There is a lot discussion about the future potential of the equity markets but it might be helpful to focus just as much on the future of the currency markets. The moves in the Canadian dollar relative to the U.S. dollar over the past 20 years have been extraordinary and the volatility has had a very large effect on investment returns for Canadians. Currency moves may be the most difficult markets to forecast but the outlook for the “loonie” does appear to be quite challenging over the next few years. Canadians might consider a currency balanced portfolio that protects against the potential for a substantially weaker dollar. There may be an opportunity to grow capital in Canadian dollar terms while at the same time adding sector diversification.
This opinion is meant only as a long- term strategy as short-term currency moves are very unpredictable. The major goal is to have a balance of currency exposure.
The fundamentals of the Canadian economy are looking quite negative. The combination of factors including high personal debt levels, high provincial debt levels, the potential for lower corporate taxes in the U.S., the potential changes to NAFTA, and an extended housing market all point to the potential for tough times for the economy and the currency. Recent corporate news also includes large U.S. corporations leaving Canada especially in the energy market.
As seen in the chart below, the cost of a U.S. dollar in Canadian Dollars over the past 20 years has ranged from a low of $0.9056 in November 2007 (1.104 C$) to a high of $1.6188 in January 2002 (0.617 C$). The current level as of this article is $1.3722 which is in the upper middle of the range and above the high of the 2008 financial crisis; the “loonie” is weakening. Canadians are currently being rewarded for having assets in U.S. listed assets and the trend would lean towards the Canadian dollar moving lower in the next few years, potentially substantially lower.
From Thomson One
Investment returns are made up of a combination of three (3) major components:
- The change in the price of the investment during the period.
- The dividend paid during the period (if applicable).
- The change in the level of the currency of the underlying investment during the period.
There have been periods over the past 20 years when the currency moves have actually been the most important aspect of investment return. The U.S. market was not kind to Canadian investors from 2000-2011 as the Canadian dollar was very strong but since 2011 the trend has reversed. Year to date in 2017, we are again seeing the combination of a weak Canadian dollar and a relatively strong U.S. Equity market.
One of the trends of the past few years is that large Global capital has been moving into very large U.S. listed multi-national equity. These stocks provide liquidity, dividend income and relative stability. As most investors are aware, there are many sectors of the economy that the Canadian Equity market does not represent well including Healthcare, Industrials, Technology, and Consumer Staples. Owning U.S. listed individual stocks of very high quality companies in these areas has worked very well and for many reasons this continues to be part of the recommended strategy. It should not be an “all or none” but a weighting of at least 30% in non-Canadian dollar assets seem prudent. The assets may be held is Canadian dollars especially in registered accounts where the tax treatment of the dividends is efficient. The next article will explore precious metals which may provide another level of portfolio diversification.
This publication is solely the work of Jon Batchelor for the private information of his clients. Although the author is a Manulife Securities Advisor, he is not a financial analyst at Manulife Securities Incorporated and Manulife Securities Insurance Inc. This is not an official publication of Manulife Securities. The views, opinions and recommendations are those of the author alone and they may not necessarily be those of Manulife Securities. This publication is not an offer to sell or a solicitation of an offer to buy any securities. This publication is not meant to provide legal, accounting or account advice. As each situation is different, you should seek advice based on your specific circumstances. Please call to arrange for an appointment. The information contained herein was obtained from sources believed to be reliable; however, no representation or warranty, express or implied, is made by the writer, Manulife Securities or any other person as to its accuracy, completeness or correctness.