The best investments aren’t always Canadian
“Derek, my neighbor says it is safer to invest in Canadian companies. Is that true?”
While I enjoy a good hockey game with some bacon and maple syrup as much as the next Canadian, I’m not always as patriotic when it comes to my investment choices.
Even though it is our home and native land, I believe there are always opportunities outside of our border that aren’t necessarily more risky and can enhance your long-term returns.
For starters, Canada makes up roughly two per cent of the world’s gross domestic product (GDP). As a comparison, our U.S. neighbors make up a whopping 20 per cent of the world’s GDP.
This statistic alone shouldn’t be your sole guide, but it stands to reason that there are many interesting investment opportunities that do not have their head office on Canadian soil.
As well-known as Canada is for hockey and polite mannerisms, so too are we known for the weighting of our stock index in a very few select sectors.
Specifically, the energy and materials sector makes up roughly 40 per cent of the total Toronto Stock Exchange (TSX).
Once you add our banks and insurance companies, we have a weighting of over 70 per cent of the TSX — the point being that by investing in our broad index, you are actually primarily investing in three sectors and potentially missing out on opportunities elsewhere, or worse, over-exposing your portfolio to the potential risks in these sectors.
With this information in mind it is also important to note that Canadian companies are well-known for conducting themselves in a prudent business manner.
It is no secret that our big banks are consistently heralded as some of the best run in the world — this became particularly evident during the financial crisis in 2008.
To add to our strength in the financial sector, Canada ranks in the top 10 of one of the least corrupt countries in the world.
What this tells me is that, generally speaking, when you invest in Canada you should experience greater transparency when it comes to financial reporting (for better or worse!)
As such, I don’t argue the fact that Canada certainly offers appeal from an investment perspective.
Sometimes investment choices are easier to make when there is a sense of familiarity.
As an example, most of us would recognize a name like Pengrowth Energy while not recognizing a name like Valero Energy from the U.S.A. Valero is a notably larger company, but since they do not have local operations some investors may shy away and choose to stick to familiarity.
While there is nothing wrong with that, this familiarity bias can occasionally mean you miss out on potential opportunities.
The last item to consider is that Canada’s economy is very dependent on the worldwide economy. In fact 62 per cent of our GDP comes from trade.
Of this, the majority of our imports and exports are from the U.S.A. (65 per cent) while a small but increasing amount are from China (eight per cent).
Specifically, the success of Canadian companies relies heavily on the needs of other countries — if their economies are suffering, ours will too.
My best advice is to consider why you’re choosing to invest in a specific company first. If it’s because they are in Canadian borders, I suggest looking at a different measurement before fully committing exclusively to Canadian names.
This all said, I think there are some fantastic investment choices in Canada and proudly declare that some of them are the best-run companies on a worldwide stage.
With that information in mind, consider adding names from other countries around the globe to take advantage of the added benefit of diversification in terms of economies, currencies, and politics — among other reasons.
My final thought: I’m all for standing on guard for thee, but don’t forget to consider investment opportunities from far and wide before making your investment decisions.
Derek Fuchs is a wealth adviser with ScotiaMcLeod in Red Deer, and a certified financial planner, financial management adviser and a fellow of the Canadian Securities Institute. He can be contacted at firstname.lastname@example.org.