High Loonie time for Foreign Stocks
High loonie makes now a good time to buy those foreign stocks: advisers
Kristine Owram, THE CANADIAN PRESS
TORONTO - As the loonie hovers around parity with the U.S. dollar, investment advisers say now is a good time to diversify your portfolio with foreign-currency investments.
"If you're building a portfolio of Canadian stocks, you probably do need to be adding foreign stocks to improve the industry or the sector diversification," said Kate Warne, Canadian markets specialist at Edward Jones in St. Louis.
Because the Canadian market is dominated by three main sectors - financials, energy and mining - it's important to consider foreign stocks, particularly in those sectors that don't have much representation in Canada, like health care and technology, Warne said.
"This is a great time if you haven't already done that to do it, because your dollar buys more and you can add those foreign stocks that you may have always thought about," she added.
The Canadian dollar has been in the high 90-cent U.S. range for most of March, and economists say it will undoubtedly hit parity sooner or later.
And the U.S. dollar isn't the only currency that's becoming cheaper for Canadians. Economic troubles in European countries like Greece, Spain and Portugal mean the euro has lost much of its value, falling to approximately C$1.37. Meanwhile, a slow recovery from the recession in the U.K. means the British pound is around C$1.53. Historically, the pound has often been worth well over C$2.
There are many ways investors can increase their exposure to foreign equities and other foreign investments. If you're thinking about diversifying into U.S.-based stocks, similar accounting rules mean it's easy to assess whether a U.S. company is a good investment in much the same way you would assess a Canadian company. However, this changes if you're looking overseas.
"Outside North America, we'd do that with mutual funds, rather than trying to pick which Thai retailer or which French consumer staple company would be a good pick," Warne said.
"Diversification matters the most, and a mutual fund can provide that for you," she added.
However just because the dollar is near parity doesn't mean you have to - or even should - jump immediately into foreign investments, said Adrian Mastracci, portfolio manager at KCM Wealth Management in Vancouver.
When the loonie last hit parity in 2007, it ended up soaring as high as US$1.10 before it began to retrace its steps, and that could happen again as the Canadian economy improves faster than expected while other major economies struggle with ongoing problems.
To protect against this, Mastracci suggested buying a U.S. investment, such as an exchange-traded fund, in Canadian dollars and then hedging the currency risk to guard against an even higher loonie.
However, this is only necessary if a large portion of your portfolio is in foreign currencies, he said.
Mastracci also recommended what he called "staging trades," or gradually moving your money into U.S. dollars over time. For example, if you plan to change C$100,000 into greenbacks, do it $25,000 at a time over six months.
"If we make the assumption that the loonie will keep on trucking upwards even though it's going to be an up and down trajectory between here and there... you're averaging in," he said.
Warne said the high dollar also means this is a good time to open up foreign currency bank accounts, particularly for those people who spend large amounts of money in other countries, whether on travel, paying off mortgages or even paying tuition for a child at a foreign university.
"My recommendation would be to try to balance out what you owe in each currency with what you hold in each currency," Warne said. For example, if you own property in the States and have a mortgage in U.S. dollars, now would be a good time to put money into a U.S.-dollar bank account.
Ultimately, diversification should be an investor's primary focus, and moves in the value of the Canadian dollar should be a "secondary consideration" when making any investment decisions, Warne said.