Many Canadians are watching closely as their neighbour to the south prepares to hold a crucial Presidential election in November 2024.
Meanwhile, Canada’s federal election is still more than one year away. Canada continues to contend with economic, social, and political issues that are faced in varying degrees by its partners in the G7. These issues include managing immigration, aging populations, and housing affordability. Its central bank also seeks to strike a balance in monetary policy after raising interest rates to combat inflation.
In this piece, we’ll look at how the Canadian economy has fared over the past year. Moreover, we will look at an exchange-traded fund (ETF) that offers exposure to Canada’s great companies. Let’s jump in.
Where does Canada stand in the fall of 2024?
From an economic standpoint, Canada finds itself in a difficult predicament. The OECD chart below illustrates that Canada has fallen behind many of its peers in the post-COVID-19 pandemic era.
Source: Organization of Economic Cooperation and Development (OECD), 2024 Household Dashboard, accessed October 6, 2024.
Canada’s Real GDP per capita ranking compared to its peers, especially stand outs like the United States and Italy, has been abysmal. This is coupled with dismal employment statistics that have shown rising unemployment. Even positive jobs data is skewed by government hiring in some cases.
Indeed, unemployment in Canada has climbed from a low of 5% in 2022 to 6.5% in its latest reading. Royal Bank of Canada Deputy Chief Economist Nathan Janzen recently stated that unemployment would continue to rise to 7% by early 2025. That is nearly a percentage point higher than pre-pandemic levels.
The Bank of Canada (BoC) is in a tough spot as it battles a weak economic environment and a housing supply shortage that has kept prices elevated. Now, the BoC finds itself in a position where it will need to employ further interest rate cuts. However, in doing so, it runs the risk of re-inflating the housing price bubble.
Why should you trust Canadian companies?
Canada has been in a rut economically in recent years. However, the forward price-to-earnings ratio difference between the S&P TSX 60 and the S&P 500 show that publicly traded Canadian companies still offer attractive value at this stage. Continue Reading…
A change, it had to come We knew it all along
We were liberated from the fold, that’s all
And the world looks just the same And history ain’t changed
‘Cause the banners, they all flown in the last war
As inflation rapidly accelerated towards the end of 2021, bond yields woke up from their decade plus slumber breathing fire and brimstone. Subsequently, bonds have once again become a worthwhile asset class for the first time since the global financial crisis.
I will explore the historical behaviour and characteristics of bonds. Importantly, I will also discuss how they have reclaimed some of their status as a valuable part of investors’ portfolios.
Riding the Roller-Coaster for the Long Term
Notwithstanding that stocks have periodically caused investors some severe nausea during bear markets, those who have been willing to tolerate such dizzy spells have been well-compensated. In Stocks for the Long Run, Wharton Professor Jeremy Siegel states “over long periods of time, the returns on equities not only surpassed those of all other financial assets but were far safer and more predictable than bond returns when inflation was taken into account.”
As the following table demonstrates, not only have stocks outperformed bonds, but have also trounced other major asset classes. The effect of this outperformance cannot be understated in terms of its contribution to cumulative returns over the long term. Over extended holding periods, any diversification away from stocks has resulted in vastly inferior performance.
Real Returns: Stocks, Bonds, Bills, Gold and the U.S. Dollar: 1802-2012
With respect to stocks’ main competitor, which are bonds, Warren Buffett stated in his 2012 annual letter to Berkshire Hathaway shareholders:“Bonds are among the most dangerous of assets. Over the past century these instruments have destroyed the purchasing power of investors in many countries, even as these holders continued to receive timely payments of interest and principal … Right now, bonds should come with a warning label.”
The Case for Bonds
Notwithstanding that past performance is not a guarantee of future returns, the preceding table begs the question of why investors don’t simply hold all-stock portfolios. However, there are valid reasons, both psychological and financial, that render such a strategy less than ideal for many people.
The buy-and-hold, 100% stock portfolio is a double-edged sword. If (1) you can stick with it through stomach-churning bear market losses, and (2) have a long-term horizon during which the need to liquidate assets will not arise, then strapping yourself into the roller-coaster of an all-stock portfolio may indeed be the optimal solution. Conversely, it would be difficult to identify a worse alternative for those who do not meet these criteria. Continue Reading…
To Hedge FX Risk, or Not to Hedge: Currency markets are notoriously difficult to call but can meaningfully impact portfolio returns. ETF Strategist Bipan Rai provides a detailed framework for investing outside the Canadian market.
Image Getty Images courtesy BMO ETFs
By Bipan Rai, BMO Global Asset Management
(Sponsor Blog)
Admittedly, using a spin on a famous Shakespeare quote to start a note on currency hedging1 is verging on trite. Nevertheless, if Hamlet were running a portfolio of overseas assets, his primary concern would have to be the “slings and arrows” of currency markets — which are notoriously difficult to call but can meaningfully impact portfolio returns.
For Canadian investors, looking abroad provides several benefits. The most important is diversification, whether it’s through access to other regions that are less correlated with Canadian markets or to other products that aren’t available domestically.
However, investing abroad also means taking on foreign exchange risk given that international assets are priced in currencies other than the Canadian dollar (CAD).
For illustrative purposes, consider Chart 1, which shows the total return for the S&P 500 in U.S. dollars (USD) and in CAD terms for Q1 of this year. In USD terms, the index was up 10.6% over that time frame, but since that period also corresponded to weakness in the CAD relative to the USD (or USD/CAD moved higher) the index outperformed in CAD terms (up 13.3%). That means that Canadian investors would have fared much better leaving their USD exposure unhedged ex ante.
Chart 1 – S&P 500 Total Return for Q1 2024
Source: BMO Global Asset Management
Now let’s look at an alternative period in which the CAD strengthened against the USD. Chart 2 shows a comparison of the total return for the S&P 500 from April 2020 to April 2021 (in which USD/CAD was lower by over 11%). During that period, the total return index outperformed in USD terms by close to 20%. In this scenario, an investor who had hedged their FX risk would have been in the optimal position.
Chart 2 – S&P 500 Total Return Between April 2020 – April 2021
Source: BMO Global Asset Management
As these examples show, currency risk is a key consideration for any investor who wants to look beyond Canada for diversification. That risk can cut both ways, which amplifies the importance of hedging decisions. In our minds, the decision to hedge foreign exchange (FX )risk (including the degree to which foreign exposure is hedged) comes down to the following:
An investor’s view of the underlying currency pair
Whether the currency pair is positively or negatively correlated2 with the underlying asset
In this note, we’ll make a brief comment on the first point but focus largely on the second one. as we feel that should be given more weight for hedging decisions.
FX Markets are Tough to Call
Taking a view on the underlying currency pair is easy to do — but difficult to capitalize on.
Indeed, foreign exchange markets are notoriously fickle. One reason why is the relationship between predictive factors and currency pairs is rarely stationary. For instance, a lot of market participants tend to use front-end (2-year) yield spreads as a proxy for central bank divergence in the spot FX market. Chart 3 shows the current correlation between those spreads and the different CAD crosses, and as expected, the relationship isn’t consistent from a cross-sectional perspective.
Chart 3 – Correlation Between Two-Year Spreads and the CAD Crosses
* * Correlation window is 2 years. The CAD is used as a base currency for this analysis. The spread is tabulated by subtracting the foreign 2-year yield from the CAD 2-year yield. Source: Bloomberg, BMO Global Asset Management.
We can also see this by looking closer at the relationship between a factor and a currency pair over time. Chart 4 shows the rolling 100-day correlation between USD/CAD and the price of oil (proxied by the prompt WTI contract3) going back ten years. Note how frequently the strength of the correlation (as well as the sign) changes over time. Continue Reading…
With economic uncertainty looming, taking control of your household finances is more important than ever. Preparing for potential downturns doesn’t mean drastic lifestyle changes: it means implementing smart, practical strategies that safeguard your financial well-being. By making a few savvy adjustments, you can create a solid buffer that shields your household from the effects of a recession while keeping your long-term financial goals on track.
Launch a Side Business
Starting a side business can be a powerful way to add extra income and recession-proof your finances. Whether you’re leveraging a hobby, tapping into a specialized skill set, or exploring new opportunities, a small business can provide a flexible, low-risk way to diversify your income. Consider ventures that align with your interests, such as freelancing, consulting, or offering home services, which tend to remain in demand even during tough times. By starting small and focusing on industries that offer consistent value, you can gradually build a side income that provides financial stability when it’s most needed.
Pay Down your Debt
Paying down debt is one of the most effective ways to strengthen your financial position ahead of a recession. High-interest debt, such as credit-card balances or personal loans, can quickly eat into your budget, making it harder to manage everyday expenses when the economy tightens. Focus on prioritizing payments to reduce or eliminate this kind of debt, starting with the highest interest rates. This not only frees up more of your income but also reduces financial stress. By becoming less reliant on borrowed money, you can better weather potential income fluctuations and maintain greater control over your finances.
Organize your Financial Records
Organizing your financial records can have many benefits, such as improved efficiency, better decision-making, and easier access to important information. Digitizing your documents can help you keep track of them more easily, save space, and add an extra layer of security to protect against theft or damage. After digitizing your records, try the process of splitting PDF content to break a document into smaller, more manageable files. Continue Reading…
The following is an edited transcript of an interview conducted by financial advisor Darren Coleman of the Two Way Traffic podcast with tax lawyer Anna Malazhavaya of Advotax Law.
It appeared on September 6th under the title ‘What you need to know about recent tax changes in Canada.’ Advotax is a team of lawyers and tax professionals that serves individuals, businesses and real property owners with tax planning and tax-dispute resolutions involving the Canada Revenue Agency. The discussion explored everything from the capital gains inclusion rate to expanded powers of the CRA to clients asking about moving to the US.
“It’s emotional but for some the increase in the capital gains inclusion rate was the last straw as they choose to leave Canada,” said Anna who added that over four million Canadians hold more than one property which means the government’s claim that this affects only 0.13% of the population isn’t true. “People are calling me every week. The wealthiest, the most talented entrepreneurs, are leaving Canada. It’s very sad to see.”
Anna and Darren talked about this phenomenon and how the June 25th deadline made it more expensive to leave the country with what can be a hefty departure tax. They also got into RRSPs, RIFs, and bare trusts which involve putting your property in someone else’s name. Anna said while the bare trust may have been designed to catch those who are less than scrupulous, it also captures honest people and gave examples.
I want your perspective and what your clients are thinking about the capital gains change we saw recently, and the deadline for people making changes. Now we’re in the new environment where the inclusion rate, or the amount of money you have to pay tax on, has gone up. And the government told us this was only going to affect 0.13% of taxpayers. Do you think their math was right?
Anna Malazhavaya
I have doubts. I’m not an economist and don’t have access to all the government stats, but I can share some stats. Capital gain may apply on the sale of your property that is not your principal residence. This includes your cottage, and your investment in rental properties.
4 million Canadians hold more than one property
Darren Coleman
More than four million Canadians hold more than one property. So four million Canadians, potentially, may be subject to that new increase capital gain rate. So that’s not 0.13%. That’s more.
Anna Malazhavaya
It’s way more. Of course, if I argued for the other side, I would say, Well, you don’t know how much money these people made on the property, and the first $250,000 of capital gain is still subject to the old rate, and that’s true. But at the same time, something tells me if these people held the property for more than 10 years that gain will be substantial. Look at how the real estate market performed in the last 20 years.
Darren Coleman
A lot of these people will be subject to the new rules. And not only that, think about people who only have one property, and let’s say, live on a farm property, and they have their house. When they sell their property, not the entire sale price will be sheltered by the principal residence exemption, but only the portion that’s required for the maintenance of their farm property. Everything in excess will be subject to capital gain and can potentially be subject to these new higher rates. Do you know how the government arrived at their number? A reasonable solution would have been to look at past taxpayer data and say, if we look at the last five or 10 years, how many taxpayers had a capital gain over $250,000? Let’s average it out over a bunch of years. But that’s not what they did. They looked at one year, 2022, and said only 0.13% of taxpayers had a capital gain of over $250,000. But that was also a negative year for stock markets globally, and a bit of a negative year for real estate equity markets everywhere. Tell me a little more about how your clients are experiencing this change.
Anna Malazhavaya
Until 2022 I probably had five people consulting me about leaving Canada. Normally, it was the other way around. We had all those talented people who wanted to bring their money, settle their life in Canada, educate their children here, build their future, build businesses, hire people. Pay taxes at 54% mind you. But this year alone, I have over a dozen new clients who plan to leave Canada and for my practice it’s a big change. People calling me practically every week, saying, I’m done. You know what? This capital gain game change. It did not affect me today. It probably won’t affect me tomorrow, but it’s the straw that broke the camel’s back.
More Canadians want to leave the country
Darren Coleman
The people who used to hire people, who used to come up with brilliant solutions, making everyone’s life better, they’re leaving Canada. Very sad to see and you’re not alone in experiencing that. I had a conversation this morning with a cross-border tax accountant and he said he’s had a surge of people looking to leave Canada, and he blames it on the tax policies which are making it less attractive for them to be here. Is it easy to just pack up and go to places like Florida?
Anna Malazhavaya
Leaving Canada became a lot more expensive. If you want to leave Canada, you are treated by Canadian law as if you sold all of your assets, even though you’re not selling anything. You keep all your assets. But the government says, Okay, fine, you want to leave Canada, but we want all the tax on the gain that you accrued to date. Some call it a departure tax, although this isn’t an official name, but it can hit you hard if you decide to leave Canada. So you have to declare all the gain you had from all your assets. Continue Reading…
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