Time To Invest In Canada Again?

The C$ drop alters the investing landscape dramatically. The 25% plunge in the loonie since November, 2007 makes foreign diversification less appealing, exporters more attractive and inflationary pressures greater. How so?

First, diversifying into foreign markets is less appealing because the Canadian dollar has now lost a great deal of purchasing power and buys much less (hopefully you did your foreign diversification as 2007 came to an end). As well, the risk of incurring currency losses on foreign holdings has risen since the loonie has fallen back closer to the bottom of its historical range and is more likely to go up in years ahead. In short, it’s perhaps time to think about investing more in Canadian stocks.

Second, the drop in the Canadian dollar obviously benefits manufacturing and other non-resource exporters that have long suffered under the loonie’s rise over recent years. This sector of the Canadian economy perhaps deserves more attention, especially if the exporter has a lot of clients in recession-resistant sectors. An example might be SNC-Lavalin Group (SNC.TO), which takes on infrastructure projects for governments around the world.

Third, the drop in the loonie means the dampening effect of a strong currency is gone. Imported inflation will put pressure on the Canadian consumer price index to rise and that means the Bank of Canada will have less leeway to lower interest rates in response to recessionary conditions. Shares in Canadian companies selling mainly to the domestic market may reward investors less than companies selling more to foreign markets.

Comments

[Distressed ...:]

I'd like to see where commodities go from here.. The $CAD/USD did well w/ commodity inflation (oil/gas exports especially) as well as the Toronto mkt.. We'll see if Canada catches a cold if the U.S coughs....If commodities roar higher, or credit unfreezes globally, I bet there's a risk of massive inflation, benefiting commodity produces, as well as the $CAD... That definitely depends on consumer power though.. A bunch of moving parts. I'd also like to see how the income trust tax affects the canadian economy if there's a slow down.
I wrote a post about the FXC and Canandian energy trusts earlier on my blog, distressedvolatility.c... we'll see what happens

2008 Oct 12 08:23 PM

[NOWHEREMAN:]

PVX declared its normal monthly, lets see what the others do. The hedge fund forced selling window is supposed to close on November 15th I believe, so I would wait until just before then. It won't be just the Canadian Dollar which turns.

Meanwhile, the Monetary Crisis may be averted and the possibility of a "depression" style malaise but the Recession will still occur and all the "regular" recessionary woes will still be there. The US will still import every drop of Canadian Oil and Nat. gas they can get. Demand Destruction will apply to oil from more distant production areas.

The CAD decline will inflate Canadian oil earnings as they sell in dollars and convert.

2008 Oct 13 09:08 AM

[George Gorski:]

I agree, I flipped my US stocks to get the benefit of the exchange and because the suspect US$ is going to crash shortly. The retail price of CND oil /NG stocks is about 1/4 to 1/3 of the 52 week highs as of Friday. With low crude and NG prices, the credit squeeze, OPEC set to lower production and new projects being shelved for a long time. This all points to higher oil/NG prices. Even with a 5 year horizon, there are many reasons to buy CND oil/NG stocks now.

2008 Oct 13 10:35 AM