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Real Estate Investment Trusts

Property Values: Canadian REITs Still a Bargain

By Roger S. Conrad, on Mar. 18, 2014

About four months ago, we highlighted 14 Toronto-listed real estate investment trusts (REIT) that have been battered by weakness in the Canadian dollar. This headwind has reduced the value of US investors’ positions in these stocks and the dividends paid out. (See Canadian REITs: The Price is Right.)

In subsequent months, these names have largely treaded water, with Lifelong Income Portfolio holding Artis Real Estate Investment Trust (TSX: AX-U, OTC: ARESF) eking out an industry-leading return of about 5.5 percent in US dollar terms.

Currency Headwind

To be fair, Canadian REITs continue to contend with a weak Canadian dollar, which was worth US$0.96 in November 2013 but now fetches about US$0.90. This headwind has lopped about 6 percent off US investors’ returns over the past four months.

This underperformance has many US-based investors asking whether holding Toronto-listed equities makes sense in an environment where the greenback continues to rally against the Canadian dollar–and many other currencies.

As my colleague Elliott Gue outlined in A New Morning in America and America’s Energy Advantage, we expect the US dollar and economy to continue to gain strength, thanks in part to booming energy production that transcends our dysfunctional government.

America’s abundance of inexpensive energy has helped to bolster the country’s industrial sector, making it cheaper to produce some goods in the US than in China. (For example, see The Empire’s New Textile Mills.)

America’s energy advantage and manufacturing renaissance explains why companies last year announced about $50 billion industrial expansion projects in Lifelong Income Portfolio holding Entergy Corp’s (NYSE: ETR) service territory.

Although we remain bullish on US equities in general and cyclical industries in particular, investors shouldn’t abandon their international holdings or overlook the importance of currency diversification to long-term returns.

For one, the greenback’s recent strength largely reflects fears about the strength of the global economy.

Concerns about China’s slowing economic growth and weakness in its financial system have raised the appeal of US equities, Treasury securities and the greenback to investors.

Among the US dollar’s primary rivals, only the euro and British pound have appreciated consistently over the past year and a half, largely because of the perception that Germany will keep the Continent on the straight and narrow.

However, the strength of the pound and euro in part reflects shaky sentiment, not economic fundamentals; investors shouldn’t mistake the recent strength of the US dollar and these European currencies a permanent state of affairs.

We wouldn’t bet on a near-term recovery in Argentina’s peso or Venezuela’s bolivar, but the currencies of fiscally responsible nations such as Australia and Canada eventually will rebound.

Foreign exchange rates will fluctuate over time; however, owning shares of high-quality businesses with solid growth prospects remains the only tried-and-true way to build sustainable wealth.

Against this backdrop, patient investors should regard the recent weakness in the Canadian dollar as an excellent opportunity to buy Canadian equities.

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