Josh Brown, otherwise known as the Reformed Broker, recently called Canada on the carpet over its blatant “Home Country Bias.” Brown wasn’t speaking about the country’s love affair for hockey but rather its affinity for retirement stocks of a domestic nature.
Using data from a 2016 report by Vanguard, the financial advisor and part-time social media phenom revealed that Canadians put more money into domestic equities than almost every other developed country around the world.
Canada, noted Brown, represents just 3.4% of the global market cap, yet its citizens invest 59% of their equity portfolios in Canadian stocks, leaving just 41% for international stocks. There’s no excuse for that, Brown jokingly remarked in his July 26 post.
While Brown singled out Canada for the huge differential between its actual global index weight (% of world market cap) and reality, he was even harsher when it came to Australia, which as a country invests 67% of their equity portfolios domestically while its global index weight is even lower than Canada’s at 2.4%.
Outrageous, snapped Brown. Again, he wasn’t being serious.
However, it does point out one more reason why U.S. investors should be grateful when it comes to making decisions about their 401k’s and retirement stocks.
How’s that you say?
Americans invest 79% of their equity portfolios in U.S. stocks; higher than the four other countries highlighted in the Vanguard report: Canada (59%), Australia (67%), UK (26%), and Japan (55%). But none of these countries have a global index weight above 7.2%. America’s is more than seven times that at 50.9% or half the world’s market cap.
The U.S. investor, big or small, has a serious built-in advantage over investors everywhere else. Be grateful for where you live, and not just because America’s a great place to call home.
Investors are driven to home country bias for a number of reasons but a big one in Canada is currency.
In the past 30 years, Canada has seen its dollar go from strong to weak to strong and back to weak again, where it sits today. At its highest point, November 2007, a single Canadian dollar could buy $1.10 in U.S. currency. Today, that same Loonie (the name of the Canadian one-dollar coin) buys 76 cents, or three-quarters of a greenback.
With this kind of currency volatility, Canadians have naturally shied away from investing in retirement stocks denominated in currencies other than their own.
Brown followed up his July 26 post with a second post three days later that included a couple of paragraphs from one of his Canadian readers who’d responded to the first post.
The reader points out, quite rightly, that Canadians receive a federal tax credit on dividends paid by Canadian resident corporations, which effectively makes dividend income less onerous from a tax perspective than interest income and even capital gains in Alberta and the Yukon. So, it’s another big reason Canadians are attracted to domestic equities.
A third reason, which is mentioned by Brown’s Canadian respondent, is one every equity investor faces throughout the globe; a familiarity with one’s own backyard. According to Vanguard, it’s one of the six primary reasons for home country bias
If you live in the U.S. you probably understand Hormel Foods Corp (NYSE:HRL) more than you do Canadian meat producer Maple Leaf Foods (OTCMKTS:MLFNF) simply because you’ve eaten Hormel products or seen them in the grocery stores.
Focus on U.S. Retirement Stocks
Now, back to why U.S. investors should be grateful.
Although Brown reminds his readers that there have been times in the past where the S&P 500 was a much riskier bet relative to European or Emerging Markets’ equities — generally when the U.S. dollar has been weak — I believe, historically, it has been much easier for U.S. investors to go overweight on domestic equities than anywhere else in the world.
Well, until U.S. companies become unattractive investments over the long-term, other investors, not just those here in America, will still want to own U.S. equities.
It’s a big reason Warren Buffett’s so confident in America. He’s grateful for U.S. equities; you should be too.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.