As most of you know, as of late I have been professing the importance of favoring global investments over Canadian. The following 2 visuals help provide more context.
The list of headwinds currently facing Canadian economics has shifted considerably since the second half of 2017. I would add that the measures taken by provincial and federal governments to try reduce the deficit will add to this column. More obviously, the depth of industry in Canada is just not there with over 75% of our market being comprised of Financials and Resource companies. The success of our financials will continue to rely on the appetite of Canadians to assume more debt (which I think will be a bit more challenged).
Even our own Canadian Pension Plan (CPP) has moved to favor Global equities more recently which is a sizable shift from 10 years ago (reducing their Canadian equity exposure from 23.5% to 3.7% more recently). This shift is certainly partly for economic reasons to benefit from a broader mix of economic cycles in various countries. These foreign markets have fewer headwinds currently but also contain an improved depth of industry with consumer discretionary, technology, healthcare, Industrials, etc. This allows for the creation of more robust portfolios in the current climate. With the Canadian dollar at $0.78 USD, this is also not a bad time to buy foreign as well. The Canadian dollar more than likely has more downside towards the longer term trend of the low 70 cent range which would be a tailwind for investments we make outside our borders.
This is not an either/or discussion as there are still reasons to own some Canadian investments. That said, the Canadian piece should be a relative underweight to Global investments over the next while. For similar reasons but also including interest rate risk and a preference for corporate debt, I would advocate a similar geographic asset allocation towards global bonds. Many countries such as Indonesia, Brazil, India and South Korea offer investment grade debt with higher coupons and less interest rate sensitivity.
As always, should you know anyone who might benefit from this type of insight, feel free to share.
Source: Cornerstone Macro