Saturday, August 12, 2017

Is Canada a Better Investment Haven in Troubled Times?

The Canadian dollar is enjoying an imperious run of form of late. Between 1 May 2017 and 7 August 2017, theCAD/USD has appreciated by 7.8923% – a remarkable achievement. The loonie (CAD) has rebounded sharply in recent months, owing to the improved performance of the Canadian economy. The S&P/TSX compositeindex is currently down 0.59% for the year to date, with a 52-week trading range of 14,319.11 on the low end, and 15,943.09 on the high-end.

However, over the past 1 month the index has moved from 15,105.29 (July 10, 2017) to its current level of 15,197.84 (August 10, 2017). The slight appreciation is reflective of current trends in the Canadian economy. Consider that the 1-year return of the S&P/TSX composite index is 5.93%, spurred in large part by the uptick in commodityprices like crude oil, gold, natural gas, coal, and the like.

Canada is a commodity-rich country, with some of the largest crude oil deposits in the world. Currently, Brent crude oil is trading at $53.24 per barrel, and WTI crude oil is inching closer to the $50 per barrel level at $49.85. As oil prices rise, the Canadian economy strengthens. As Canada’s chief export, crude oil has a large part to play in the performance of the CAD. Rising prices boost the value of oil companies on the S&P/TSX composite index. This in turn raises confidence in the Canadian economy.

An Economic Recovery on the Cards

In Q1 and Q2 of 2017, many nascent oil and gas companies was struggling owing to soft energy prices. Existing oil majors dominate the market, thanks to economies of scale and deeper pockets. Over the past 2.5 years, some 17+ listed CanadianJunior oil and gas companies shuttered, when oil plunged from well over $100 per barrel to its current level. However, greater efficiency of operations, cost cutting measures and improved efficiency have shored up the energy sector and returned it to profitability.
The departure of high cost, low-volume operators has allowed existing oil and gas companies to assert control by lowering costs and expanding production. It is estimated that companies require at least $1 billion in market capitalization to survive the current trends in the oil industry – leaving the majors in charge of oil.

Canada or the US – Investors Contemplate their Options

The recent performance of the USD is a little disconcerting to traders and investors. The US dollar index – a broad measure of the USD against a basket of currencies – is currently trading at 93.578 (August 10, 2017). However, the year to date return of the DXY is -8.45% – largely in line with the recent trends in the CAD/USD (+7.8923%). The US dollar index tracks the performance of the greenback against 6 currencies including the GBP, EUR, JPY, CAD, SEK, and CHF.  
Across the border in Canada, confidence is improving. Currently, there is a net long position of some 40,000 contracts on the CAD/USD. This indicates that there is significantbullish sentiment with the Canadian dollar. The current level of the CAD/USD is above the 50-day moving average of 0.773, and the 200-day moving average of 0.755. These technical indicators suggest that the CAD is clearly on the ascendancy. Investors have multiple options to dabble in when considering Canada as their preferred North American haven.

Managing Canadian ETF Portfolios

Individual stocks are always a risky proposition, since there is little certainty in price movement. However, a broader measure of stocks is found in ETFs. Exchange traded funds are an ideal accoutrement to a financial portfolio, especially for people looking to diversify into the Canadian market. Ideally, the best ETFs in Canada are those associated with low fees, high returns and bullish trends.
The best CanadaETF recommendations include the following:  
  • ·         VXC – the Vanguard FTSE Global All Cap ex-Canada index ETF. This has significant exposure to many companies, geological regions and sectors. The asset allocation of this fund is 44.65% weighted in international equities, 54.27% in US equities and just 0.02% in Canadian equities.
  • ·         However, investors looking for Canadian market exposure will want to take a look at the Vanguard FTSE Canada All Cap index ETF (VCN). It is a Canadian equity-strong fund with 95.11% investment in Canada and just 4.59% in US equities. The international equity component is just 0.24%.
  • ·         Another high-ranking Canadian ETF is the Vanguard Canadian aggregate Bond Index ETF (VAB). This is predominantly a fixed income asset allocation fund with 99.54% in fixed income, and it is a terrific fund for Canadian bonds (investment-grade bonds, government bonds (provincial and federal)).

Current trends indicate that the Canadian economy is undergoing a robust recovery, and this is slated to continue as prospects for a tax overhaul in the US diminish. Canada represents a beacon of economic hope for the North American continent. Investor preferences indicates strong support for Canadian ETFs. 

1 comment:

  1. Dear Mr.Amit Agarwal

    Thank you very much for this suggestion of Canada as a lucrative alternative investment destination to the US.

    I generally found investing overseas not so easy with high minimum investment requirement, fees, minimum transaction size, etc.

    Kindly comment on this.

    Thank you,

    With Best Regards



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