Currency holds a tricky spot in any investment portfolio. Whether you’re investing directly in currency or just stocks that are affected by it, the role of currency is enormous. Therefore, currency movements can significantly impact the TSX as well, especially for international companies. So, let’s look at some strategies on how to mitigate or even leverage these effects and some TSX stocks to consider.
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Currency and the TSX
First, let’s take a deeper dive into how currency can affect your TSX portfolio. First, there’s an appreciating Canadian dollar. When the CAD strengthens, it can actually negatively impact companies that earn revenues in foreign currencies, especially the USD. These revenues are worth less when converted back into CAD. Meanwhile, the reverse is true as well. When there’s a weaker CAD, it benefits companies with foreign revenues, as those revenues translate into more CAD, potentially boosting profit.
This goes beyond a mere shift as operational costs come into play as well. Companies that have costs denominated in foreign currencies may be impacted by currency fluctuations, and an appreciating CAD can reduce these costs and improve margins. There’s also competitive positioning to consider. A strong CAD can make Canadian exports more expensive and less competitive on a global scale, and vice versa. Therefore, currency volatility can seriously affect investment decisions.
Two to consider
With that in mind, where do investors start when it comes to investing in TSX stocks? Two options might be Canadian National Railway (TSX:CNR) and CAE (TSX:CAE). Let’s start with CNR stock. This company is part of a railway duopoly, with diversified revenue streams that run across North America. CNR’s diversified revenue base also runs across different segments like grain, fertilizers, and automotive. These can help cushion currency volatility impacting any sector.
Furthermore, its cost management is one to admire. The company focuses on cost control and efficiency that can mitigate the effects of currency fluctuations on profitability, as well as its strategic investments. Add on a solid operating ratio and improved earnings, and CNR is a top choice during currency fluctuations.
What about CAE? This international aerospace stock earns a significant portion of revenue in foreign currencies, specifically USD. This could benefit a weaker CAD, especially with a substantial backlog for more revenue and stability against volatile currency impacts. Long-term investors will love this, as well as its regulated civil and defence operations, allowing CAE to leverage opportunities in different markets.
Bottom line
Currency fluctuations can be scary for investors who aren’t sure what exactly is even going on. Honestly, a weaker CAD can be good for most companies to allow for competitiveness and foreign investments. But CNR and CAE are strong in any portfolio, providing resilience against currency volatility.
CNR offers a stable dividend, returns, diversification, and revenue. Meanwhile, CAE holds international revenue streams and a huge backlog. Therefore, both of these TSX stocks are sold choices to capitalize on currency fluctuations. Yet as always, make sure the strategy aligns with the rest of your portfolio, and always speak with your financial advisor before making any investment decisions.
