Declining Canadian economy, dollar mean investors should add protection to their portfolios (2024)

There is a lot of uncertainty for the average Canadian these days, including trying to navigate a complex macro-economic environment that is already starting to have a material impact on their overall financial well-being.

The glaring issue de jour is that the federal government is trying to keep pace with the current United States administration by running large deficits, but without the blessing of having neither the world’s reserve currency nor the tax base with room left to pay for it.

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This is an issue because, until more recently, both governments were able to rely on their respective central bankers to print money to buy all the new debt required to fund their deficits. However, this has quickly come to an end because monetary policy has been forced into being restrictive to try to keep inflation in check.

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As a result, instead of adjusting their spending programs, politicians are now looking for new ways to raise taxes given the market limitations on debt issuance. We don’t think it’s a coincidence that Prime Minister Justin Trudeau and President Joe Biden announced proposed capital gains changes a few days apart from one another.

But Canada could be in a lot more trouble than many think because its economy is a lot weaker and significantly less productive.

For example, from 2018 to 2024, U.S. gross domestic product per capita has grown by more than eight per cent while Canada’s has shrunk by well over two per cent. Many of us feel poorer, and that’s because we are. If the Canadian economy had simply stayed flat from where it was in 2015, we’d all be earning an extra $4,200, according to a Statistics Canada report.

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Eventually, there will have to be a variance in monetary policy between the two countries’ central banks because the Bank of Canada will be forced to cut rates at a faster pace than the U.S. Federal Reserve, which will likely send the Canadian dollar lower. The big question is: how much lower?

The Bank of Canada could undertake two to three rate cuts this year compared to only one by the Fed. In the past, we had oil prices to provide a bit of a buffer, but that relationship delinked about two years ago with the massive public-sector hiring spree coming out of Ottawa.

Therefore, there really is no floor as to how low the Canadian dollar could go, especially if the existing federal government’s fiscal policies continue unchecked over the coming years. We worry this could accelerate the pace of net foreign capital outflows from the country, along with the next generation being pushed to move to more affordable jurisdictions with a lower cost of housing and higher net pay after taxes.

But instead of addressing this as being a substantial risk, there are those in government such as Minister of Finance Chrystia Freeland who took to X, formerly known as Twitter, to cheerlead our shrinking economy and highlight the news that Warren Buffett is looking to deploy some capital into Canada as a means of support.

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Having a close friend who ran a Berkshire Hathaway Inc. company, we know that Buffett is notorious for hedging his downside and looking at broken, undervalued opportunities. Well, if he can hedge the Canadian dollar risk, there are plenty of broken, undervalued opportunities to be found here.

Being on the other side of a Buffett trade really isn’t something I, as a Canadian, feel comfortable bragging about, but I’m not in charge of our country’s finances, so maybe Freeland knows something I don’t.

We’ve been taking to the foreign exchange markets to help protect our clients’ wealth by boosting our U.S. dollar positioning. Fortunately, we’re even able to structure trades to own what we think are beaten-up Canadian assets, but in U.S. dollars.

We have also sold the vast majority of our Canadian government bonds because we think the loss coming from an eventual deteriorating credit quality and falling Canadian dollar will erase any benefit received from falling interest rates. We would simply much rather own U.S. floating-rate bonds.

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There is still time to add some protection to your portfolios against a falling Canadian dollar and policies that are accelerating the deterioration of our nation’s economic well-being.

Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc., operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning. The opinions expressed are not necessarily those of Wellington-Altus.

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