Canadians with too much Canada in their investment portfolios might be wishing for the good old days when oil was high and the loonie soared. Those horses have left the barn, but experts say it's not too late to break a home bias.
In 2011 the most widely owned Canadian energy producers were pumping record profits as the global economic recovery drove crude oil prices above $100. That pushed the Canadian dollar above the value of the U.S. greenback, giving Canadian investors buying power outside the country to further capitalize on the global recovery.
It seems the world was our oyster. Yet, according to a Harris/Decima poll the following year, only 28 per cent of Canadian investors had foreign holdings in their portfolios. Most Canadians clung to a basket of domestic stocks that represents less than 3 per cent of the world's publicly traded equities, two-thirds of which are resource or finance related.
Since then oil has plunged to $50 a barrel and profits are drying up for energy producers. To make matters worse, the loonie is now 78 cents to the U.S. dollar, and that makes investing outside of Canada expensive.
"We've been pounding the drum on this for years," says John O'Connell, chairman and chief executive officer at Davis Rea Investment Counsel. Whether to diversify internationally now is "a very difficult call to make."
Regardless, Mr. O'Connell says Canadian investors should always be diversified and should at least start planning to spread their investments beyond our borders. "I don't think it's too late. I think it is a matter of degrees."
He doesn't expect oil prices to spring back to $100, or the Canadian dollar to top the U.S. dollar any time soon, but he does expect opportunities to arise when both stabilize.
"If and when the Canadian dollar recovers, that's when they should be diversifying, and the catalyst for that will likely be rising energy prices," he says. When the loonie reaches the high 80s, versus the U.S. dollar, "investors should be aggressively looking to diversify their portfolios outside of Canada."
In the meantime, he says investors should make a list of stocks that would fit best in their portfolios. He says they don't need to go any farther than the United States because many U.S. companies harvest their revenue overseas. "Start identifying the kinds of companies you would like to own in the United States and wait until that company becomes compelling in value," he says.
Since the summer of 2011, U.S. stocks on the S&P 500 have risen by 85 per cent on average, but Mr. O'Connell says an abundance of bargains can still be found. That includes fast-food giant McDonalds, which has risen only about 10 per cent over the same period.
"McDonalds right now is dealing with its struggles and problems but it yields close to 4 per cent. That's twice as good as a U.S. treasury bond," he says.
Andy Nasr, senior portfolio manager at Middlefield Capital Corp., also cautions Canadians not to rush into foreign equities.
"Identify a target, set it and gradually increase your exposure to it," Mr. Nasr says. "It could be over six months or three months. Doing it in a day or a week – that's where you could get caught offside."
How much foreign exposure Canadians should assume depends on the individual, but he says some foreign exposure is essential.
"Start with a 10- or 20-per-cent weighting, and if the currency goes in your favour or the U.S. market pulls back, use that as a buying opportunity until you get to 30 per cent at the very least."
Mr. Nasr likes technology and health care, but he says it is expensive to diversify to those sectors in Canadian dollars at the moment because the best companies are in the U.S.
The scarcity of non-resource and non-financial stocks in Canada has also pushed money managers with Canada mandates to reinvest in the TSX through other sectors, driving prices above their true value. Canadian telecom companies Rogers Communications Inc., BCE Inc. and Telus Corp. are good examples of overpriced stocks, Mr. Nasr says.
"The multiples are really high relative to where they have been historically, and it's because you've seen that rotation within Canada into these other sectors," he says.
Once the Canadian dollar strengthens, he cautions investors not to rush directly into emerging markets. "You can get emerging market exposure from developed markets. You don't need to chase higher returns because there is usually higher risk accompanied with that," he says.
The best way to benefit from emerging and developed market growth is not through U.S. stocks but European stocks priced in cheaper euros, he says. About 30 per cent to 35 per cent of revenue from European-listed companies is generated in emerging markets, compared with 15 per cent to 20 per cent from U.S.-listed companies.
"If you're buying a big blue chip European company that pays a dividend, chances are emerging markets are a significant portion of its sales. Conversely, in the U.S. the companies tend to be a little bit less emerging-market-focused and -dependent," he says.
Unfortunately, buying individual European stocks is much harder for the average Canadian investor than buying U.S. stocks. Mr. Nasr suggests buying exposure to European equities though exchange traded or mutual funds.