Time to look south

One of the classic rules of investing is to leave before the party ends. In other words, take your profits while you can because the good times won’t roll on forever.If you believe in this approach, then it’s time to start thinking seriously about reducing your exposure to Canada. Our stock market has had a great run and there may still be some profits to be made. But commodity prices don’t rise to the sky and sooner or later we are going to see a sharp correction. With almost half the S&P/TSX Composite Index composed of resource companies and businesses that provide support services to them, we are extremely vulnerable to an economic slowdown.That explains why many professional money managers are taking profits in Canadian stocks and redeploying the money elsewhere. Where are they finding the bargains now? Mainly in U.S. large-cap stocks and, to a lesser degree, in European and Asian securities.The importance of global diversification was the main theme of the annual meeting of the Templeton Growth Fund last week. That’s not surprising in one sense because the fund invests around the world. But although the pretext for the occasion is the AGM of the fund, in actulity Franklin Templeton uses it as a marketing extravaganza to promote all its products. That means senior portfolio managers from Canada and around the globe are on hand to give their state of the world messages.I was particularly interested in the views of Fred Pynn, the manager of the Bissett Canadian Equity Fund. He’s based in Calgary, in the heartland of our energy boom. If anyone is bullish on Canada, you’d think it would be him. But he’s not. He has reduced energy stocks in his portfolio to 22 per cent, well below market weight, and has sold off virtually all his mining stocks which he says have reached price levels never seen before. We’re just about at the end of the current cycle, he warned. Returns from Canadian stocks will moderate going forward and the profits will come from different sectors, particularly large-cap dividend paying stocks. His message: focus on non-cyclical quality businesses like banks and diversify internationally.That view was echoed by Canadian George Morgan, the out-going manager of the Templeton Growth Fund. Canadian stock valuations are very high and in “a danger zone that we need to pay attention to,” he said. The best valuations are to be found in the U.S.But what about the currency risk that has seen U.S. stock market gains of the past three years virtually wiped out by the rising loonie? Morgan and many other money managers believe the exchange rate rebalancing process is just about over and that the Canadian and U.S. dollars will trade in a fairly narrow range going forward. Some even feel there’s a good possibility that the loonie will retreat from current levels to below US85c, which would boost any profit from American stocks.The Franklin Templeton folks aren’t alone in their views – far from it. I had lunch last week with Dale Harrison, head of the Canadian equity team at Phillips, Hager & North. He’s of exactly the same view and he recently adjusted his personal assets accordingly by putting a big chunk of his RRSP in his company’s U.S. stock fund.“There are no good values to be found in Canada any more,” he told me. “The best place to find value for money now is in U.S. stocks.” Remember, this comes from a Canadian equity manager!The message in all this is if you’re still heavily invested in Canadian stocks and/or mutual funds, it’s time to reassess your game plan. Our resource stocks have enjoyed tremendous gains in recent years. If you don’t want to exit the party just yet, at least think about edging towards the door by locking in some of those gains.And start looking south of the border. Historically, the U.S. market has outperformed ours. The past three years have been an aberration, and that won’t continue forever. With the currency risk now greatly reduced, it’s time to start gradually adding top-quality U.S. stocks to your mix, with a special focus on those with a strong history of dividend increases. Remember, you should never invest in the basis of the past. It’s only the future that counts.