Asset Allocation – geographically speaking
For many of you the last few years have not only seen us more heavily invested in equities versus fixed income investments, but also more heavily invested in the U.S. vs. Canada. This has turned out to be the best thing we could have done. More recently, we have taken some of the profits from these equity holdings, leaving the proceeds in cash, but have maintained our overweight exposure to the U.S. markets.
So what is our thinking, and is what do the numbers tell us? If, and when we see a slowdown / recession in the U.S. we believe that things will be even rougher in Canada for a number of reasons.
The most important determinant of Canadian GDP is U.S. GDP. Therefore, any global or U.S. recession would likely have the same effect on Canada. However, Canada would be starting from a weaker position than the U.S. as we have:
- a weak energy sector - Chinese demand significantly influences commodity prices
- a cooler housing market - 22% of Canadian GDP is now linked to housing-related activities
- competitiveness challenges
Additionally, commodity prices typically fall in an economic slowdown, which will further hinder any growth from our energy sector.
The following three graphs substantiate this view further.
Household debt to income much higher in Canada
Haver Analytics, 2018
Canadian household debt service burden rising
Statistics Canada 2019
Canadian households have been saving less
On the positive side however, it should be noted that to date, Canada has not embroiled itself in any trade wars as has the U.S. And with a very insular banking system, we should see some stability here.
Additionally, the Canadian dollar typically weakens during recessions, which in turn provides an economic boost (and portfolio return boost when US investments are converted back into Canadian dollars).
And finally, whatever your opinion of Trump, he is little more than a blip on the long term investment horizon. What is more important is that the investments we make are market leaders, not only at the current time, but are also likely to remain so in the future.
As an interesting aside, just five stocks have contributed to over 25% the U.S. stock market’s performance this year; Microsoft, Apple, Amazon, Google and Facebook. You should own them all.
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