Canadian investors tend to be overweight U.S. assets and underweight international exposure after performance-chasing during the U.S. market’s long bull run.Willy Kurniawan/Reuters
In response to U.S. President Donald Trump’s renewed rhetoric on tariffs and annexation, Canadians are abandoning winter ski trips and selling their vacation homes in the U.S. Some investors are also questioning their exposure to U.S. assets.
How should advisors respond to clients who want to consciously uncouple from their southern neighbour? And what are the alternatives for reinvesting that capital?
“We can dislike the U.S. administration and some of their tactics, but I don’t know if that should influence your portfolio construction,” says Craig Basinger, chief market strategist at Purpose Investments Inc.
“I don’t think politics is a good reason to change your allocations abruptly.”
Mr. Basinger admits Canadian investors tend to be overweight U.S. assets and underweight international exposure after performance-chasing during the U.S. market’s long, largely uninterrupted and “monstrous” bull run. For years, that included the best global earnings growth, which is reflected in premium valuations.
“There is also our familiarity with U.S. companies and brands, which has led a lot of Canadian portfolios to be ‘over their skis’ on U.S. exposure,” he says.
Putting patriotic emotions aside, Mr. Basinger says there are compelling reasons for a gradual tilt toward international markets.
Last year, earnings growth expanded to other regions, with Europe seeing double-digit growth and Japan and emerging markets improving, he says – and with lower valuations than the U.S. market.
“A renewed focus on investing in economic growth and reducing regulatory hurdles should be constructive for non-U.S. markets and bodes well for earnings,” he adds.
On the fixed-income side, while it’s prudent to favour Canadian bonds to avoid currency risk, Mr. Basinger says, U.S. debt remains attractive.
“Their credit and debt markets are very large and liquid. Most of our credit exposure comes from the U.S.”
Other ways to send a message
Canadian investors wanting to send a terse message to the U.S. government by selling their Nvidia Corp. NVDA-Q or Apple Inc. AAPL-Q stock should understand that it will have no effect on the U.S. administration, says Phillip Petursson, chief investment strategist at IG Wealth Management Inc.
“What we tell clients is selling shares in U.S. companies doesn’t send the same message to the U.S. government as not travelling there,” Mr. Petursson says.
Many U.S. firms are global companies that do more business outside the U.S. than within it, he adds.
“When you sell Microsoft Corp. MSFT-Q stock, for example, the money goes to the seller, who could be anywhere in the world,” he says. “Selling out of U.S. assets only excludes the investor from the largest market in the world with some of the best companies and operators who continue to grow and share profits with their shareholders.”
Martin Cobb, senior vice-president, equities at Lorne Steinberg Wealth Management Inc., says advisors need to help clients who want to avoid the U.S. clarify what they’re trying to achieve. Do they want to sell U.S. equities, or to avoid the U.S. economy or the U.S. dollar entirely?
The latter is more difficult, he says, as the U.S. dollar is the world’s reserve currency.
Patriotism may be one catalyst for rejigging portfolios, but fundamentals are another. Last year, the S&P 500 lagged some other major stock indexes, including Canada’s.
“We’re getting a lot more questions from clients about their U.S. allocations,” Mr. Martin says, as many U.S. companies are much more expensive than comparable firms based elsewhere.
“There’s been a discount for being domiciled outside the U.S. and maybe it’s gone too far,” he says. “We’re buying 20 stocks from ex-U.S. world leaders, and when I tell clients about their valuations and growth rates, it opens their eyes.”