The Confused Capitalist left the following comment in response to an earlier post on blue chip bargains:
I agree with your overall thesis; however, you, like I, have the currency issues to consider. i.e. the possibility of continuing deterioration of the US dollar. Not an issue to be taken lightly, in my view, as I think it could erode 5-10% from returns over a rather lengthy period.
He has a valid point: The S&P 500 has returned -2.12% in the past five years in Canadian dollars, compared to annualized total returns of 3.85% in U.S. dollars. The Canadian dollar has appreciated significantly from about 65¢ to its current level of 88¢, a gain of 35%. If the C$ appreciates further, the returns of a portfolio of U.S. equities will be negatively impacted.
While currency movements are a concern in the short or medium-term, long-term investors should ignore currency considerations. Over the long-term (20+ years), it is impossible to predict what the exchange rate will be. Not to mention, there were more predictions and Air Farce jokes (Question: What do you call an American Dollar? Answer: A toonie) of a 50¢ dollar, a mere three years back when the loonie was scraping bottom. So, why should we believe the “experts” making predictions of an at-par dollar now?
Currency fluctuations are not a big factor in investing in large American blue chips as they tend to operate in many foreign markets and a falling U.S. dollar would boost their bottom line when all the euros, yens and pounds are converted back. Take General Electric (GE), for instance. According to its latest annual report, GE derives just 14% of its revenues from the Americas compared to 51% from Europe and 25% from the Pacific region.
I think that the bulk of the appreciation of the loonie has already occurred and it is an excellent time to accumulate U.S. and other international assets. Investors in U.S. large-cap growth equities are getting a double bargain: the assets themselves are relative bargains and they are even cheaper when translated to loonies.