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Canadian Stocks

Betting on Canadian Values

By Roger S. Conrad, on Sep. 3, 2013

File this under unforeseen developments: 2013 has been the year of the US dollar. Only a year ago, the conventional wisdom held that Uncle Sam’s profligate ways and the Federal Reserve’s recklessly accommodative policies would doom the dollar.

At the time, the digital currency Bitcoin was all the rage, while gold fetched almost $1,800 an ounce and appeared to be heading higher. Among other paper currencies, only the euro–beset by the widening rift between the haves and the have-nots–garnered at least as much suspicion as the greenback.

Fast-forward to summer 2013, when growing concerns about slowing economic growth in China and other formerly red-hot emerging markets have prompted investors to seek sanctuary in the US dollar. The price of gold has retreated by almost $500 per ounce, while the Australian dollar’s exchange value has slipped to about US$0.90 from the neighborhood of US$1.10. On the other hand, the oft-maligned euro has proved relatively resilient, hovering around US$1.30.

In the current environment, investors prefer the US economy’s stop-start recovery to the uncertainty elsewhere in the world. And although the unemployment rate remains elevated, the Federal Reserve appears committed to phasing out quantitative easing, which should boost interest rates and strengthen the greenback.

The US dollar should also remain strong over the long term, thanks to the US energy renaissance. Surging oil production from the Bakken Shale and other unconventional resource plays has displaced imported oil, narrowing the US trade deficit. Meanwhile, the emergence of the US as a major energy producer has been a boon to US manufacturing, particularly the petrochemical industry, which has benefited from the ultra-low price of natural gas and natural gas liquids–key inputs in this energy-intensive business. (See America’s Industrial Revolution.)

Against this backdrop, the US-dollar’s long-term strength no longer appears as tenuous as alarmists have claimed in recent years. The greenback’s resurgence also provides an important reminder of why investors shouldn’t overlook the importance of country diversification to a balanced portfolio and underscores the risks of abandoning quality stocks based on currency weakness alone.

The improving outlook for the US economy and the dollar has contributed to the recent underperformance of Canadian equities, a market that’s ripe with bargains for patient investors with a longer time horizon.

In a momentum-driven market where valuation is an afterthought, these stocks could drift lower. But as long as these companies continue to grow dividends and earnings, their stock prices eventually will follow suit. In the interim, all these names reward your patience with generous dividends.

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