Bruised Dollar an Opportunity for Canadian Investors

Includes: DBGR, DBV, FXC, UDN, UUP
by: Market Blog

By David Berman

There isn’t any love for the U.S. dollar these days, but love is the last thing you should want when you’re shopping for an investment. Distrust is preferable, maybe even hate – and that is why the beaten up greenback should beckon Canadian equity investors.

With the Canadian dollar comfortably above par against the U.S. dollar, our money goes a lot further in the United States right now, and the stock market is no exception. A U.S. stock that could have been bought for $15 (Canadian) just eight years ago – when the loonie was in the dumps – is now on sale for about $10, all else being equal.

Yet, despite such bargains, you really get the sense that many investors are reluctant to expose themselves to a currency that is clearly losing the popularity contest, but could just as easily rebound.

According to the latest fund-flow statistics from the Investment Funds Institute of Canada, Canadians held $20.5-billion worth of U.S. equity funds in January. That’s up about 20 per cent over the previous 12 months, but is still a small number.

In comparison, Canadian investors had nearly seven times more money parked in domestic equity funds and about three times more money in global equity funds. U.S. equity funds accounted for only 3.4 per cent of total fund assets (excluding money market funds), making U.S. stocks look like fringe elements in a typical portfolio.

It shouldn’t be this way. The U.S. dollar has already fallen about 40 per cent against the Canadian dollar over the past decade. It seems likely that the worst of the freefalling is over, given that the factors that drove the dollar down – including massive deficits and stimulative monetary policies – will probably move in reverse as the economy improves.

Meanwhile, U.S. stocks provide exposure to many of the best companies in the world, even if you invest through a broad index such as the S&P 500. On average, about half the sales for companies within this index come from overseas markets, which gives investors some protection against currency fluctuations anyway.

For example, Coca-Cola’s (NYSE:KO) international sales are nearly 70% of total revenues. For Pfizer Inc. (NYSE:PFE), the number is 57%. And for Intel Corp. (NASDAQ:INTC) it is about 80%. If the U.S. dollar weakens further, the value of these non-U.S. sales increases – potentially driving earnings and share prices higher.

Bespoke Investment Group last week found that U.S. stocks with the most international exposure have been outperforming their more domestic-oriented peers so far this year, suggesting that this approach to international revenues has been unfolding according to plan.

And if the U.S. dollar strengthens as the country gets its finances in order? Even better: U.S. stocks in Canadian-dollar terms will be worth more, and so will their dividends.

Disclosure: None