Ontario’s about to bring in climate change legislation. Alberta unveiled its plan Sunday. And, soon, the feds. That’s altruistic, responsible and forward-thinking. Evidence abounds the world is hooped without human action. We’ve already managed to harvest 70% of the fish and eliminate half the animals in the time I’ve been married to Dorothy. Since I was born the global population has doubled. This will end badly.
But the economic costs are huge, and you’re probably not being told what to expect. In Ontario, for example, a carbon-pricing regime will add about 4 cents to a litre of gasoline, increase home heating costs, electricity and the cost of almost everything you buy. In Alberta, the bill will be $500 per family per year, including a 7-cent gas hit. This is all intended to reduce consumption and inhibit economic expansion through higher charges. You either consume less or pay more. The toads and butterflies love you, but your finances don’t.
As a former director of the Sierra Legal Defence Fund (now Ecojustice), which gives money to lawyers to litigate for environmental protection, I don’t consider myself to be a dino when it comes to such issues. We’re wanton wasters of the world. But I also think folks should stay focused on what’s coming when we elect a bunch of progressives who (as our federal government self-avows) say climate change trumps the economy.
For Canadians, this zeal could hardly come at a worse moment. Oil has careened to the $40 range and shows no sign of recovery. Household debt has bloated higher again, with $75 billion in new mortgage borrowing in the last year. Wage growth is anemic, unemployment’s stuck and layoffs seem everywhere. The economy spent half the year in recession and our dollar sank to 75 cents after the central bank was forced to cut rates to stave off deflation. On Friday we found the last federal government not only left the cupboard bare, but burned it to keep the lights on. The new guys propose to increase spending and debt, tax those who the most taxed, increase family levies and pension premiums plus reduce the ability of everyone else to save. And rescue the planet.
If this sounds vaguely scary, you get it.
The economy needs greater investing activity, leading to jobs. Not bigger government, more debt and higher overhead. But it’s too late to moan now. People wanted a hot anti-Harper with nice hair, tats and groupies. So that’s what we have. No judgment there. But preserving and building wealth is about to become more challenging.
Unless the oil sands are exempted, a carbon tax, cap-and-trade or any other climate-guarding regime will kill them. It will also reduce cash flow for most households, since they carry an historic debt load, and add to inflation – exacerbated now by a low dollar. As the US moves to raise rates for the first time in a decade (next month), the dollar will fall more. So, as Ontario, Alberta and Ottawa shift onto a climate-change agenda over the next few years, it’s reasonable to expect slower economic growth, higher costs and reduced job creation.
How should you invest in this kind of world?
First, reduce your Canadian exposure. Big time. If your financial guy is old-school and has stuck you in a bunch of ‘high-quality, blue-chip’ Canada stocks, then run. The TSX in the last year has underperformed the S&P 500 by almost 10%, and European markets by about 25%. The Canadian market is overweighted in energy and resource issues, plus the financials that support them – and there’s no light at the end of the tunnel.
Second, that means at least two-thirds of the growth assets you own should be US or international. They should be broadly diversified, which suggests using index exchange-traded funds, spread between large-cap and smaller companies. It’s also wise to hedge against the loonie, so having about 20% of your portfolio in US$ is smart – in fact, this saved the butt of many investors over the past year.
In a recent report on the connection between investing and climate change, Mercer had this to say:
“UK, Australian, and Canadian equities to be more sensitive given the higher exposure of these regional equity markets to carbon-intensive sectors. UK and European equities to be less vulnerable to climate change policy shocks given existing policy and commitments in place. We expect these markets to be better prepared for additional climate-related policy given the relative transparency regarding the direction of future policy. We expect the US to continue to drive global equity markets in the near term. Therefore, we would expect any significant policy developments in the US to impact global equities to a greater extent than developments in other regions.”
Third, do not discount the value of balance, having 40% or so of your portfolio in safe stuff – like government, corporate, high-yield and real return bonds, plus preferred shares which will benefit as rates rise. This is called ‘fixed income’ and it gives a modest yield regardless of where stock markets head. Remember to keep bond durations short, as they will be minimally impacted when the cost of money increases. Also consider a small weighting in commercial real estate, through REITs, since they are not correlated with equities. Rents continue to be paid, collected and passed through to investors.
Fourth, reduce your Canadian residential real estate exposure. A slower economy, higher consumer costs, augmenting taxes and swelling mortgage rates are not supportive of housing. Already most markets are in neutral or decline with falling sales and stalled prices. If the bulk of your net worth is in this one asset, you’re seriously at risk.
We may not have much of a choice in dealing with climate change. Inaction means trouble. But this will be neither cheap nor painless. Unless you’re Al Gore.