Go west, young man, to grow your portfolio

Not quite what American author and editor Horace Greeley is credited with saying when advising exploitation of 19th century western expansion and prosperity in the USA. Here in Canada in the 21st century, prospects for provincial growth rates in 2018 aren’t expected to be similar either. That’s why it’s important that you reduce sector risk by owning a diversified portfolio of stocks that are situated in different provinces.

Investment_StrategiesPicking stocks is a difficult process. But if you consider the advantages of diversification, your method should improve, along with your returns. One way to reduce sector risk is to diversify provincially.

Why is it necessary to own stocks domiciled in different provinces? In 2018, some provinces are expected to underperform the estimated Canadian gross domestic product, or GDP, growth rate. It’s prudent, therefore, to reduce your sector risk by purchasing stocks from different provinces.

Saskatchewan leads provincial growth forecasts

RBC Economics Research forecasts the Canadian economy’s GDP will expand by 1.9 per cent in 2018. That’s at the low end of a range of forecasts recorded by The Economist. According to the magazine’s poll, some economists are predicting growth as high as 2.7 per cent.

At any rate, RBC projects Saskatchewan, Alberta, BC, Ontario, Newfoundland and Labrador, and Manitoba will lead Canadian economic growth in 2018. In contrast, Quebec, PEI, New Brunswick and Nova Scotia are expected to lag the 1.9-per-cent growth rate.

Saskatchewan is expected to grow the fastest, at 2.7 per cent. The province, according to RBC, stands to benefit from a rebound in the energy sector and healthy gains in potash production. With Saskatchewan in the lead, it’s no surprise that Alberta comes next. Expected to grow 2.3 per cent this year, Alberta, too, should benefit from the energy rebound. But RBC says the province’s growth will broaden across economic sectors.

BC (2.2%), Ontario (2.1%), Newfoundland (2.1%) and Manitoba (2.0%) are forecast to grow at a pace closer to the national average.

Nova Scotia last in provincial growth forecasts

On the other side of the spectrum, Nova Scotia is projected to grow the least in 2018—just 0.6 per cent. The culprits, RBC says, will be reduced investment and construction projects, as well as “weakening demographic factors”. Next in line is New Brunswick (0.7%), followed by PEI (1.5%) and Quebec (1.8%).

In general, then, Eastern Canada is expected to lag in 2018, and Western Canada, from Ontario on, is expected to lead. If most of the stocks you own are based in Eastern Canada, therefore, it’s possible your portfolio will underperform the Canadian market in 2018. To help avoid this, we recommend no more than 20 per cent of your Canadian holdings should be domiciled in one specific province.

If you own a lot of eastern-based companies with a substantial local focus such as Cogeco (TSX—CGO), Quebecor (TSX—QBR.B) or TVA Group (TSX—TVA.B), or even companies with an international reach such as Emera (TSX—EMA), your next purchases should consist of companies that do business in Western Canada.

By adding stocks like Canadian Western Bank (TSX—CWB), Shaw Communications (TSX—SJR.B) or Telus (TSX—T), you’ll take advantage of the higher growth rates that are expected to occur in the western provinces. By diversifying in such a manner, your returns may well improve.

Diversify internationally too

We’ve long advised that you keep about 25 per cent of your portfolio in US or international stocks. From time to time, we’ve received some push-back on that advice. After all, when you invest outside of Canada you don’t receive the dividend tax credit. And, of course, currency fluctuations can erode the value of your foreign holdings in Canadian-dollar terms.

While there are disadvantages in diversifying outside of Canada, we think they’re outweighed by the benefits of reduced risk and enhanced returns. This point is best illustrated by the different performances of the Canadian and US markets in 2017. While the S&P 500 gained 19.4 per cent, the S&P/TSX Composite Index increased only 6.0 per cent.

What’s more, there are times when currency fluctuations can work to your advantage. In 2015, for example, the S&P 500 declined 0.7 per cent. But because the Canadian dollar fell 16.0 per cent against its US counterpart, an investment in the S&P 500 rose 18.2 per cent in Canadian-dollar terms.

This is an edited version of an article that was originally published for subscribers in the January 26, 2018, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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