Personal Investor: Canadian investors caught in trade war crossfire
It’s war. The U.S. tariffs on Canadian metal imports has been met with a dollar-for-dollar retaliation from Canada. And while the titans battle it out, Canadian retail investors are caught in the crossfire.
It’s not clear exactly how the trade spat will play out on the markets, but it is certain Canadian investors are especially vulnerable. According to a recent study from Vanguard, Canadian investors have on average 60 per cent of their equity portfolios invested in the U.S. Another poll by Scotiabank finds only 28 per cent of Canadians with investments hold foreign securities in their portfolio.
Home bias would be fine in a country like the United States, which offers a wide variety of publicly traded multinational stocks that span every sector. Canadian equities account for about three per cent of global equities and two-thirds are resource or financial stocks. That means Canadian casualties in a trade war could be harder to contain.
The way to protect your portfolio from a trade war is the same remedy for any broad market risk: diversification. Spreading your investments around the globe will lower your exposure to concentrated risk and keep your portfolio open to new opportunities.
Most of those opportunities, it turns out, are behind enemy lines. Over half of the world’s publicly traded stocks are listed in the United States. Most Canadians have direct access to U.S. stocks and can even trade in U.S. dollar denominations in their registered retirement savings plans (RRSP) and tax free savings accounts (TFSA).
Thirty-five per cent of global equities are listed in Europe, Asia and Australia. Ten per cent are listed in emerging markets. While it may be hard for the average Canadian investor to access international markets, there’s no shortage of international mutual funds or exchange traded funds that focus on international stocks.
Exactly how much of your portfolio should be invested outside of Canada is something that should be discussed with an investment advisor. Most would recommend a weighting much higher than three per cent because the Canadian market is familiar to Canadians, and investments are in Canadian dollars.