A weak dollar isn’t a bad thing—as long as it’s stable.
That’s because extreme volatility diminishes investor confidence and market predictability, says Craig Jerusalim, portfolio manager on the Canadian Equity team at CIBC Asset Management. He co-manages the Renaissance Diversified Income Fund.
Still, he’s not worried about the loonie’s current US0.88 cent to US0.92 range. For one thing, Canadian commodity producers selling to the U.S. benefit most when our dollar is low.
That includes the energy sector, says Jerusalim, since “crude oil prices are [now] in that sweet spot where many producers are generating attractive levels of free cash, but prices aren’t high enough to choke off demand.”
He adds, “On the gas front, given the extremely low levels of storage and the need for record production levels to fill that storage, we expect current strong natural gas prices will stay higher for longer than [anticipated].”
Companies located in the U.S. that are exchanging earnings into Canadian dollars benefit as well.
A weak dollar hurts retailers and airlines that sell in Canadian dollars but have costs in U.S. dollars.
“Stocks I’m more cautious on,” says Jerusalim, “include the retail-focused companies, grocers, and select REITs that don’t have the proper square footage to deal with changing online trends, or [the ability to compete with] aggressive U.S. competitors expanding into Canada.”
But he doesn’t let macroeconomics drive his investment decisions. Despite currency challenges, Jerusalim holds companies with market leadership, strong balance sheets and competitive advantages.
These types of firms, he says, are successful in every economic cycle. In fact, “when the macro picture is positive, I’d expect that these companies would generate excess levels of free cash, [as well as] have the discipline to either invest that money accretively or return the excess capital back to shareholders.”
Jerusalim adds, “If the outlook appears weak, it’s the same companies that benefit from the flight to quality given their strong financial positions, cost advantages and track records for success.”