The right time to cash in US$ assets?

Although basing an investment strategy on the largely unpredictable swings of currencies often is a fool’s game, the fact that the U.S. greenback has appreciated by about 40% against the C$ since 2011, when the C$ was close to an all-time high of about US$1.05, is impossible to ignore.

More recently, the C$ slipped to as low as about US68¢. However, a growing number of observers, such as Darrell Gebhardt, senior vice president and investment advisor in Winnipeg with Montreal-based National Bank Financial Ltd., believe the trend is ripe for a reversal – albeit a relatively modest one.

“In 2008, our advice was to buy U.S. assets because of the strong loonie and depressed U.S. [stock market],” Gebhardt says. “As the U.S. recovers, it’s a double whammy. You get the currency gain and the appreciation on the U.S. asset.”

From a real estate investment point of view, divesting could include selling properties bought in Phoenix or Orlando a few years ago, Gebhardt says. (If the homes were bought as part of a lifestyle decision, however, there’s no reason to call a realtor, he adds.)

But clients who hold property in the U.S. are not the only ones who are experiencing these benefits. Many business-owner clients whose businesses ship manufactured goods to the U.S. have been benefiting of late because their costs are in C$ while their revenue is in US$, Gebhardt says.

Most Canadians, however, monitor the highs and lows of the loonie as a gauge of whether to go shopping across the border or take holidays down south in the winter. So, clients who have U.S. securities in their portfolios that are generating US$ should use money from that investment account when they venture south rather than converting their Canadian currency, Gebhardt advises.

Tim Burt, president and CEO of Winnipeg-based Cardinal Capital Management Inc., says he has read several reports about Canadians starting to monetize their U.S. real estate holdings and bring that money back to Canada. And although the U.S. equities market has outperformed its Canadian counterpart for the past few years, that can’t go on indefinitely, he says.

“This is probably the year that changes,” Burt says. “You’re probably going to see better Canadian market performance and better Canadian dollar performance. You could get a double gain.”

On the flip side, clients with significant exposure to U.S. equities in US$ have seen their holdings decline by 8%-9% over the past year because of weak markets, says Shaun Osborne, chief foreign-exchange strategist with Toronto-based Bank of Nova Scotia. Still, he adds, “In Canadian dollars, the outright return is still positive.”

Osborne says the way to hedge away the currency element is to choose investments such as exchange-traded funds or mutual funds that manage such risk. “It’s late in the cycle, ” he says. “If you’ve been exposed to U.S.-dollar assets for the past few years, it’s quite possible you’d want to think about taking some risk off the table. We don’t think there’s that much more appreciation to come at this point.”

In fact, Osborne believes, the C$ is close to its low point: “We don’t believe we’re going to see a US50¢ or a US60¢ Canadian dollar. It’s looking quite attractive.”

Burt is in the same camp. He believes the US$ has peaked vs the loonie and, as a result, Cardinal’s advisors recommend that their clients reduce their exposure to US$.

“Unless you think oil is going to US$20 a barrel and the U.S. Federal Reserve Board will continue to raise [interest] rates, which would put pressure on the Canadian dollar to drop into the mid-US60¢ range, it’s too late to start buying U.S. dollars now,” Burt says.

Although there recently was fear that Bank of Canada governor Stephen Poloz would cut interest rates this year if the Canadian economy continued to weaken, Burt says, that worry has subsided: “If there’s an interest rate spread between the two countries, the one with the lower rate will have a currency problem.”

Canadian snowbirds are always going to need some U.S. assets that earn either interest or dividends to provide them with some income. But for your clients who don’t have any property in the U.S. and don’t plan to take vacations south of the border, there’s no point in having a large amount of money sitting in US$, Burt says: “It’s very difficult to play these currency swings. Very few people, including me, are good at forecasting currency trends. It’s my gut feeling that the U.S. dollar has peaked and is heading down.”

Gebhardt, for his part, suggests that now is the time to look at investment opportunities outside Canada, as the price of a barrel of oil is expected to come out of its recent funk later this year – and with that, the loonie will rise.

“As the currency appreciates,” he says, “you want to add more to your U.S. positions as a hedge to get the global diversification beyond the Canadian marketplace, which is dominated by energy, materials and financials.”

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