(The following article was written by Darren Sissons, managing director at Portfolio Management.)
It's been somewhat sad watching the Canadian loonie flounder like a bird whose wings have been clipped. The Canadian currency has shed around 34% of its value against the greenback since the peak reached on April 29, 2011.
For the most part, the poor loonie has been victim of an oil slick, predicated on its reputation as a petro currency and brought on by a gusher of supply and an equally dramatic plunge in price.
Given Canada's reputation as a commodities producer, and in particular an oil exporter, the loonie's slide has been almost directly correlated with the oil price collapse. The currency plunged to under $0.79 to the U.S. dollar as of Thursday afternoon.
While Canadians and others invested in Canadian dollar assets certainly haven't been enjoying watching the loonie's swan dive, its dramatic drop has already produced a few silver linings -- among them, a big enticement for Canadian dollar-priced goods and services. This in turn could somewhat offset the massive decline in oil-related revenues.
Indirectly, there has been an additional positive: A strong boost to assets priced in U.S. dollars, which will likely continue to make non-Canadian securities attractive investments for Canadian investors.
It's true that the loonie's drop against the U.S. dollar has been dramatic and has had a negative impact on Canadians' costs of buying goods and services in the U.S. and elsewhere. But it has also had a rather positive effect for Canadians who have investments in the U.S. or pegged to the U.S. dollar, for instance in Hong Kong.
For companies paying out dividends, the upside potential return in Canadian dollar terms is even greater. A company like PayChex (PAYX), for instance, which has an excellent balance sheet, a 3.14% dividend yield and which steadily grows its dividends, ends up providing even more of a return thanks to the increasing strength of the U.S. dollar.
Even if the U.S. dollar declines from current heights relative to the Canadian dollar, the currency decline will be gradually offset by the dividend increases.
To be sure, it's not doom and gloom if you don't already own U.S. dollar or dollar-pegged investments. Whether on your own or with the help of an investment professional, you can use the boost in returns to generate more U.S. dollar income via adding to U.S. equity and fixed income investments, diversifying the portfolio in the process.
When adopting this strategy, you are effectively using a strong U.S. currency to buy more U.S. investments, and as you fund these investments from income generated by your U.S. investments, you are not in actual fact paying more for those investments.
What's more, as the Canadian dollar continues to decline, U.S. investments will raise the average return of the portfolio, leaving more cash to buy discounted securities outside the U.S.
Looking at an example in Europe, Deutsche Telecom (DTEGY) was priced at 8 euros ($9)/share, a steep discount in 2013, but has since recovered to the 15 euros/share mark. In Canadian dollars, what that means is an extra 20% gain on the stock appreciation: 8 euros at 1.20 to the Canadian dollar versus 15 euros at 1.40 to the Canadian dollar today.
Whether it be the Canadian loonie or the Thai bhat, key when it comes to watching currencies move hard and fast is taking the income stream from investments in a currency that is strengthening, and using it to buy more assets in the same currency, without taking a hit.
You can also use the extra income to buy assets denominated in other currencies that over time will eventually appreciate -- European shares, for instance, which are currently on sale thanks to the weak economy and now weakened euro, or Canadian stocks, which have not only seen a drop in valuations but have been further discounted by the loonie's recent slide.
Besides taking advantage of currency moves, international investing provides additional diversification, too.
Moral of the story: Currencies go up and down, and both asset values and returns can be eroded. But if done right, international investing can significantly enhance well-positioned investment portfolios for longer-term growth and appreciation.