks by asset managers and analysts for 2014.
There are a couple of reasons money managers often advise Canadian investors to overcome their home-country bias and to put part of their assets abroad. One goal is to get a chance at higher returns by investing in expanding businesses or industries that are absent from our own stock exchanges. Canada's stock market represents only about 3.4 per cent of the world's $62-trillion (U.S.) in publicly traded companies. A second goal is to diversify wealth and reduce the vulnerability of one's portfolio to a collapse in the Canadian market.
Whether buying securities at home or abroad, investors need to do their homework beforehand, analyzing how a potential trade fits their overall strategy. Taxation is generally more favourable for domestic investments than foreign ones, and investing overseas adds currency-exchange risk. Plus, there's the chance that Canadian investments will soar while overseas prices sink.
Here are seven international investment ideas that differ in their rationale, profile, valuation, potential return and risk.
Visa and MasterCard are among the products that most of us carry in our wallets. Mark Lin, who helps oversee about $1-billion in stocks worldwide at CIBC Global Asset Management in Montreal, also has them as the top holdings in his technology fund.
The world's two largest electronic-payment networks will continue to benefit from several global trends, Mr. Lin says. They take a cut of every transaction in which they are used; there's a shift away from cash and toward cards and electronic payment, especially in emerging countries; people are increasingly shopping over the Internet; and it's difficult to set up a rival payment network.
"You basically own part of everybody's future spending," Mr. Lin says. "That's really what you're buying into. More and more monetary transactions will go over the electronic system."
Visa shares have risen about 10 per cent since Dow Jones & Co. said on Sept. 10 that it will add the company to the flagship Dow Jones Industrial Average. On the other hand, that has pushed the stock price to 26 times earnings for Visa, and MasterCard has a price-earnings ratio of 30, making them expensive. For these investments to make sense, "the price has to be right," Mr. Lin says.
Another stock Mr. Lin likes is Luxottica Group SpA, which owns or has licenses to sunglass and eyeglass brands, including Ray-Ban, Oakley, Prada and Dolce & Gabbana. The company, which trades in New York and Milan, also operates the LensCrafters and Sunglass Hut retail stores, among others.
"It's a unique story in that they not only make the product, they also control distribution," Mr. Lin says. "If you want a high-end pair of sunglasses or prescription glasses, there's really no escape."
NCC Group Plc is the top holding of the Global Small Cap Fund run by Paul Moroz at Mawer Investment Management Ltd. in Calgary.
The company, whose London-listed shares have risen about 15 per cent this year, helps clients, including the British government and the retailer Tesco Plc, keep important software running, even if the software developer or supplier goes out of business. Companies also hire NCC to hack their computer networks and websites to test and monitor security and vulnerabilities.
"It's a robust business model," Mr. Moroz says. "There's the theme of disaster recovery in software. You can just imagine that long-term theme of cyber crime."
Boustead Singapore Ltd. is another stock Mr. Moroz recommends because of the engineering and real-estate company's dividend, cash flow and business prospects in Asia. Excluding one-time gains, earnings rose 20 per cent to a record in the company's latest fiscal year, led by the property division, and Boustead increased its dividend by 40 per cent.
"It pays a really nice dividend," Mr. Moroz says. "There is safety in the excess cash that they have."
For investors betting on a continued economic recovery in Europe, John Gabriel, an ETF strategist at Morningstar Inc. in Chicago, recommends the Vanguard FTSE Europe ETF.
Emerging market ETFs
For those willing to shoulder more risk, Mr. Gabriel suggests emerging markets as one option. Some analysts expect money flows to emerging markets to slow in coming months as investors move money to the U.S., making emerging-market stock valuations attractive. The Vanguard FTSE Emerging Markets Index ETF holds about 850 large- and mid-sized companies from 22 emerging-market countries, and the iShares MSCI Emerging Markets IMI ETF has about 1,750 holdings, including smaller companies.
Mr. Gabriel points to two ETFs for investors wanting to bet that changes to the U.S. health system will buoy health-related shares, as previously uninsured people seek services and counter the effects of price declines. The iShares S&P Global Healthcare fund has about 90 health-care stocks from around the world, and is dominated by large drug makers. The BMO Equal Weight U.S. Health Care Hedged fund focuses solely on 50 U.S. health-care stocks, and gives each an equal weight. Both hedge the U.S. dollar exposure back into Canadian dollars.