China is accelerating stimulus measures on both a monetary and fiscal perspective and Chinese stocks tend to be very pro-policy driven, says one portfolio manager.Lee Jin-man/The Associated Press
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With markets in turmoil, Canadian investors are taking a new look at opportunities outside our borders – something advisors say is necessary for a geographically balanced portfolio that can absorb the shocks of volatile markets.
After three months of selling off about $48-billion in foreign stocks and bonds from January through March, Canadian investors jumped into international securities in April, buying a whopping $29.2-billion in foreign assets – mainly driven by non-U.S. securities, according to Statistics Canada. But transactions eased in May, with $573-million invested in foreign securities.
“Conceptually, how I think about those flows is during good times, people invest abroad and during bad times, they pull things back home,” to handle any financial obligations in Canada, says Konstantin Boehmer, senior vice-president and portfolio manager at Mackenzie Investments in Toronto.
North American markets declined steadily through the first three months of the year and then bumped up slightly in April before declining again.
Alan Fustey, vice president and portfolio manager at Adaptive ETF, a division of Bellwether Investment Management in Winnipeg, says those StatsCan figures can get skewed by mergers and acquisitions, but it signifies the need for Canadians to have foreign investments as part of their overall portfolio for diversification.
Investors need to remember that about 30 per cent of the Toronto Stock Exchange (TSX) consists of energy and materials stocks, while more than 30 per cent are financial stocks. Over 50 per cent of the whole index is concentrated in three sectors, he explains.
“The TSX has done extremely well on a relative basis versus the S&P 500 and global markets. That’s reversed a little bit in the last quarter with oil prices and a lot of the commodity prices coming down,” he adds.
To add some exposure to stocks outside of Canada while still being defensive as the markets gyrate and recession fears grow, Mr. Fustey says investors should look to U.S. health care, consumer staples and utilities stocks, which are “less sensitive to changes in economic growth.”
Another good option is Vanguard FTSE Global All Cap ex. Canada Index ETF VXC-T, which invests in more than 11,000 global securities that don’t include Canada.
It’s a Canadian dollar-denominated investment, and with a management expense ratio of 0.21 per cent, “it’s a very efficient way to gain exposure to global equity markets,” he says. While the exchange-traded fund (ETF) is down about 19 per cent year to date, it’s up 79 per cent since its inception in June 2014.
He adds investors shouldn’t buy Canadian-dollar hedged investments.
“When stuff starts to get scary, everyone starts to buy U.S. dollar assets,” he says, and that strengthens the U.S. dollar and hedged investments lose out on those gains.
Mr. Fustey also avoids choosing one specific country over another as markets slide and more broadly looks at regional allocations.
“We view it generally as a buying opportunity and for investors with a long enough time horizon, this is the time they want to add to equities,” he says.
However, Canadians do tend to exhibit a pretty big home bias, says David Kletz, vice-president and portfolio manager with Forstrong Global Asset Management Inc. in Toronto, but there’s always a good case to go global.
“You can get a lot of extra diversification in portfolios by including global assets,” he says. “There’s a lot of other types of asset classes and investment opportunities that they’re really missing out on to a large degree by not going outside the borders.”
While growth stocks, particularly technology stocks such as Amazon.com Inc. AMZN-Q, Apple Inc. AAPL-Q, and Netflix Inc. NFLX-Q, among others, were the winners in a low interest rate environment, Mr. Kletz says value stocks will have their turn now as interest rates rise, and inflation steadies at a higher-than-normal rate.
Investors should “prioritize more of a value orientation in their investment style,” he explains.
“In doing so, it makes sense to either go toward a more value sector orientation in the U.S. or go toward international markets, like Europe and Asia, which in general … have more of an orientation toward value stocks that would tend to perform better in this type of economic environment.”
Opportunities in value stocks outside North America
Investors can also benefit from the euro’s decline to near parity with the U.S. dollar, he says, as a lower euro means exports priced in that currency will be more competitive.
“When you combine those factors – a cheap currency and more of a value orientation and less of a valuation risk for those markets – it can make it a fertile time to invest there for those that have the risk tolerance,” he says. These stocks may be in less exciting industries than technology, such as financials and industrials.
While he tells investors to stick to broader regions instead of choosing individual countries, China is an interesting case right now, he notes.
China is accelerating stimulus measures from both a monetary and fiscal perspective.
“They’re almost running completely counter to what you see in the U.S. and other [countries],” he says. “Just from a diversification standpoint alone, it’s a really interesting play for policy diversification, but also for Chinese stocks, which tend to be very much pro-policy driven.”
Latin American commodity exporters of industrial metals, such as those from Peru, Chile, and Brazil, are also doing well right now as demand jumps, he notes.
However, Mr. Kletz is avoiding stocks in Eastern and Central Europe as well as those in some Asian nations as they haven’t begun to raise interest rates to tame inflation.
One investment he prefers is emerging market sovereign bond ETFs that are priced in local currency, such as iShares J.P. Morgan EM Local Currency Bond ETF LEMB-A.
“That’s one of our preferred vehicles just because it is sovereign, so you’re not taking an additional layer of credit risk on top of the [emerging markets] exposure,” he notes.
Where fixed income is attractive
Mr. Boehmer, who co-leads Mackenzie’s fixed income business, says investors shouldn’t dismiss fixed income investments right now either.
“Performance has been dismal, absolutely horrific for fixed income across the board, whether it’s high yield or investment grade,” he says. “But if you invest now in fixed income, you’re picking up those higher yields.”
Investment grade corporate credit yield rates are around 5 per cent right now, he adds. “That’s a pretty solid place to park your money, especially if you’re a little bit fearful of what’s going to happen with this economy.”
With Canadian and U.S. central banks raising interest rates, fixed income investments are improving, he says. While he’s wary of China right now, other Asian countries such as Singapore, Malaysia and Indonesia look interesting.
Mr. Boehmer would avoid areas where central banks haven’t begun moving interest rates higher already because if the economy starts to falter, countries that have boosted rates can cut them to help stimulate activity.
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