Should Canadians buy foreign stock with strong Loonie?

[MBC]

Should you buy foreign stocks with stronger loonie?
Exposure to U.S. economy still risky

Don MacDonald, CanWest News Service
Published: Sunday, November 18, 2007

In recent weeks, the scale of the U.S. credit disaster has become clear: tens of billions of dollars in writeoffs, ravaged share prices and the end of the careers of once high-flying CEOs.

The shock waves have travelled far from Wall Street to international stock and currency markets. The housing bust, credit squeeze and fear of a U.S. recession have provoked a crisis of confidence in the U.S. dollar that, along with the near $100-a-barrel oil, sent the Canadian dollar rocketing to a high of $1.10 US this month.

The question for Canadian investors is how to react to these developments. I recently advised investors to use their valuable Canadian dollars to top up exposure to foreign securities.

Jeff Rubin, CIBC World Markets' ebullient chief economist, disagrees with that idea, arguing that Canadians should steer clear of a worsening situation in the U.S.

"Before I'd start buying U.S. assets with my now more valuable Canadian dollars, I'd ask myself why everybody else seems to be selling U.S. assets. What do I know that they don't?" said Rubin, who expects the Canadian dollar to settle at $1.05 US next year.

"The answer is that the U.S. has a huge current-account deficit and the U.S. dollar is in secular decline. And in terms of U.S. real-estate assets, we're probably entering into an extended period of either stagnant values or further deflation."

In Canadian portfolios, Rubin recommends investors overweight energy and metal stocks and underweight Canadian industrials, information technology and banks.

"What we are saying is to overweight [Canadian] stocks that are a play on the global economy at the expense of stocks that are a play on the continental economy, and particularly the U.S. economy," he said. "Base-metal stocks, gold stocks and energy stocks reflect global economic conditions, not U.S. economic conditions."

Rubin's view on U.S. stocks is at odds with that of Yves Erard, managing director in Montreal of money management firm Mirabaud Gestion Inc. Erard argued the rapid rise of the loonie has "opened a window" for Canadians to invest profitably in blue-chip U.S. and European stocks. He noted the dollar is trading at levels not seen in recent history and that's making it attractive to purchase conservative U.S. stocks with international, non-cyclical businesses.

"For those who have a relatively long-term view -- one or two years -- I think there's an opportunity to buy U.S. securities now, because they're less expensive."

In this debate, I come down on the side of spending Canadian dollars abroad, especially for those who don't already have a full weighting of foreign securities in their portfolios.

But keep it conservative -- dividend-paying blue-chip stocks or short-term bond funds -- because the risk of U.S. recession can't be ignored.

-- Montreal Gazette
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