“To improve is to change; to be perfect is to change often.”
Winston Churchill
One of the main stories this year continues to be the changing value of the Canadian dollar. As discussed in my last update, the Bank of Canada caught everyone off guard by raising interest rates without warning twice in the last year, with the most recent hike taking place in September. This drove our currency up over 12% versus the U$ in only a couple of months. It was very challenging to show returns in C$ terms on U$ assets (stocks, bonds, real estate) unless those investments appreciated more than the Loonie’s appreciation during this time. Well the US markets have been doing well, but not nearly enough to offset that kind of currency adjustment!
When the Loonie started to gain steam, I didn’t think the move was backed up by strong economic fundamentals and therefore had little staying power. In my mind, our economy is still overly dependent on home construction. And there are also many uncertainties around the NAFTA (North American Free Trade Agreement) renegotiations. Over the quarter, we reviewed our allocations to U$, making adjustments where appropriate and so far that has proved correct as the C$ is dropping back just as fast as it went up (currently back below $.80). I think we will see it level out around $.76-.77 so the weakening C$ will be a tailwind to portfolio returns. To put it another way, we are just getting back returns that the loonie temporarily borrowed over the summer!
Thankfully the Canadian market finally got out of “neutral” in early September and has climbed back into positive territory for the year. After peaking in February, our market began a slow decline into late summer. I suspect much of our market’s malaise was due to the strong C$ because just as the C$ started coming back down, our stock market started going back up! Once again we see the market challenging the 16,000 level but before we pop champagne bottles, it bears mentioning that we are just slightly above where we were 9 years ago before the financial crisis started. So no real headway for our stock market in almost a decade! Meanwhile, the US markets keep grinding to fresh highs thanks mostly to the sectors that Canada just doesn’t have exposure to such as technology and healthcare. Therefore well diversified portfolios built for the long term need lots of foreign holdings and we are just going to have to live with the currency adjustments and hope to make timely tactical calls when opportunities present themselves!