All posts by Pat McKeough

Why Canadian Investors should Include U.S. Stocks in their Portfolios

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U.S. stocks can provide Canadian investors with all the foreign exposure they need

I’ve been advising Canadian investors to include U.S. stocks in their portfolios for more than 30 years. I continue to recommend them today. The U.S. stock market offers the widest variety and highest investment grade of companies to invest in of any country in the world. It also offers a wider selection of growth opportunities for those companies to pursue, in North America and around the world.

For our portfolio management clients, our general preference is to invest one quarter to one third of their holdings in U.S. stocks and the remainder in Canadian stocks.

Many major financial institutions recommend investing in North America. Some also recommend investing outside North America, especially in developing nations. They say that countries outside North America also offer great opportunities, and they may be right in some cases. They note that foreign investing offers an additional chance for diversification. This may be true, but we see it as irrelevant. Our view is that North America offers all the diversification that you really need.

Many promoters of emerging-market investing are also motivated at least in part by a conflict of interest.

By offering imported investments in their home market, they can earn higher profit margins than they get with domestic investments alone. That is, they make more money by promoting foreign investments. Investors may not make any more money, but they undoubtedly face more risk.

We have occasionally offered favourable advice about a handful of high-quality foreign stocks in the past few decades, while mentioning the added risk. But we’ve stressed our view that the U.S. and Canadian markets provide all the investment opportunities that you need to succeed as an investor.

Of course, the Canadian market offers opportunities that beat those available in the U.S.: in bank stocks, in the Resources & Commodities sector, and in specialists like CAE Inc. But Canada has nothing to compare with, say, Alphabet, Microsoft, McDonald’s and any number of other household names.

Neither too hot nor too cold

Some investors say they agree with our view on U.S. stocks in principle, but they disagree with our timing. They think the U.S. dollar is just too high at present levels: too hot, you might say. These folks seem to think that the natural foreign exchange rate between the U.S. and Canadian dollars should be around parity.

As of late 2023, the U.S. dollar has traded at around one-third higher than the Canadian dollar. Way above parity! In fact, the U.S.-Canada exchange rate has not been anywhere near parity in the past decade.

The U.S. dollar has mostly stayed between $1.20 Cdn. and $1.46 Cdn. since the start of 2015. It’s now around the middle of that 8-year range.

Since 1971, the U.S. dollar has stayed between $0.94 Cdn. and $1.60 Cdn. It’s now around the middle of that 52-year range.

Timing is worth a look. But if you make it the deciding factor in your investment decisions, it’s apt to cost you money, in the long run if not in the short.

“Has-been” U.S. dollar has a long life ahead

A lot of foreign governments share the view that the U.S. dollar is overvalued.

In March 2023, in a meeting in New Delhi, the representative from Russia revealed that his country is spearheading the development of a new currency. It is to be used for cross-border trade by the BRICS countries: Brazil, Russia, India, China, and South Africa. (Potential recruits include Iran, Syria and North Korea.)

I put this ambition on a par with the claims of cryptocurrency promoters. Some of them still predict that cryptocurrencies will take the place of the U.S. dollar. Continue Reading…

The Thucydides Trap and the Challenges facing China’s Rise

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Examining the Thucydides Trap including factors impacting China’s economic and geopolitical growth

Shanghai Lujiazui civic landscape: Deposit Photos

Thucydides, a fourth-century BC Athenian historian and general, wrote a book about the Peloponnesian War, a conflict between Athens and Sparta. He concluded that the war was inevitable due to the growth of Athenian power and the fear it caused in Sparta. This idea, the Thucydides Trap, has been generalized to suggest that when a rising power challenges a dominant power, war becomes unavoidable.

The concept of the “Thucydides Trap” re-emerged in recent years, with some authors suggesting that the U.S. and China were likely to go to war based on Thucydides’ observations. However, comparing the economic power of China and the U.S. solely based on the size and growth rate of their GDPs can be misleading. China’s larger population should be taken into account, and when considering per-capita GDP, the U.S. still surpasses China.

The export boom in Asia started in the 1960s, led by Japan, and was followed by Taiwan, South Korea, and China. Each country developed its own export capabilities. However, China, despite its late start, has faced challenges in reaching the high-end market and relies on importing high-end components. On the other hand, Japan, Korea, and Taiwan excel in high-value manufacturing goods, such as advanced computer chips.

Massive inequality and limited consumption

China’s focus on expanding its workforce and factory output, rather than raising worker incomes, has contributed to its growth but has also led to massive inequality and limited consumption. The Chinese approach contrasts with the Western emphasis on using technology to raise productivity and wages. Additionally, China’s reliance on low-cost unskilled labor and its demographic challenges, resulting from the one-child policy, pose long-term problems for the country.

Russia’s war on Ukraine is not a clear example of a rising power challenging the U.S. and NATO. Russia has been a declining power for decades and has used outdated weapons in the conflict. The beating Russia has faced in Ukraine has surprised many and may have disappointed Chinese leader Xi Jinping, who may have hoped that Russia could distract the U.S. and NATO while China pursues its own long-term plans. After all, Russia has carried out some successful invasions in the past couple of decades, even if they haven’t recovered much of the lost Soviet Empire. But China itself hasn’t been in a war of any consequence since its 1979 border clash with Vietnam.

I.P. Theft

The U.S. announcement of broad new limits on sales of semiconductor technology to China has been viewed by some as a war-like gesture. However, China’s technological gains have often involved theft of intellectual property, according to foreign firms and individuals who have worked there and invested their own money.

They say that enforcing intellectual property rights in China is difficult for foreigners due to local judicial protectionism, difficulties in obtaining evidence, small damage awards, and a perceived bias against foreign firms.

China also forces foreign joint-venture operators to share their designs and patents with local partners, who may then go off and sell copies elsewhere in China or Asia. Many accept the demand, just to get access to the vast Chinese market.

More ambitious Chinese businesses may simply buy a copy of a competitor’s product and reverse-engineer it if that’s all it takes: just pirate the technology, in other words. In The End of the World is Just the Beginning, however, Peter Zeihan wrote,

“Or, if we’re being brutally honest, to successfully reverse-engineer the products of others: Don’t get me wrong, I don’t feel great when I see a new story about some Chinese spy successfully funneling American military technology to Beijing. But please keep it in perspective. China didn’t figure out how to make a ball-point pen without imported components till 2017. The idea that China can get a set of blueprints and suddenly be able to cobble together a stealth bomber or advanced missile system is a bit of a scream.”

Demographics is a key negative for China

China’s demographic situation is a significant long-term problem. The one-child policy and forced migration from the interior to the coast have resulted in an aging workforce and a shrinking labour pool. As retirees increase, the government will face challenges in supporting them with reduced tax revenue and a smaller labour force.

The key indicator of future population is the number of children the average woman has in her lifetime. The “replacement number” that keeps population stable is 2.1 children. The UN estimates that China’s rate dropped to 1.16 in 2021 from just under 3.0 in the early 1980s, and 2.5 as recently as 1990. After decades of government family-size control, the new legalization of larger families has not yet caught on. Continue Reading…

Artificial intelligence is evolving in different ways – how can you best profit?

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While Get Rich Quick publishers use AI for email advertising, investors combat their spam with AI-based anti-spam programs. Meanwhile, what’s the best way to profit from AI with less risk?

Image courtesy Pexels/ThisIsEngineering

AI continues to make gains, mostly in communications. (In contrast, early adopters are still waiting for a licensed, insurable, road-worthy self-driving car.) You also hear a lot about AI-related start-ups. Most seem aimed at improving existing devices and/or cutting business costs. Many have highly specific goals.

Meanwhile, AI will keep attracting investment interest.

Here’s how AI has changed one industry

As you’ve probably noticed, a boom is underway in the investment-newsletter publishing business, at least in its “GRQ” segment. (GRQ is an acronym for Get Rich Quick.)

GRQ publishers sell newsletters and related products to subscribers. Their expertise is in newsletter marketing, not investing. Many publish numerous newsletters that may offer conflicting advice. When one publication puts out a stream of bad recommendations that drive off too many customers, the publishers change the publication’s name and/or investment specialty. That way, they always have one or more fresh titles that still have customer appeal and can operate at a profit.

GRQ publishing has been around for many decades, if not centuries. But it really went into high gear in the early 2000s. That’s when email began to replace postal mail as the main carrier for newsletter advertising, and costs began to plummet.

In the days of postal mail advertising, it cost a publisher perhaps $1 per “name” to offer a newsletter subscription to prospective customers. Publishers had to create, print and mail elaborate mailing pieces. They had to rent prospect names from direct competitors, or from other publishers in the same or related fields.

Compared to the costs of paper/postal mailings a decade or two ago, today’s costs of email advertising are close to negligible. Now publishers spend heavily in other areas: direct marketing consultants, specialized writers of advertising copy for email marketing, and so on.

Some newsletter publishers seem to be using AI to help them create email ads in ever larger numbers, to send to investors who never asked for them: spam, in other words. Continue Reading…

The Uncertain Future of Globalization: Will World War III or Economic Factors herald its Demise?

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Geopolitical strategist Peter Zeihan offers insights into the collapse of globalization and its potential consequences for major powers like China and Russia.

Pexels/Pixabay

Globalization refers to the increasing interconnectedness of the world’s economies, cultures, and populations, facilitated by the cross-border trade of goods and services, advancements in technology, and the movement of investment, information, and people. Right now, there is an uncertain future of globalization.

After Russia’s invasion of Ukraine last year, concerns arose about the possibility of World War III. The Thucydides Trap, a concept highlighting rising trade tensions between the U.S. and China, added to these concerns.

(Thucydides, a fourth-century BC Athenian historian and general, wrote a book about the Peloponnesian War, a conflict between Athens and Sparta. He concluded that the war was inevitable due to the growth of Athenian power and the fear it caused in Sparta. This idea, the Thucydides Trap, has been generalized to suggest that when a rising power challenges a dominant power, war becomes unavoidable.)

However, China has shown no interest in aligning with Russia for such a war. Both China and Russia face obstacles that previous world powers like Stalin or Hitler did not. Today’s young people in China and Russia are well-informed through technology, and both countries face demographic challenges with an aging population and a shortage of young people.

Peter Zeihan, a geopolitical strategist and founder of Zeihan on Geopolitics, is an expert in various areas impacting world trade and economic growth. His insights shed light on the impact of a country’s geography, military strength, and vulnerability on major global events throughout history.

I’ve never come across anybody who has the breadth and depth of knowledge that Zeihan has in the areas he studies. I’ve read a great deal about matters that affect the stock market, but Zeihan’s books have filled in a lot of blanks for me.

Here are some quotes about China from Peter Zeihan’s website, Zeihan.com:

  • The Americans are China’s single-biggest end-market and the Americans import more than triple from the Chinese than the other way around. In any tariff v tariff conflict the Chinese just don’t have much ammunition.
  • The Chinese are the world’s largest exporters. Nearly all that trade is dependent upon the U.S. dollar-denominated and SWIFT-managed trading system. Should China befall American financial sanctions the China story would crash pretty quickly.
  • The U.S. Navy has ten times the power of all other navies combined. Since World War II the Americans have used that imbalance to create a unified global system. Should that commitment fail — and it is — anyone dependent upon global trade is more or less screwed. Like, say, China. Making matters worse, nearly all Chinese trade with the rest of Asia is water-borne and therefore vulnerable.

Instead of worrying about war with Russia and/or China or World War III, Zeihan’s main concern is right there at the end of the title of his latest book: “…the collapse of Globalization.”

Hidden motives in Bretton Woods

I’ve written about the Bretton Woods agreement of 1944, and how it sidelined gold and catapulted the U.S. dollar into its position as the key currency throughout the world. However, there’s much more to it than that. For instance, how did the Americans get their wartime allies to go along with this plan?

The Bretton Woods agreement of 1944, which established the U.S. dollar as the world’s key currency, played a pivotal role in the post-World War II era of globalization. The U.S. offered its naval power to protect global commerce and opened its market to allied exports, creating an alliance against the Soviet Union. This agreement fostered economic growth and stability for several decades.

Containerized shipping and cost-effective Asian wages propelled globalization forward. Japan, with its Just-in-Time manufacturing process, took advantage of these opportunities and experienced significant economic growth. However, the U.S. struggled to adopt JIT manufacturing due to cultural and business practice differences. While Japan was expected to surpass the U.S. as the largest economy, its economy declined in the 1990s.

Recent trade disagreements between the U.S. and China, as well as supply chain disruptions caused by the COVID-19 pandemic, raised doubts about the future of globalization. Some experts refer to this period as the “New World Disorder.” Complex shipping patterns and tensions between countries make supply chains vulnerable. Major firms are considering changes to their supply chains to mitigate risks.

Peter Zeihan predicts significant changes or even a breakdown of globalization by the end of the decade. The U.S. economy, which used to be much larger than the rest of the world combined, now represents a smaller share. China, positioned at the furthest reaches of globalization, faces its own challenges. Its territorial disputes in the South China Sea and strained relations with Taiwan discourage foreign investors. China’s competition with other countries in terms of economics and foreign policy also poses challenges. Continue Reading…

Focus on Blue Chips and hold the good ones indefinitely

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Uncover good companies for long-term investments and you will boost your portfolio returns over time. Learn more here and discover one of our top picks.

 

Long-term stock investment strategies aren’t built to make a fast dollar. They are built to prosper over time, and most importantly, teach you how to pick the right stocks.

In our view, your goal as an investor, particularly if you follow a conservative investing strategy like the one we recommend, is to make an attractive return on your investments over a period of years or decades. Failure means making bad investments that leave you with meager profits or losses. Continue reading to learn about good companies for long-term investments.

Visa Inc., symbol V on New York, is on our list of good companies for long-term investments

Visa has been a terrific performer for our subscribers since we first recommended the stock at $19 (adjusted for share splits) in the December 2010 issue of our Wall Street Stock Forecaster newsletter.

A big part of Visa’s appeal is that it gets most of its revenue from the fees it charges card issuers and merchants using its network. This unique business model means the banks — and not Visa — are responsible for evaluating customer creditworthiness and collecting payments, which helps to cut risk for investors.

The company first sold its stock to the public at $11 a share in March 2008. We held off recommending it at that time, as the best way to cut the risk of investing in initial public offerings is to wait till after the next market slump and/or recession comes along. Thanks to Visa’s unique business model, it was able to avoid big losses during the 2008-2009 financial crisis.

Even though rising interest rates and inflation could slow consumer spending, we feel Visa has many more years of growth ahead. The COVID-19 pandemic accelerated the shift to online shopping, while the easing of restrictions will spur the use of credit and debit cards to pay for airline tickets and hotel rooms.

Visa is also making shrewd acquisitions that enhance its expertise in new areas, such as buy-now-pay-later payment plans. These moves will let it stay ahead of smaller firms with potentially disruptive fintech (the combination of financial services and technology services). 

The company also continues to reward investors. In the first half of fiscal 2022, it spent $7.05 billion on share buybacks. It still has $9.8 billion remaining under its current authorization.

Visa has also increased its dividend each year since the 2008 IPO.

Visa is a buy for long-term gains.

Spotting good companies for long-term investments lets you profit from long-term growth in the economy

For decades — as long as I’ve been involved with the stock market — some brokers have claimed that they favour the “buy and hold” investing strategy in principle, except when the market was so treacherous and unpredictable that their clients had to indulge in short-term trading, options or whatever to make any money. Continue Reading…