The Canadian dollar has risen dramatically since the beginning of May, which could have harsh implications for overseas assets held by Canadian pension funds.
“Given the low price of oil and low Canadian interest rates, I don’t think there was necessarily a perception that the loonie was headed significantly stronger in 2017, so I would imagine a significant chunk of the pension exposure was sitting unhedged,” says Andrew Torres, managing partner and chief executive officer at Lawrence Park Asset Management.
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Torres adds the currency move will likely cause market losses to appear in the second quarter and into the third.
“There’s a twofold effect,” he says. “The first is there are losses on a mark-to-market basis on your foreign holdings and the second is that those foreign holdings are producing lower equivalent income in Canadian dollars. So if the degree of foreign holdings in the big Canadian pensions is as high as has been reported, then I think you can expect to see income levels drop by maybe seven or eight per cent.”
Also, the dollar’s level doesn’t represent a tangible buying opportunity for overseas markets as they are, overall, expensive at current levels, says Blaine Pho, who leads the fixed-income team at Greystone Managed Investments Inc.
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The health of foreign markets, however, could cushion some of the losses as some are doing well enough to offset the currency risk, notes Torres.
“If you look at how the S&P 500 has performed in U.S.-dollar terms, it’s clearly up fairly significantly in 2017, but then if you convert it to Canadian-dollar terms, it’s still negative on the year. Even though you’ve had decent performance, the strong move in the Canadian dollar has in many cases offset that more than 100 per cent,” he says.
Looking ahead, a significant event may be necessary to shake the dollar from its current levels. Pho sees a possible high of 82 cents (U.S.) over the next year, with a gentle push downward as the U.S. dollar regains strength.
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