Currency remains a dangerous bet

As the loonie continues its waltz with the greenback, investors may be tempted to jump into U.S. markets in the hope of making a double whammy of returns, should the loonie slump back to 80 cents. Advisors, however, are quick to warn against such a move, saying it could be unwise, premature and a departure from fundamentals of investment.

“Timing a currency is a difficult endeavour,” says Brent Smith, chief investment officer of Franklin Templeton managed investment solutions.

“I think investors shouldn’t make an investment based on where they think the currency is going,” says Smith. He says the overriding consideration should be whether it is a good time to invest in U.S. equities because it offers an attractive asset class or because the U.S. stock market offers better return potential than somewhere else.

“When you are allocating money to different asset classes in different regions, you must consider if U.S. equities offer better investment opportunity than other markets,” says Smith.

There is a strong correlation, he says, between the value of the loonie and the risk appetite. “If the risk appetite disappears, the Canadian dollar will go down. So if you do have U.S. investments you’ll do well,” says Smith while predicting that the Canadian dollar will continue to appreciate for the next 5 to 15 years.

Jason Pereira, a financial consultant with Woodgate Financial Partners in Toronto, would rather take the currency issue out of the equation altogether.

“I would prefer to have my portfolio hedged,” says Pereira. His reasoning is simple: dealing in foreign currency introduces new form of risk to the portfolio. “It takes away from the actual quality of management or reason for investing in a company.”

Pereira says currency fluctuations bite both ways. “You can see increased returns, but you can also see them devastated over time,” he says. “Currency fluctuations and the U.S. equity markets are constantly erasing each other’s gains.” As a financial consultant his prime objective is to ensure “steady returns” on a client’s investment. One of the ways he achieves that is by telling clients they are better off when fully currency hedged.

Seasoned financial planner Don Macfarlane in Thornhill, Ontario, is not averse to investing in the U.S. equity market, but his reasons have little to do with the currency market’s Wild West antics.

“I strongly encourage my clients to remain diversified, and to rebalance at regular intervals,” says Macfarlane. “The bottom line is that I will not recommend that my clients move more assets to the U.S. other than as a result of rebalancing.” That a weakening of the Canadian dollar would make the U.S. component look better is but incidental.

There are, however, those who do go along with the assumption of a double whammy windfall should the loonie fall back to earth.

Tina Tehranchian, financial advisor at Assante Capital Management in Toronto, is one of them. “I think the Canadian dollar is definitely in a position of strength right now and this momentum may continue for the next few months. Therefore, it is a great time to go shopping for U.S. stocks,” she says, “especially because the U.S. market is just emerging from one of the worst decades in the history of that market.”

Some others believe that although this is a good time to consider U.S. markets, the rewards of currency fluctuations may be not as rich as some investors may imagine.

“I do think there is some good opportunity to invest outside Canada to benefit from the rebound in the U.S. market as well as the U.S. dollar,” says Sadiq Adatia, chief investment officer, Russell Investments. “However, one point to note is that we do not expect to see an 80 cent dollar anytime soon, as the trading range may now have support at 90 cents.”

In the final analysis, financial experts do seem to agree on the fact that although there is potential for gains from U.S. equity, most of it will come from the U.S. market rather than from the currency.

(04/14/10)