Strong Loonie creates bargains in foreign equity

June 06, 2007 | Mark Noble for advisor.ca

The Canadian dollar is at a thirty-year high and many Canadians are wondering whether they should take a quick jaunt across the border to do some shopping. The same logic can be applied to buying international equity — purchasing foreign companies has never been cheaper, and fund managers right now are taking advantage of the high-flying loonie to find bargains in foreign equity.

Sal Guatieri, senior economist with BMO Capital Markets, says that if a high dollar persists over the long term, it's bad news for most Canadian businesses because of their reliance on exports. Even for commodity producers, who have been on a roll, the high dollar means increased operating costs and reduced value for sales made in foreign currency.

On the flipside of this, Guatieri says, Canadians have a window of opportunity to go cross-border shopping. "That's the positive of a rising currency; we can buy more of what the world is offering. Everything in the world is on sale right now. Your purchasing power and living standard have gone up."

Guatieri says this window is conditional upon whether the Bank of Canada will raise interest rates in July. If it does — and recent comments suggest it is certainly being considered — Canada's purchasing power will continue to rise. If the Bank does not raise rates, Gautieri expects the dollar to drop considerably.

In the meantime, fund managers are looking at this as an opportunity to stock up on international equity.

"You can argue that foreign stocks are on sale right now with the strong Canadian dollar," says Steve Way, senior vice-president at AGF and portfolio manager of AGF Global Equity Class Fund and AGF World Companies Fund.

Way says that Canadians should already be investing in international equity to diversify their portfolios against the narrow offerings of the Canadian market, but the strong dollar makes global investing even more appealing. "Whether you're a tourist or whether you're an investor, your dollar goes further than it has for many years."

Bargain-hunting should still be tempered, Way says, because the greatest price reductions don't necessarily correspond with quality investments. Much of the increased purchasing power of the loonie is due to the comparable weakness of the U.S. greenback. This can deceptively inflate the value of the loonie.

Canadians are not the only investors with increased currency leverage in the global market. Australia, which Way says is already a much larger consumer of foreign equity than Canada, has seen a similar trajectory in its currency which is at an 18-year high against the U.S. dollar at $84.34.

Way says the devaluation of the U.S. dollar is well deserved. He is intentionally avoiding bulking up on U.S. equities and focusing instead on markets where the proportional rise of the loonie has been much lower, but where the longer-term investment prospects are much better.

"The global strategy that I'm implementing in the funds I look after is that we are more optimistic on Europe and emerging markets than we are on the United States," Way says.

Way also highlights that while his stock in trade is global equity, Canadian investors who reside in Canada, need to maintain some Canadian investments. "Their liabilities will be priced in Canadian dollars. When they retire, their food and rental costs are going to be in Canadian dollars. To account for this, a certain proportion of your money should always be invested in Canada."

Those who deal in Canadian equity are also recommending a balanced approach. James Cole is the senior vice-president of AIC and portfolio manager for the AIC Canadian Focus Fund, which recently raised the cap on its foreign equity holdings from 30% to 49%. Cole says a push to increase foreign holdings in Canadian-focused funds is an industry-wide trend, and regardless of the loonie's value, he likes the flexibility it allows.

"Having flexibility is definitely a good thing. Over time, my expectation is that our foreign content is likely to go higher than the 30% that it had been capped at," he says. "This is an excellent time for Canadians to increase their non-Canadian investments."

Even in a high-dollar environment, there are still some Canadian companies that will thrive. "In terms of companies that will be positively affected by a high dollar, certainly [domestic] retailers will do well," he says.

He expects these companies will have higher profit margins, since they are effectively buying for less and selling for more.

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com

(06/06/07)

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