Stock Smarts: Look To Europe For Profits

This has not been a good year for Canadian investors. In fact, to put it bluntly, it’s been a stinker.

Just take a look at the year-to-date performances of the world’s major stock markets. Only one is in the red as of the close on August 9 – ours, with a year-to-date loss of 0.5 per cent. Everyone else is in profit territory, although some gains are pretty meagre – Australia is only ahead by 1.7 per cent. The big winners so far this year are Hong Kong (+26.2 per cent), India (+19.4 per cent), and Nasdaq (+17.7 per cent).

The TSX has been dragged down by weakness in the energy sector, which accounts for 20.4 per cent of the Composite Index. It’s off 19.6 per cent for the year, despite a recent rally. Most other sectors are in the black or just below break-even but that hasn’t been enough to offset the oil and gas drag.

Surprisingly, bonds have fared better than stocks this year, despite the Bank of Canada’s recent rate hike. The FTSE TMX Universe Bond Index is ahead 1.21 per cent year-to-date thanks to a modest recovery last week after slumping in July on weakness in Federal government issues. Corporate bonds have done even better. The All Corporate Bond Index is ahead by 2.16 per cent for the year.

So where should we look for stock gains? One possibility is to shift more assets to New York, where U.S. stocks are surging. Led by Nasdaq, all the major indexes there have been strong, with the Dow up 11.6 per cent and the S&P 500 ahead by 10.5 per cent for the year. There’s just one problem: the Canadian dollar, which has been unexpectedly strong this year.

The loonie started 2017 at US$0.7443, according to the Bank of Canada. It closed on Aug. 9 at US$0.7871. That is a gain of 5.8 per cent this year, which wipes out a big chunk of any profit earned on the Dow or the S&P 500 once the money is converted back to Canadian dollars.

Emerging markets are the best bet with the MSCI Emerging Markets Index ahead by 25 per cent so far in 2017. But some investors are uncomfortable with the volatility. There is also some nervousness about investing heavily in Nasdaq at this point after the strong run in the tech sector.

European stocks offer a less volatile option. The European economy finally seems to have emerging from the doldrums, despite the on-going concerns about Brexit, slow growth in key countries like Italy, and the upcoming German election. The Euro STOXX 50 Index, which includes the top blue-chip stocks from the Eurozone, started the year at 3,309 and was at 3,467 on Aug. 9, for a gain of about 5 per cent. Plus, the loonie has lost value against the euro this year, dropping from €0.7157 at the beginning of January to €0.6697 as of Aug. 9. If you hold Eurozone stocks that is a currency gain on your investment of approximately another 6 per cent.

One way to invest in this index is through the new Horizons Euro STOXX 50 Index ETF (TSX: HXX), which was launched last December. It has a very low management expense ratio of 0.19 per cent and is off to a strong start, with a year-to-date gain of 14 per cent. This is still a very small fund (about $75 million in assets) and is thinly traded, with daily volume often less than 5,000 units. So if you plan to take a position, enter a limit order and be patient.

This ETF is suitable for investors looking for more exposure to high-quality European companies. Note that this fund is not appropriate for those who need regular cash flow, as there have been no distributions to date. Ask your financial advisor if it is suitable for your account.

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca.