With 2020 fast approaching, the United States is on the minds of many Canadian investors. It always is, given our proximity. Now, add in the non-stop political calculations leading up to a presidential election next year and worries about a potential recession south of the border.
In this climate, how should financial advisors approach their clients’ U.S. holdings and strategies? Should investors be adding to U.S. positions? How do you account for the see-saw between the U.S. and Canadian dollars? Should currency hedging be on the table?
“Clients will say, ‘I don’t want to own anything in the U.S. because I don’t like what’s going on down there.’ It is a legitimate concern. But you really can’t ignore the largest economy and the largest stock market in the world because that is really affecting your bottom line,” says Marc Lamontagne, founding partner at Ryan Lamontagne Inc. and portfolio manager at Sona Wealth Counsel Inc. in Ottawa.
He has strong arguments for clients. The U.S. currency has outperformed Canada’s loonie in recent years. The performance of U.S. stock markets have also beaten that of Canada’s, and they offer exposure to companies and industries that investors simply can’t find on this side of the border.
“The U.S. is a good diversifier compared with owning Canadian or other international equities,” Mr. Lamontagne says.
He typically doesn’t hedge his clients’ U.S. investments, a strategy that has paid off given the greenback’s relative strength in the past few years. It’s also a philosophical stance. He sees U.S. dollar-denominated investments as just another asset class.
“The advantage [of holding them] is it increases diversification,” Mr. Lamontagne says.
Over the longer term, he says currency fluctuations within a portfolio also tend to even out.
Ilana Schonwetter, investment advisor at BlueShore Financial in Vancouver, shares that view. Although currency values are a consideration, what matters most is the asset.
“The decision to add geographical positions should be made in relation to the strategic asset mix of the overall portfolio,” Ms. Schonwetter says. “Using currency fluctuations to your advantage can add to the portfolio bottom line in the short term.”
In cases in which it may make sense, she typically hedges 50 per cent of the currency exposure. That creates what she calls a more neutral short-term return. Her preferred instrument is a currency-hedged exchange-traded fund, which represents an industry or sector and offers direct currency exposure.
For longer-term investments, Ms. Schonwetter doesn’t use hedging, as currency variations fade away as an issue.
As for the daily barrage of political news from the U.S., Ms. Schonwetter thinks her clients – and other advisors – need to tune it out. The headlines of presidential impeachment, White House intrigue and campaign ups and downs make noise. But “markets have no political affiliation,” she says.
“Missing out on exposure to the largest economy in the world has historically resulted in lagging portfolio returns, especially considering Canada represents less than 3 per cent of the global economy. We need to look outside our borders for sector diversification,” Ms. Schonwetter says.
Dan Hallett, vice-president and principal at Highview Financial Group in Oakville, Ont., has a less sanguine view about the U.S. market and an investment strategy that specifically targets it.
“Advisors should think twice about allocating to specific countries,” he says.
The U.S. has posted some of the strongest returns in the world over the past several years. However, Mr. Hallett says that choosing a specific allocation to U.S. stocks requires, in turn, separate allocations to other overseas regions.
“That’s not where advisors add value,” he says. “Quite the contrary, too much slicing and dicing usually adds up to poor performance – and sometimes higher costs.”
Having lived through several investment cycles, Mr. Hallett says that advisors and their clients shouldn’t fret much about future events that may or may not happen.
“If we’re talking about shorter-term investment shifts around issues like next year’s U.S. election, I’d say not to bother,” Mr. Hallett says. “Just look at the lead-up to the last election and the many dire predictions made in the case of a Trump election win. They were all right for about an hour, after which markets starting soaring.”
He also doesn’t like to play the recession guessing game. Mr. Hallett notes that stocks typically begin falling well before a recession is officially declared and start recovering close to the time that conditions are at their worst. That’s when savvy investors begin piling back into equities.
“There is no rule that says that we will get a recession just because we haven’t had one in a long time,” Mr. Hallett says. “One will materialize, but when and how severe are big unknowns. And not every recession is awful news for stocks. We take more of a longer-term view. That means not trying to get cute with shifting here or there in anticipation of specific events.”