Why Canada still belongs in your portfolio?


It’s funny to watch the love/hate relationship between the U.S. and Canada. It is easy to understand during hockey tournaments. Love Canada! Hate the U.S.! But, when you focus on capital markets and politics, it becomes a little less black and white. Many in the U.S. oppose how the leadership manages the country. That being the case, Canada’s leadership is leaning far in the opposite direction, which similar to our U.S. counterparts, many Canadians strongly oppose it as well. One point that is hard to deny is the U.S. economy has been very strong. The unemployment numbers are at record lows. The stock markets continue to grow pushed by new innovative companies that did not exist 20 years ago. Canada, in my opinion, has been mediocre at best. We are still a market that is built on banks and resource companies.

So, if this is the case, then why invest in Canada at all? We now have portfolios that provide global diversification and keep Canadian exposure to the 3%-4% range. This is a more accurate representation of Canada’s market size relative to the world market. There is a concept in investment management called “Home Bias”. Simply put, Home Bias occurs when you keep a percentage of your portfolio invested in your country of residence at a higher level than the country actually represents as a percentage of the world market. This often begs the question, “is this just a Canadian thing?” The answer is no. Home Bias exists in all markets – U.S., England, Australia, Japan, etc. Some benefits to employing Home Bias:

  • No currency risk — The investment incomes earned are paid in the domestic currency.
  • Tax advantages — In Canada, you may be eligible for a dividend tax credit. Many countries have tax laws that encourage you to invest domestically.
  • Relative performance — Your portfolio’s performance will be related to the country in which you will spend money. For example: If your own country’s economy is prosperous with cost of living increasing, and your portfolio is stagnant because you chose to have no Home Bias (minimal exposure to your domestic stock market), you will suffer relative to others who opted for a Home Bias. If your country’s economy is slowing and your portfolio performs in tandem, then you’ll have the same experience as most others. In this case, cost of living should stay manageable.

My final point: Canada is still a great place to invest!

  • Very solid banking system — Although, under heavy regulation that can stifle growth, the sector has proven to be very stable.
  • Canada is cheap (relatively speaking) — The S&P500 is currently trading at over 24 times earnings, which is deemed to be very expensive. The S&P/TSX composite (Canada’s main index) is trading at less than 18 times earnings. Bargain.
  • Power of immigration — Canada has historically high immigration numbers, as evidenced by the demand for property (increase in values) in the few metropolitan areas. Conversely, the U.S. is at its historic low for immigration. An increase in population means an increase in demand for goods and services country-wide. This has always been the roots to a successful country and economy over the long run.

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