Thursday, February 25, 2010

Something worth to consider:

America -- buy or bye?
07:19 EST Tuesday, Feb 23, 2010
Rob Carrick

Buy American?

Yes, and now’s the time. That’s the conclusion of some research by Calgary-based McLean & Partners that predicts the U.S. dollar’s 10-year bear market will come to an end in the next year or two. McLean’s research notes the high level of concern about the a U.S. debt load (government and consumer) that is now approaching $14-trillion, but it also says this debt is a fair bit less dire when viewed as a percentage of U.S. economic output.

Still, the consensus view of the U.S. dollar has been overwhelmingly negative. Over the past 10 years, the U.S. dollar has depreciated 28 per cent against the Canadian dollar and 26 per cent against the Euro. Over the past 20 years, it has depreciated 37 per cent against the Japanese yen. McLean believes this trend will ease in the next 12 to 24 months, with the U.S. dollar starting to strengthen slightly. Two supporting factors for the currency: U.S. headway in reducing its budget deficit, and a turnaround the U.S. real estate market that will drive demand for U.S. dollars.

McLean sees this as a buying opportunity for Canadians. “Buying U.S. dollar-denominated assets, such as select real estate and stocks, is proving to be an excellent opportunity. Although it might feel like the beginning of the end for the U.S. dollar, in
reality we think it is the beginning of the end of its descent as the race to economic recovery continues.”

Buying U.S. stocks has been a losing proposition for Canadian investors for years now. Soft U.S. stock market performance and currency-related headwinds have combined to produce an average annual loss of 5 per cent for U.S. equity mutual funds over the past 10 years. The lesson many investors have absorbed is that it’s smarter to buy Canadian.

Now’s the time to start thing about buying American, too. If you do, remember to give the issue of currency hedging some thought. Hedged U.S. equity funds and ETFs filter out distortions caused by currency fluctuations, but they have higher fees than unhedged funds and they’re imprecise in matching the returns of their underlying stocks. Even so, hedged funds have been the way to go in recent years as a rising Canadian dollar eroded returns from U.S. stocks.

Now, it’s time for a re-think. You could take a conservative approach and leave half your U.S. exposure unhedged, or go unhedged altogether. The usual advice from money managers on hedging is to use it if you’re holding for a short to medium term, and not to bother with it if you’ve got a long term outlook. If you go the unhedged route, prepare for volatility. The U.S. dollar may indeed reverse its downward trend in the next two years, but there could be some scary moments along the way.

Rob Carrick has been writing about personal finance, business and economics for more than 12 years.

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