Why US Investors Should Consider Canadian Stocks.
Long-Term Horizon, Portfolio Strategy, Bonds, Dividend Investing
Seeking Alpha Analyst Since 2011
Dale Roberts is the Chief Disruptor at the Cut The Crap Investing blog. Cut The Crap will introduce Canadians to the many sensible low fee investment options in Canada. Canadians currently pay some of highest investment fees in the world. Dale will help Canadians on the path to creating their own low fee portfolios or direct them to the lower fee managed portfolio solutions.
Dale was a former Investment Funds Advisor and Trainer at Tangerine Investments, and is a still recovering former award-winning advertising writer and creative director.
Dale has been writing on Seeking Alpha from 2013, covering asset allocation, dividend investing and retirement.
As always past performance is not guaranteed to repeat. You should always conduct your own research or speak to a financial advisor. If you don't know what you're doing, don't do it. Dale's articles are not investment advice.
Summary
- The US markets have been on an incredible run, the Canadian stocks have not.
- There might be much more value in Canadian stocks in sectors that offer a nice inflation hedge. You will get a petro dollar currency hedge as well.
- It's easy to build a portfolio of Canadian stocks that are available on a US exchange.
- In this post I also link to my various writings over the last two weeks.
It's no secret that the US stock markets are expensive. From these levels there is the risk that US stocks might deliver no real returns, or very modest real returns over the next several years or decade. Let's not forget the lost decade for US stocks.
And of course U.S. stocks have failed in more periods than stagflation.
Add in the failure (even) of a traditional stock and bond balanced portfolio.
Obviously, to be prepared and protected, a U.S. investor needs to do more.
There's more than U.S. stocks
US investors can diversify away some of that US stock market home bias risk by way of International developed and developing markets. You might also consider a basket of Canadian stocks. The Canadian market is unique as it offers many oligopoly and wide moat or narrow moat sectors. They often comes with juicy dividends that grow at a very good clip.
It is not hard to beat the market in Canada, historically.
The sector allocation is very different for the Canadian and US markets. They can compliment each other and can provide some negative or weak correlation at times.
Canadian and US stocks, working together.
When US stocks began their lost decade, Canadian stocks enjoyed some nice gains. We can say the same for developed international. But Canada offered an added boost.
It is only recently that US stocks caught up to the Canadian stocks.
And of course the worst performing period for US stocks (in real dollar, inflation-adjusted terms) was the 1970's and into the early 1980's, the period known as stagflation. We had inflation and no growth.
US stocks delivered no real return from 1968 to 1982.
Canadian stocks did much better for much of that period of stagflation, especially late in the 1970's.
From 1976 to end of 1979 Canadian stocks outperformed by over 80%.
Of course a portfolio would need some serious inflation fighters such as gold to tackle the stagflation period. It is a period when the wonderful but surprising Permanent Portfolio would have performed very well. Add in some Canadian stocks and you would have performed even better.
Here's my recent post on the Permanent Portfolio.
From that post.
Putting it all together, we can have four quadrants or economic conditions.
- Inflation in a period of economic growth.
- Inflation in a period of economic contraction.
- Deflation in a period of economic growth.
- Deflation in a period of economic contraction.
And the portfolio.
Stocks for economic growth
- 25% in stocks to provide a strong return during times of prosperity.
Bonds for deflation
- 25% in long-term bonds, which do well during times of prosperity and during times of deflation (but which do poorly during other economic cycles).
Cash for economic contraction
- 25% in cash to hedge against periods of recessions or depressions.
Gold for inflation
- 25% in gold and precious metals to provide protection during periods of inflation.
Check out that post to see how that portfolio crushes US stocks from the year 2000. It would have done the same during the stagflation period. Gold went up 9-fold.
The Permanent Portfolio is a simple framework for demonstration. In my opinion you can certainly do better, and you might somewhat overweight the equities component. But in doing so, don't leave an economic quadrant overly exposed.
Most investors have a recency bias. We think that the economic conditions cannot changed. And most investors are only prepared for a disinflationary period. It's all they know.
Stocks and bonds like the goldilocks slow growth disinflationary periods.
They/we think the current economic conditions will go on, forever.
If things change, we might get sideswiped.
We might build an all-weather portfolio. Here's a look at ...
For that model, U.S. investors would substitute the appropriate U.S. dollar ETFs, to match the sector.
For example for the gold and commodities exposure, you might look at Invesco's (DBC). I hold that in U.S. dollar accounts. There are many options available for U.S. investors.
Building the Canadian stock portfolio.
My readers will know that I offered the idea of the Canadian wide moat and the wider moat portfolios. Perhaps we can call the wider moat the 'More Moats' portfolio. After all, it is offering 15 stocks instead of the 7 stocks in the wide moat portfolio.
In this post, BMO's Low Volatility ETF takes on the market-crushing More Moats Portfolio.
Here's the More Moats vs the market over the last several years.
Follow that link for the 15 stocks in the portfolio. You will find most of those stocks on the NYSE, a couple of them are only available over the counter.
For my US stock portfolio that offered an incredible beat of the US market in 2020, on Seeking Alpha, please have a read of our 2020 performance update.
And here's the first half of 2021 U.S. stock portfolio review.
What's going on in the markets these days?
Every week I scour the headlines and watch the markets, and listen to analysts and portfolio managers to make sense of the markets.
I have a weekly column for MoneySense.
I know you'll enjoy it. Fast paced and entertaining. The markets have been delivering so many surprises and drama for the last year and more.
Recently, we looked at 'bonds are a stupid investment?'. So says Ray Dalio and many others. In that post the US Fed also says that inflation and growth are on the way. That said, the growth and the inflation might be fleeting.
Last week when I made sense of the markets I look at the Canadian bitcoin ETF price war and tax hikes are on the way for the US and for US investors. And the third wave threatens the economic recovery.
And here's the post that kicked off 2020, with some observations that are all 'coming true' to date. These trends are not hard to spot and perhaps profit from. I suggested that readers take a look at Canadian energy stocks, some 80% ago.
There may be much more to come on that energy producer front.
On Million Dollar Journey I had suggested that investors look to Canadian bank stocks. From July of 2020 the banks have more than doubled the total returns of the market.
Back to those Canadian stocks.
Of course Canada is a small fish in the global market of stocks, but again, I believe they do offer that interesting and advantageous oligopoly situation.
How much? That is a personal decision but you might even consider a 10% weighting. That's not advice of course, you will Read. Decide. Invest.
I would also suggest investors take a look at Emerging Markets.
That's where they might keep the future GDP growth and favorable demographics. Remember, demographics is destiny.
That trend appears to be another no brainer.
To each his or her own, but on that subject, for me ...
Investing in bitcoin is a no brainer.
That post lays out some of the simple 'math'.
Thanks for reading, we'll see you in the comment section. Remember this is not advice. Factor in this information into your own decision-making process.
Read. Decide. Invest.
Author's note: Thanks for reading. Please always know and invest within your risk tolerance level. Always know all tax implications and consequences. If you liked this article, please hit that "Like" button. Hit "Follow" to receive notices of future articles.
Dale
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