We have seen some fairly material changes in the markets since the previous June appearance. The Canadian dollar, already at recent lows has only gone lower; oil continues to slide after what looked like some support in June; and an unloved gold market for the last few years’  has given investors more reason to hate the sector with a quick drop just this past week. Always trying to keep things in perspective, let’s first look at the long-term chart dating back to 1986. We find the CAD/USD long-term chart most interesting as we think a lot of investors are exhibiting recency bias. 

Canadian Dollar / US Dollar: We have heard many investors expecting the Canadian dollar to strengthen due to it being far from the more recent, shorter-term average that investors have experienced over the last few years. However, when we look at longer-term charts, one could easily argue that the Canadian Dollar is just now reaching longer-term averages and could actually weaken further. Surely diverging interest rate policies between Canada and the US could support such a movement. From peak to trough, it looks like there could be a tendency for the dollar momentum to persist for around a decade. Past does not predict the future but sometimes it is all we have to go on.  We would caution investors to simply assume the dollar will revert back to short-term means and with a sagging commodity environment along with lower interest rates in Canada, it becomes tough to get too bullish on the Canadian dollar. 

Gold: Similar to currencies, the gold charts are interesting when looking at longer term. The recent price action has been painful for investors but for longer-term investors, they are actually still doing OK over a longer period. With that said, gold charts are forming a picture that in five to ten years, investors may be looking back, saying that a popping gold bubble was pretty clear. Things have clearly changed since the 80’s and 90’s and we do not really want to get into all of the arguments that can support higher gold prices but investors continue to think gold hits a bottom and yet it continues to go lower. Maybe gold investors are in for a long-term reversion to the mean.

Oil: The final piece to the puzzle that has been making Canadian investors lose sleep is that of oil. While producers have seemed to largely adapt fairly well to the changing environment, the share prices have not and rightfully so. When a company is selling its main product for one price on day 0, then selling it for half the price the next day, there is not much a company can do to protect the share value. Similar to the gold situation, this is not helping Canadian markets nor is it helping an argument for a strengthening Canadian dollar.

For some shorter-term perspective, we have put a one-year chart of the three items below. XAU references gold while USO is a US Oil ETF that reflects the price of West Texas Intermediate (WTI). So how does this environment affect our views on Canadian stocks? 

We had voiced this view previously and we still believe it has merit and it is simply that while the Canadian environment does not look great, we should still benefit from close ties to a strengthening US economy. Lower energy prices should continue to benefit margins in non-energy companies while a lower Canadian dollar should continue to make Canadian exports as well as Canadian businesses very interesting to US companies. Where there could be some opportunity is in companies that have a high degree of exposure to the US economy that are also generating cash flows in US dollars. Companies that have comfort with Canadian markets might find allocating US dollars toward Canadian businesses quite compelling. Not to mention many Canadian businesses are likely showing depressed trading multiples relative to recent history, making the opportunities all the more enticing.  An added bonus for companies establishing or acquiring operations in Canada are lower interest rates as operations can be financed at lower rates once the Canadian businesses get up and running. The ingredients for some interesting acquisitions or strategic growth moves exist in Canada and Canadian companies with US exposure might be the best way to benefit from this potential.

Dont forget to catch Peter's appearance on BNN Market Call, August 4th.