There's no hiding from a strong loonie.
Even the most domestically focused Canadian investor has little hope of entirely dodging foreign-exchange movements, which can prove to be powerful determinants of equity returns.
But there are ways of dulling the impact of this year's rise in the Canadian dollar.
Canadian companies that report financial results in U.S. dollars, for example, might benefit from an important offset to foreign-exchange pressures, according to Ian de Verteuil, head of portfolio strategy for CIBC World Markets.
"A U.S.-dollar reporter with significant Canadian operations – like most TSX-listed names have – will likely have stronger reported earnings trends when the U.S. dollar is weak," Mr. de Verteuil said.
"All other things being equal, a strong loonie will result in upward revisions to earnings estimates."
Over the past four months, the Canadian dollar has risen by nearly 10 cents (U.S.). And when the loonie gains ground on the greenback, profits earned in Canada are essentially worth more when converted to U.S. dollars. As a result, this year's run in the Canadian dollar amounts to an earnings improvement of sorts for U.S.-dollar reporters.
Nearly one-third of the companies in the S&P/TSX composite index report in U.S. dollars – a reflection of the concentration of natural resources in the local stock market. These sectors deal in commodities usually priced in U.S. dollars and typically destined for export outside of Canada.
But the fortunes of resource sectors tend to be aligned with the U.S. dollar. Periods of greenback weakness generally coincide with commodity price strength, which outweighs whatever is happening with the loonie.
"It is with non-resource companies reporting in U.S. dollars where the analysis gets interesting," Mr. de Verteuil said.
There are 32 such companies within the S&P/TSX composite index. Among them, the companies that do the most business domestically would be best positioned to benefit from currency conversion. Conversely, those generating a smaller proportion of revenues in the United States would be relatively insulated from the weak U.S. dollar.
Restaurant Brands International Inc., for example, which is the parent company of Tim Hortons, Burger King, and Popeyes Louisiana Kitchen, generates nearly three-quarters of its revenues in Canada.
By contrast, FirstService Corp., a Toronto-based property management company, is almost exclusive to the U.S. market.
Of course, a company does not need to report in U.S. dollars to be heavily exposed to the American market. Boyd Group Income Fund and Algonquin Power & Utilities Corp., for example, both rely on the U.S. market for at least 90 per cent of their respective revenues.
Companies such as that "would be the most at risk of currency headwinds should loonie strength continue," Mr. de Verteuil said.
Meanwhile, Canadian investors who own U.S. securities are also directly vulnerable to the strengthening Canadian dollar. Over the course of the loonie's resurgence since the spring, the S&P 500 index has gained 4.5 per cent, in U.S.-dollar terms. That becomes a 7.4-per-cent loss when converted to Canadian dollars, however.
Over the longer term, since the Canadian dollar bottomed out in early 2016, the S&P 500 index has moved up by 33 per cent. A Canadian index investor, however, would have forfeited two-thirds of those returns on the conversion.