The sentiment towards Canadian stocks remains down in the dirt. Arguably a somewhat reasonable attitude given Canada’s economy and stock market are inextricably linked to energy – a relationship that appears to be getting tighter knit over time
Considering the challenges at home, many investors ask the logical question: Should we be looking beyond our border? With stronger employment, wage growth, and gas-pump-savings lining consumers’ pockets – it looks as if the U.S. is an attractive place to invest. Sure folks say America faces economic problems (fuelled by its strong dollar) but relative to the slow down of the global economy – it looks like a ray of hope.
If you wish to escape more than just Canada’s winter – before fleeing her markets – here are some points worth pondering.
In the world of investing, today’s underdog is tomorrow’s favourite. Asset classes, industry sectors, and geographical regions all tend to have their day in the sun. That’s why diversification has proven its long-term value.
Now’s a time to recall the expression don’t throw the baby out with the bathwater. 2015 was a tough year for Canadian stocks and, so far, 2016 is rough, too. Resource and energy-related companies are working through the lower for longer oil-price dynamic, but the stock market has a habit of taking everything else down with it.
The chart below shows that the correlation between the non-resource sector and the price of oil has been on the rise as of late. This tendency to move together includes companies that actually benefit from lower energy prices or the weaker Canadian dollar—a by-product of the energy rout. In pricing almost everything in Canada as though it’s an energy stock, the market seems illogical.
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You may need to look beyond each company’s country-of-origin to understand its real long-term story. When a stock shows up as a Canadian equity versus U.S. or international – this is generally based on the head office or main location of the business. However, many Canadian companies operate businesses with significant portions of revenues derived from outside of our borders.
Take for example Student Transportation Inc. (STB.TO), which is North America’s third-largest provided of school bus transportation services. STB is listed under Canadian Equities yet in 2015 saw almost 90% of its gross revenues come from the U.S. The point being that investing in Canada isn’t always just “investing in Canada”.
With U.S. dollar’s current strength there is added currency risk to factor in when adding U.S. equities to your portfolio now. Yet, as we see, there are ways to tap into the strength of the U.S. consumer-led economy all from the comfort of your home (country).