Warming to Global Investing
Canada's S&P/TSX 60 equity index has had a spectacular run, gaining 27.85% over one year to March 31, 2006, and an average annual rate of return of 23.68% for the three years to that point. The typical Canadian investor holds the majority of his or her portfolio in domestic securities, but perhaps the time has come to further diversify beyond our national borders. Here, we'll outline some of the reasons that Canadian equity markets have posted strong returns in recent years, and review the arguments for expanding international investment holdings today.
How long can it last?
The rise in Canada's equity index levels over recent years has been driven by a number of factors, but perhaps most predominantly by rising energy prices. As much as Canada has attempted to evolve its economy beyond hewers of wood and drawers of water, we are still very much resource driven.
With rising commodity prices, Canadian resource and energy companies have attracted foreign investors, putting upward pressure on the Canadian dollar. The rising dollar, in turn, creates some concern for the future values of Canadian equities (particularly for those companies that rely heavily on exporting).
The Global Alternative
The good news of a rising Canadian dollar – apart from cheaper vacations to Disney World and less expensive imported BBQs – is that it increases purchasing power for Canadians investing offshore. In the late 1990s, the advent of RSP Funds drew many Canadian investors into mutual funds based on any number of non-domestic securities markets.
Global Dividend LEADERS™ Basket
However, for the past couple of years, those same investors saw growth in their non-Canadian investments undercut by the rising Canadian dollar. The Canadian dollar returns of these markets suffered from the inverse set of foreign exchange dynamics that had made international funds look so appealing in the first place - specifically, the 90s had been characterized by a long-term deterioration in the value of the Canadian dollar, with each falling cent helping bolster the apparent performance of non-Canadian dollar investments.
Now with the Canadian dollar reaching 20-year highs, Canadian markets having posted several years of strong performance, and commodity prices at record levels, many investors are giving foreign markets renewed attention.
The arguments are compelling. While the Canadian market is concentrated in a few sectors - energy, financials and materials - international markets provide the opportunity to diversify more broadly across industrial sectors. With commodity prices up several multiples over recent years, the future growth opportunities within those sectors is open to question.
As well, given that Canada accounts for just three per cent of the world's equity markets, by concentrating on domestic markets, Canadian investors are severely limiting their opportunities. For comparison purposes, Canada's equity market is roughly the size of Italy's. Would you invest the majority of your assets in the Italian market or would you choose to diversify more broadly?
Further, foreign equity markets have not experienced the recent bullish conditions that Canada has enjoyed, and consequently tend to offer cheaper equity valuations.
For Canadian investors, a strong domestic currency, the need to diversify and the attractive valuations available in other markets combine to make a compelling case for increasing their portfolio allocation of international securities.
So, does global diversification make sense? The arguments are strong. The rising dollar gives Canadian investors greater international purchasing power than they have had for a generation. The recent bullishness of the Canadian equity markets argues for broader diversification. The combination of leading global indices in the G7 Note provides the ultimate blue chip exposure. In addition, the ONE Financial Notes offer security for investors, with a 100% principal guarantee and protection of all growth (net of dividends, naturally). Finally, the Note's distributions are return of capital, maximizing investors' after-tax returns. In other words, they offer just about everything needed to securely broaden your investment horizons.
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