Why Canada's fiscal situation makes it even more imperative to diversify your investments
“People mistakenly assume that their thinking is done by their head; it is actually done by the heart which first dictates the conclusion, then commands the head to provide the reasoning that will defend it.”
— Anthony de Mello
The federal government’s shocking financial update last week really got me thinking about how we collectively act no different than we do as individuals in believing how much better we are than others.
The Corporate Finance Institute provides a great explanation of this overconfidence bias, which it describes as “a tendency to hold a false and misleading assessment of our skills, intellect, or talent. In short, it’s an egotistical belief that we’re better than we actually are.”
As a result of this bias, how can we improve when no one is willing to ask how we could be wrong in our thoughts, beliefs and actions? As Thomas Szasz, a Hungarian-American academic and psychiatrist, points out: “Clear thinking requires courage rather than intelligence.”
Unfortunately, there appears to be neither intelligence nor courage present with the existing federal government’s handling of our country’s affairs. Perhaps this is why there has been a severe lack of transparency despite the unimaginable amount of money being spent.
A great example of this is the recent $900-million award by Justin Trudeau to a charity his family is very involved in, which was only recalled after conflict-of-interest alarms were raised.
Don’t worry though: this government has plenty of cheerleaders feeding into its overconfidence bias. Simply look at all those prolific economists who have been flag waving the low debt-to-GDP ratio until just recently, but have now moved on to the low debt-servicing-costs-to-GDP argument.
Meanwhile, here we are with a $343-billion deficit, one that is billions ahead of expectations. According to Bloomberg, “no other major advanced economy tracked by the International Monetary Fund is expected to record a larger one-year fiscal swing in 2020.” Think about that.
Now, given the extreme circumstances, by no means am I arguing against supporting those impacted by the shutdown nor am I downplaying the severity of their situation, but it is worth reflecting on the effectiveness of what we did, and what is the plan going forward to put people and businesses back to work.
This first step requires full transparency, meaning an in-depth look into how every dollar is spent, if it actually was spent or not, as well as the actual results/impact, and then asking how we can do better. None of this was accomplished last week. If it had been, perhaps there would be an answer to why Canada still has the highest unemployment rate in the G7 and is third from the bottom in the G20 despite the government’s record spending.
The good news is that there is plenty Canadians can do to hedge against the overconfidence bias occurring among our nation’s leaders. The sad thing is it means reallocating your wealth outside the country, particularly into those regions that appear to be not as affected as us.
Fortunately, the Canadian dollar appears to currently have major support, though we believe it’s trading at a level well ahead of our country’s underlying fundamentals.
The argument for investing abroad is even more supported as a means of diversifying outside the major source of wealth for most Canadians: real estate.
Real estate markets, especially in hot regions such as the Greater Toronto Area or Montreal, appear to be skyrocketing once again, which is quite the dichotomy to the overall economic picture. For those with exposure here, why take the risk by going all-in Canada with your investment portfolio?
Overall, we see some excellent value opportunities in developed markets outside the United States, including in countries comprising the MSCI EAFE index and even a few in emerging markets.
From a valuation standpoint, the
Europe, Australasia and Far East
markets are trading at a 23-per-cent discount to the FANG-heavy U.S. market, and emerging markets are at a 37-per-cent discount, according to Yardeni research.
That said, there are even value opportunities within the S&P 500, since it has a median negative return of 11 per cent and 450 companies within the index have a median negative return ranging from five to 38 per cent.
Becoming aware of the overall fiscal situation and then objectively assessing opportunities helps remove the anxiety surrounding our country’s economy and goes a long way to minimize its financial impact. Hopefully, this happens sooner than later, since it would be a real shame to see domestic capital being forced to flee the country.
Martin Pelletier, CFA, is a portfolio manager at Wellington-Altus Private Counsel Inc. (formerly TriVest Wealth Counsel Ltd.), a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax and estate planning.