Canadian stocks are set to give American investors a twofer. As stocks go up, Gordon Pape, one of Canada's leading experts on mutual funds and the editor of The Canada Report, says that Americans get stock appreciation and a currency bonus – making investing in Canadian stocks more profitable than U.S. stocks. And now, says Pape, is an especially good time to invest since stocks and the Canadian dollar have recently taken a breather.
We caught up with Gordon Pape to talk to him about earning market profits plus a currency bonus.
Recently, you said that American investors were able to really make a killing in the Canadian market. Can you explain?
Pape: Yes, as of June 17, the S&P 500 had risen 41.9% from its March low. That's good. But at the same time, the Toronto Stock Exchange Composite Index was up 42.3% and the Canadian dollar gained almost 17%. So Americans investing in Canada got not only great market returns but also a huge bonus. The market increase plus the currency bonus resulted in a total return to 58.9% - significantly higher than investors would have made in the S&P 500.
It makes you want to go out and buy some Canadian stocks right away. But with the stock market and the dollar coming off a little June 17th, is there is still opportunity for similar gains?
The market and the loonie (the colloquial term Canadian's use to refer to the Canadian dollar) have both pulled back with weakness in commodity prices. Part of what drove them down was the World Bank's announcement that the recession would be deeper than expected. While that may be the case, if you believe in a recovery, investing in Canadian stocks is an obvious play and the current pullback is a buy opportunity.
Do you believe a recovery is coming?
Yes. Stocks went too far up too fast. The stock market is a leading indicator of the health of the economy. It's worth remembering that after the crash of 1929, the stock market went tearing back up before collapsing. So there is no guarantee that we are in a recovery mode yet. But I do believe we will see a sustained turnaround later this year and that it will gather momentum in 2010 with oil prices moving up.
Have U.S. investors had this opportunity before?
From 2002 to mid-2008 the stock market surged and the loonie soared from 62 cents to $1.10 in U.S. dollar terms. But investors need to understand and be prepared for a lot of volatility in the currency because of volatility in oil and commodities.
But I'm confident in the future of the Canadian economy. If you look at the big picture and the fiscal policy of both the U.S. and Canada, they couldn't be more different. The U.S. has an incredible deficit with systemic devaluation in the U.S. Dollar. The dollar will be devalued further because the U.S. believes that the only way to get out of the deficit is by printing money which will be inflationary. Assuming resistance to tax increases stays in place, the only real way out of this deficit is inflation – which devalues the U.S. dollar further. That makes the Canadian dollar looks stronger.
But Canada has a deficit as well.
Yes, but that deficit is coming off of years of surplus so we are in a better situation to deal with this temporary situation. Plus, oil will not stay at $67 for any length of time. It will move higher.
But you have to time it right since many U.S. investors lost their shirts in Canadian stocks recently.
Between July 2008 and March 2009, when the market fell and the Canadian dollar fell, U.S. investors took a beating. Everything we recommended in first half of the year went down, hit by the double whammy. But it created a great opportunity and now the loonie's rebound is great news.
To give you some history, just over seven years ago, the Canadian dollar hit its lowest point since the Second World War at U.S.61.79 cents. That meant it cost almost C$1.62 to buy one U.S. greenback. Some analysts were predicting the loonie would fall even more with one prominent economist saying it could drop all the way to U.S.25 cents. There was talk of abandoning the loonie entirely and adopting the U.S. dollar as the national currency.
Then something surprising happened. The loonie not only stabilized but it began a five and a half year run that took it all the way to U.S.$1.103 on July 11, 2007. At that point, you could literally buy U.S. greenbacks for 90 cents on the dollar (90.66 cents to be precise). Some economists were saying the Canadian currency could go as high as U.S.$1.25.
But that didn't happen.
No, the loonie began to slide and by July 2008 it was back to parity. Then, as world oil prices crashed, the Canadian dollar followed them down, hitting a recent low of U.S.76.53 cents on March 9 of this year. It cost almost C$1.31 to buy a U.S. dollar at that time. But the price of oil started to recover and guess what? The loonie followed.
I take from this two things. The first is that it the market appreciation and currency play is really a double-edged sword. Second, it seems like the loonie is a petro-currency given that it moves in synch with oil prices.
The loonie is a petro-currency, but it doesn't make a lot of sense really. We are a strong oil producing country but there is a lot more to Canada than oil – but this is how the foreign exchange markets respond to the Canadian dollar.
And yes, investing in Canada can be a two-edged sword. If the loonie drops against the U.S. dollar, American investors will see a negative impact on the value of the Canadian stocks they own. Even if the base price did not fall, the drop in the exchange rate would result in a loss.
However, at this point it appears the odds favor a continued rise in the Canadian dollar over the next year, although at a slower pace than we have seen. It's just one more reason to consider putting some money into Canada.
Could you give me some examples of stocks that provided U.S. investors with market plus currency gains?
One was Suncor Energy (NYSE: SU). On March 9, Suncor closed on the NYSE at $23.20. The closing price on the TSX was C$30.29. On Friday, June 12, Suncor finished at $34.97 in New York and C$39.05 in Toronto. For Canadian investors, the gain was 28.9% over the period. For an American investor, it was 50.7%.
The same March day, Potash Corporation (NYSE: POT) of Saskatchewan finished at $69.31 on the NYSE and C$90.03 on the TSX. On June 12, the shares closed in New York at $116.01 and in Toronto at C$129.65. Gain for Canadian investors: 44%. For U.S. investors: 67.4%.
Finally, Manulife Financial (NYSE: MFC) finished on March 9 at C$9.20 in Toronto and at $7.13 in New York. Closing prices on June 12 were C$24.25 on the TSX and $21.82 on the NYSE. Canadian profit: 163.6%. U.S. profit: 206%,
What's your advice to Americans interested in buying Canadian stocks for market and dollar strength?
The current pullback provides a buying opportunity – though we don't know how much it will pullback – so my advice is to decide how much of your portfolio you want to allocate to Canadian stocks and then dip in. So, if you have nothing there now and you want 10% of your portfolio in Canadian stocks, I would invest 2% to 3% now and gradually add to it.
Also, with Goldman Sachs now predicting that oil will hit $85 by the end of this year and $95 in 2010, few people would want to bet against a continued rise in the loonie. Parity within a year certainly seems to be a strong possibility.
Gordon Pape is the editor of The Canada Report.
Pape: Yes, as of June 17, the S&P 500 had risen 41.9% from its March low. That's good. But at the same time, the Toronto Stock Exchange Composite Index was up 42.3% and the Canadian dollar gained almost 17%. So Americans investing in Canada got not only great market returns but also a huge bonus. The market increase plus the currency bonus resulted in a total return to 58.9% - significantly higher than investors would have made in the S&P 500.
It makes you want to go out and buy some Canadian stocks right away. But with the stock market and the dollar coming off a little June 17th, is there is still opportunity for similar gains?
The market and the loonie (the colloquial term Canadian's use to refer to the Canadian dollar) have both pulled back with weakness in commodity prices. Part of what drove them down was the World Bank's announcement that the recession would be deeper than expected. While that may be the case, if you believe in a recovery, investing in Canadian stocks is an obvious play and the current pullback is a buy opportunity.
Do you believe a recovery is coming?
Yes. Stocks went too far up too fast. The stock market is a leading indicator of the health of the economy. It's worth remembering that after the crash of 1929, the stock market went tearing back up before collapsing. So there is no guarantee that we are in a recovery mode yet. But I do believe we will see a sustained turnaround later this year and that it will gather momentum in 2010 with oil prices moving up.
Have U.S. investors had this opportunity before?
From 2002 to mid-2008 the stock market surged and the loonie soared from 62 cents to $1.10 in U.S. dollar terms. But investors need to understand and be prepared for a lot of volatility in the currency because of volatility in oil and commodities.
But I'm confident in the future of the Canadian economy. If you look at the big picture and the fiscal policy of both the U.S. and Canada, they couldn't be more different. The U.S. has an incredible deficit with systemic devaluation in the U.S. Dollar. The dollar will be devalued further because the U.S. believes that the only way to get out of the deficit is by printing money which will be inflationary. Assuming resistance to tax increases stays in place, the only real way out of this deficit is inflation – which devalues the U.S. dollar further. That makes the Canadian dollar looks stronger.
But Canada has a deficit as well.
Yes, but that deficit is coming off of years of surplus so we are in a better situation to deal with this temporary situation. Plus, oil will not stay at $67 for any length of time. It will move higher.
But you have to time it right since many U.S. investors lost their shirts in Canadian stocks recently.
Between July 2008 and March 2009, when the market fell and the Canadian dollar fell, U.S. investors took a beating. Everything we recommended in first half of the year went down, hit by the double whammy. But it created a great opportunity and now the loonie's rebound is great news.
To give you some history, just over seven years ago, the Canadian dollar hit its lowest point since the Second World War at U.S.61.79 cents. That meant it cost almost C$1.62 to buy one U.S. greenback. Some analysts were predicting the loonie would fall even more with one prominent economist saying it could drop all the way to U.S.25 cents. There was talk of abandoning the loonie entirely and adopting the U.S. dollar as the national currency.
Then something surprising happened. The loonie not only stabilized but it began a five and a half year run that took it all the way to U.S.$1.103 on July 11, 2007. At that point, you could literally buy U.S. greenbacks for 90 cents on the dollar (90.66 cents to be precise). Some economists were saying the Canadian currency could go as high as U.S.$1.25.
But that didn't happen.
No, the loonie began to slide and by July 2008 it was back to parity. Then, as world oil prices crashed, the Canadian dollar followed them down, hitting a recent low of U.S.76.53 cents on March 9 of this year. It cost almost C$1.31 to buy a U.S. dollar at that time. But the price of oil started to recover and guess what? The loonie followed.
I take from this two things. The first is that it the market appreciation and currency play is really a double-edged sword. Second, it seems like the loonie is a petro-currency given that it moves in synch with oil prices.
The loonie is a petro-currency, but it doesn't make a lot of sense really. We are a strong oil producing country but there is a lot more to Canada than oil – but this is how the foreign exchange markets respond to the Canadian dollar.
And yes, investing in Canada can be a two-edged sword. If the loonie drops against the U.S. dollar, American investors will see a negative impact on the value of the Canadian stocks they own. Even if the base price did not fall, the drop in the exchange rate would result in a loss.
However, at this point it appears the odds favor a continued rise in the Canadian dollar over the next year, although at a slower pace than we have seen. It's just one more reason to consider putting some money into Canada.
Could you give me some examples of stocks that provided U.S. investors with market plus currency gains?
One was Suncor Energy (NYSE: SU). On March 9, Suncor closed on the NYSE at $23.20. The closing price on the TSX was C$30.29. On Friday, June 12, Suncor finished at $34.97 in New York and C$39.05 in Toronto. For Canadian investors, the gain was 28.9% over the period. For an American investor, it was 50.7%.
The same March day, Potash Corporation (NYSE: POT) of Saskatchewan finished at $69.31 on the NYSE and C$90.03 on the TSX. On June 12, the shares closed in New York at $116.01 and in Toronto at C$129.65. Gain for Canadian investors: 44%. For U.S. investors: 67.4%.
Finally, Manulife Financial (NYSE: MFC) finished on March 9 at C$9.20 in Toronto and at $7.13 in New York. Closing prices on June 12 were C$24.25 on the TSX and $21.82 on the NYSE. Canadian profit: 163.6%. U.S. profit: 206%,
What's your advice to Americans interested in buying Canadian stocks for market and dollar strength?
The current pullback provides a buying opportunity – though we don't know how much it will pullback – so my advice is to decide how much of your portfolio you want to allocate to Canadian stocks and then dip in. So, if you have nothing there now and you want 10% of your portfolio in Canadian stocks, I would invest 2% to 3% now and gradually add to it.
Also, with Goldman Sachs now predicting that oil will hit $85 by the end of this year and $95 in 2010, few people would want to bet against a continued rise in the loonie. Parity within a year certainly seems to be a strong possibility.
Gordon Pape is the editor of The Canada Report.
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