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Martin Pelletier: For those who ignore the risks, the costs could be significant
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Lockdowns and the fight against COVID-19 have understandably caused tremendous anxiety over the past year, as people worry for their loved ones and deal with the uncertainty of what life will look like in a post-pandemic world.
Here in Canada, the lack of vaccine supply and resulting slow roll-out have only exacerbated the situation, as a third wave of the virus and the emergence of variants wreak havoc on our public health-care system.
During this time, we’ve put together financial plans for a number of clients and, interestingly, we found there was a common theme: people are increasingly worried about maintaining financial security into and during retirement in the face of the economic upheaval COVID has caused.
The primary concerns that have come up are the rising cost of living and the rapidly deteriorating fiscal situation in both provincial and federal governments, something that could lead to material tax hikes.
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Many are also very worried about how these deficits are being supported by the Bank of Canada through what is effectively an experiment in modern monetary theory, which brings with it risks for the value of our currency and the future path of interest rates.
That said, the overall population does not seem as concerned: based on polling and support for the current federal government, these factors do not appear to be resonating much at all. But people should not kid themselves — given enough time, unprecedented loose fiscal and monetary policies will eventually come back to roost and may change the retirement equation for all Canadians, in a negative way.
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For those looking to get ahead of these risks, there are a couple of things you can do:
Reduce domestic exposure, including real estate and go international
We recommend reducing exposure to Canadian dollar denominated assets including Canadian equities exposed to the domestic economy, government debt and yes, even real estate. Simply ask yourself what happens if the Bank of Canada has no choice but to raise interest rates to support a falling Canadian dollar?
This would be catastrophic for the federal government, making it costlier to service the massive debt load it is onboarding, but even worse for Canadian households, which are the most indebted in the developed world on a debt-to-GDP level.
Then there is our insatiable appetite for real estate. Consider this, according to David Wolf, a portfolio manager at Fidelity Investments, housing accounts for more than 40 per cent of total capital spending in Canada, which is double that of most other countries. Looking at the past 20 to 25 years only three countries have had similar levels — Spain, Ireland and Greece.
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For an idea on potential exposure, our client portfolios have on average at least 50 to 60 per cent weighting to international denominated assets in their respective currencies with a large exposure to U.S. dollars. We may actually look at increasing this further given the recent strength in the Canadian dollar.
Protect yourself from inflation
This means having some exposure to those components of the market in your portfolio that will benefit from high levels of inflation such as value, commodities and cyclicals. For example, we’ve been talking about the attractiveness of oil stocks more recently but there are also plenty of great opportunities in the value segments of the market that will benefit from the restart of the economy. We think this is especially the case in jurisdictions such as the U.S., which have done an outstanding job of deploying vaccines.
Undertake proactive tax planning
Tax hikes will be on the horizon especially as monetary stimulus begins to unwind and all levels of government seek new sources of funding for their large fiscal deficits. This means you should maximize your TFSAs and RRSPs, look at structures like family trusts and deploy insurance, especially corporate bond strategies, if significant assets are held within a personal corporation.
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We’ve even had discussions with some ultra-high net worth clients who are exploring relocating to more favourable tax regions outside of Canada should the tax situation deteriorate.
Overall, anxiety about the future direction of this country’s financial situation is something that can be addressed with some good old-fashioned planning. For many, moving some assets outside of the country is a good way to soften the blow should things go badly here. For those who ignore the risks, the costs could be significant.
Martin Pelletier, CFA, is a portfolio manager at Wellington-Altus Private Counsel Inc. (formerly TriVest Wealth Counsel Ltd.), a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax and estate planning.
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