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The painful flight of the loon

 

Ouch!

The loonie has soared almost 10% since June 1st, and the impact of this has made the holding of U.S. Stocks about as much fun as a sharp poke in the eye. One reason for the Canadian dollar’s recent rise is Canada’s improved economy, which is doing better than expected; this led to an interest rate hike a few weeks ago and an expectation of at least one more rate hike in the next few months. Another explanation is the global weakness in the U.S. dollar; Trump’s administration seems to be incapable of doing anything right, and it seems unlikely to pass any pro-business reforms any time soon. The US$ has fallen against all major currencies, not just ours. How much higher our loonie will go is anyone’s guess.

We bought shares of Facebook for clients a few weeks ago at around $153USD. Last week, Facebook posted terrific quarterly results, and we are pleased to see the stock up to $170USD. However, the reality is that we haven’t made a penny on it yet, because the Canadian dollar has risen just as much as Facebook. That said, we are sticking with Facebook as well as other great U.S. companies. Unlike the Canadian dollar, Facebook, posted a year-over-year revenue growth of 47%. Unlike the Canadian dollar, Facebook added 70 million monthly active users in that year, (a growth rate of 17%). Unlike the Canadian dollar, Facebook generated an increase in average revenue per user of 24%. So we’re not going to sell our Facebook shares just because the Canadian dollar has risen 10% or even if it rises another 5 or 10%. A currency can’t compound capital; a currency can’t raise its dividend; a currency can’t be taken over at a premium.

We are pleased as punch that the Canadian economy is improving, and a stronger Canadian dollar isn’t all bad news. Our clients own a number of Canadian-based companies that will benefit from a stronger Canadian dollar, including companies that import goods from the U.S.  A weaker U.S. Dollar will also be helpful to U.S. companies that export goods. Many of our U.S. holdings have complained for years that a higher U.S. dollar has impacted their profits. Every dollar they make now in Europe and Asia will be worth more when recorded in American dollars, boosting profits.

Could the Canadian dollar move up another 10% from here? Sure; anything is possible and currencies can move a long way in a short time. Whatever happens will not impact our reasons for investing in our foreign holdings. We are holding stocks to generate double-digit returns (composed of dividends and capital gains) that will compound over the long run. Patient investors holding good quality companies will be well rewarded no matter where the loonie lands next.

Barry Schwartz

 

July 31, 2017