Where to invest abroad in 2016
Canadian investors stick close to home, and that’s too small a market, some experts say
By: MARY GOODERHAM
Date: February 23, 2016
A globally diversified portfolio is more important today than ever, given the serious challenges facing Canada, investing experts say. Looking outside our borders for opportunities can be tricky, however, with the widespread impact of China’s downturn and the structural challenges plaguing many markets.
“Country selection really matters now,” says Tyler Mordy, president and chief investment officer of Forstrong Global Asset Management Inc. in Toronto. He says the “macro headwinds” that Canada faces have the potential to hit investment, incomes and employment, yet Canadians remain overexposed to domestic assets.
“There is a large investment opportunity outside our border,” says Alan Fustey, managing principal and portfolio manager at Index Wealth Management Inc. in Winnipeg. He notes that Canadian equities represent just 4 per cent of world equities, and our market is significantly concentrated in certain sectors. “There is a diversification benefit that can be achieved by investing internationally.”
Canadian investors should always have some of their equity portfolio in foreign securities “even with the historically low value of the Canadian dollar,” he notes, although it can be difficult for individual investors to single out particular countries. It is also important to consider the effect of a particular currency on an investment, he cautions. “You can have the right market, but if the currency goes down versus the Canadian dollar, you don’t make money.”
Mark Yamada, president and chief executive officer of Toronto-based PUR Investing Inc., says the foreign markets that look most interesting are those “less influenced by the Chinese contagion.” Countries can be important “diversifiers” in portfolios, although “everything comes with a caveat,” he says. “There are opportunities, if you can find the right way to play them.”
The key to investing in emerging markets is to look for countries that have tackled structural problems in the wake of the 2008 financial crisis, Mr. Mordy says, and are “positioned to reap a growth dividend from global disinflationary pressure.” His company avoids broad-based emerging market exchange-traded funds, for example, which “are stuffed with yesteryear’s winners and companies geared toward exporting.” It looks instead for “domestic-focused, reform-minded, commodity-importing countries.”
Countries that are among the most promising places to invest in 2016 include:
India is the “shining star” among emerging markets, Mr. Fustey says, which should translate into corporate earnings growth. Government-initiated reforms are expected to underpin long-term growth, while the country’s highly educated work force will continue to attract investment. Mr. Yamada says India is among those countries largely outside the Chinese “sphere of influence,” and expectations of growth at about 7.5 per cent this year are especially attractive. “A belief that Prime Minister Narendra Modi can return the country to its high-growth path of the mid-2000s, and so trigger Chinese-style transformational development,” could be enough to see a longer-running investment shift toward India “in an emerging market world currently starved for good news,” Mr. Mordy notes. The case for India assumes “fairly flawless policy execution,” he cautions, including efforts to tame inflation and a move toward “productive investment rather than public hand-outs.” If that happens, there is “big potential” for the country to “enter into a triple-merit scenario of falling interest rates, rising currencies and rising asset prices.”
With strong employment leading to wage growth, Japan is expected to see a resurgence in consumer spending, Mr. Yamada says. Corporate Japan has become lean and efficient, Mr. Mordy notes, and the country is a “veritable hotbed of companies at the forefront of several technologies reshaping the global economy,” including robotics, electrics cars and alternative energy. Japanese small caps are “deep into bargain territory,” while the plunge in oil prices is indisputably positive for Japan, which imports most of its energy needs. Japan is also becoming a nation of investors, and he sees a surge of domestic investment coming.
The Euro zone’s nascent recovery is gaining traction. The bloc as a whole is generally attractive, Mr. Fustey says, because it is earlier in the economic cycle and thus expected to experience improved earnings and revenue growth. Britain is anticipated to be among the growth leaders in Europe, and is particularly benefiting from the leadership of Canada’s Mark Carney as governor of the Bank of England. “If there’s going to be an increase in a rate anywhere in the world right now, it’s likely to be in the U.K.,” Mr. Fustey comments.
Mr. Mordy says that in an economic region geared toward exports, expect the lower euro level to initiate at least a multiquarter economic bounce, with cyclically sensitive economies such as Sweden standing to benefit most. The majority of Sweden’s exports are sold to other European nations. Its largest export market is Germany, which has decades-low unemployment and real wages rising at the fastest pace in more than 20 years. Sweden is also in the “winner” camp from lower oil prices and its undervalued currency has left it highly competitive. Mr. Mordy says that Sweden’s equity market, which has a high weight in industrial stocks and less in defensive sectors and resources, “should thrive in this environment.”
Germany is “the driver of what happens in the Euro zone,” says Mr. Fustey, and the country stands to particularly benefit from the region’s overall recovery. The size of the German economy, its huge manufacturing base and the fact that it exports into other parts of Europe are all advantages, he notes. “When the euro zone picks up, Germany does pretty well.”
Notwithstanding the financial impact and psychological effect of the Chinese downturn on markets, China’s investment in the development of southern Africa’s infrastructure, resources and manufacturing has been instrumental in the region, Mr. Yamada says. Outside of the devastated gold market, he says, “things are happening” in South Africa with the help of Chinese interests. “If you’re on the ground, it’s evident everywhere,” he says. Although Africa continues to experience political upheaval and social unrest, “what’s happening in the economy for the long-term player is sort of interesting.”
Vietnam has progressively reduced barriers to trade and capital flows and opened its economy more widely to private business, Mr. Mordy says. The economy has posted an annual per capita GDP growth of 5.3 per cent, according to McKinsey & Co. The World Trade Organization reports that Vietnam attracts as much foreign direct investment as Thailand, although its annual output is half the size of Thailand’s $375-billion (U.S.) economy. Wages tend to be 50 to 60 per cent below those in Thailand and China, according to the International Monetary Fund, bringing low-end manufacturing jobs into Vietnam. The country’s exports to China of agricultural, fuel and mineral products remain in high demand. Meanwhile, Mr. Mordy suggests that credit growth in Vietnam could signal a multiyear economic acceleration.
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